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, 2002
[_] 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 44062-0035
(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, 2002: 1,155,691
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
June 30, 2002 and December 31, 2001 3
Consolidated Statement of Income (Unaudited)
for the Three Months ended June 30, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) 5
Consolidated Statement of Cash Flow (Unaudited)
for the Three Months ended June 30, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14-15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Default Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8 - K 19-20
SIGNATURES 21
-2-
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2002 2001
------------ ---------------
ASSETS
Cash and due from banks $ 6,268,312 $ 3,443,435
Federal funds sold 3,150,000 2,450,000
------------- --------------
Cash and cash equivalents 9,418,312 5,893,435
Interest-bearing deposits in other institutions 1,149,066 1,240,207
Investment securities available for sale 25,423,981 21,179,786
Investment securities held to maturity (estimated
market value of $7,851,197 and $10,471,978)) 7,624,800 10,229,068
Loans 164,357,893 152,828,355
Less allowance for loan losses 2,162,043 2,062,252
------------- --------------
Net loans 162,195,850 150,766,103
Premises and equipment 6,328,866 6,244,797
Accrued interest and other assets 2,474,675 2,304,568
------------- --------------
TOTAL ASSETS $ 214,615,550 $ 197,857,964
============= ==============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 26,039,948 $ 24,952,407
Interest-bearing demand 7,597,162 6,523,152
Money market 9,371,154 7,940,807
Savings 46,806,973 41,518,906
Time 88,980,091 86,447,456
------------- --------------
Total deposits 178,795,328 167,382,728
Short-term borrowings 1,095,161 660,678
Other borrowings 13,148,641 9,301,334
Accrued interest and other liabilities 907,721 726,417
------------- --------------
TOTAL LIABILITIES 193,946,851 178,071,157
------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,204,463 and 1,203,633 shares issued 7,735,893 6,287,011
Retained earnings 14,116,847 14,842,519
Accumulated other comprehensive income 292,399 133,717
Treasury stock, at cost (45,722 shares) (1,476,440) (1,476,440)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 20,668,699 19,786,807
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 214,615,550 $ 197,857,964
============= ==============
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 6,078,155 $ 5,771,403 $ 3,078,538 $ 2,949,453
Interest-bearing deposits in 30,063 29,189 13,627 14,085
other institutions
Federal funds sold 25,060 96,882 9,407 54,215
Investment securities:
Taxable interest 581,569 625,116 296,483 325,235
Tax-exempt interest 210,616 239,470 101,085 119,646
------------ ----------- ------------ ------------
Total interest income 6,925,463 6,762,060 3,499,140 3,462,634
------------ ---------- ------------ ------------
INTEREST EXPENSE
Deposits 2,744,626 3,099,466 1,356,054 1,584,742
Short-term borrowings 3,546 9,103 2,274 4,209
Other borrowings 300,156 272,208 153,932 136,200
------------ ----------- ------------ ------------
Total interest expense 3,048,328 3,380,777 1,512,260 1,725,151
------------ ----------- ------------ ------------
NET INTEREST INCOME 3,877,135 3,381,283 1,986,880 1,737,483
Provision for loan losses 150,000 80,000 75,000 41,000
------------ ----------- ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,727,135 3,301,283 1,911,880 1,696,483
------------ ----------- ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 467,048 455,660 244,138 233,619
Other income 77,744 70,780 39,577 34,156
------------ ------------ ----------- ------------
Total noninterest income 544,792 526,440 283,715 267,775
------------ ----------- ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,251,923 1,150,031 659,858 604,664
Occupancy expense 175,202 148,212 87,960 68,051
Equipment expense 164,375 141,802 81,167 80,966
Data processing costs 169,131 139,053 84,163 74,139
Ohio state franchise tax 135,050 120,050 67,500 60,000
Other expense 709,413 628,386 365,024 349,406
------------ ----------- ------------ ------------
Total noninterest expense 2,605,094 2,327,534 1,345,672 1,237,226
------------ ----------- ------------ ------------
Income before income taxes 1,666,833 1,500,189 849,923 727,032
Income taxes 546,000 471,500 278,000 235,600
------------ ----------- ------------ ------------
NET INCOME $ 1,120,833 $ 1,028,689 $ 571,923 $ 491,432
============ =========== ============ ============
EARNINGS PER SHARE
Basic $ 0.97 0.89 $ 0.49 $ 0.42
Diluted 0.97 0.89 0.49 0.42
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Earnings Income Stock Equity Income
------------ ------------ ------------- ----------- ------------- -------------
Balance, December 31, 2001 $ 6,287,011 $ 14,842,519 $ 133,717 $(1,476,440) $19,786,807
Net income 1,120,833 1,120,833 $ 1,120,833
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $52,508 158,682 158,682 158,682
-----------
Comprehensive income $ 1,279,515
===========
Stock options exercised 18,960 18,960
Stock dividend 1,429,922 (1,434,607) (4,685)
Cash dividends ($.35 per share) (411,898) (411,898)
------------ ------------ ------------ ----------- -----------
Balance, June 30, 2002 $ 7,735,893 $ 14,116,847 $ 292,399 $(1,476,440) $20,668,699
============ ============ ============ =========== ===========
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,120,833 $ 1,028,689
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 150,000 80,000
Depreciation and amortization 162,392 147,114
Amortization of premium and
discount on investment securities 53,587 30,619
Amortization of net deferred loan costs (fees) (121,255) 3,801
Increase in accrued interest receivable (99,375) (3,774)
Increase (decrease) in accrued interest payable (91,871) 122,335
Other, net (93,732) (300,609)
------------ ------------
Net cash provided by operating activities 1,080,579 1,108,175
------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in
other institutions, net 91,141 (355,000)
Investment securities available for sale:
Proceeds from repayments and maturities 2,362,510 2,990,291
Purchases (6,405,134) (8,682,229)
Investment securities held to maturity:
Proceeds from repayments and maturities 2,589,537 4,908,952
Increase in loans, net (11,458,492) (8,071,917)
Sale (purchase) of Federal Home Loan Bank Stock 214,430 (106,800)
Purchase of premises and equipment (246,461) (210,458)
------------ ------------
Net cash used for investing activities (12,852,469) (9,527,161)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 11,412,600 8,409,268
Increase (decrease) in short-term borrowings, net 434,483 (115,591)
Repayment of other borrowings (152,693) (243,387)
Proceeds from other borrowings 4,000,000 --
Exercise of stock options 18,960 --
Cash dividends (416,583) (308,827)
------------ ------------
Net cash provided by financing activities 15,296,767 7,741,463
Increase (decrease) in cash and
cash equivalents 3,524,877 (677,522)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,893,435 4,839,875
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 9,418,312 $ 4,162,353
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 3,140,199 $ 3,258,442
Income taxes 254,000 510,000
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Middlefield Banc Corp. ("Middlefield")
includes its wholly owned subsidiary, The Middlefield Banking Company (the
"Bank"). All significant 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, 2001,
has been derived from the audited financial statements at that date but does not
include all of the necessary informational disclosures and footnotes as required
by accounting principles generally accepted in the United States of America. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included with Middlefield's Form 10-K
(File No. 33-23094). The results of Middlefield's operations for any interim
period are not necessarily indicative of the results of Middlefield's operations
for any other interim period or for a full fiscal year.
NOTE 2 - EARNINGS PER SHARE
Middlefield provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities.
There are no convertible securities that would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following tables set forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ----------- ---------- ----------
Weighted average common shares
outstanding 1,204,149 1,203,633 1,204,387 1,203,633
Average treasury stock shares (45,722) (45,722) (45,722) (45,722)
---------- ----------- ---------- ----------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 1,158,427 1,157,911 1,158,665 1,157,911
========== =========== ========== ==========
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 822 1,902 531 1,827
---------- ----------- ---------- ----------
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,159,249 1,159,813 1,159,196 1,159,738
========== =========== ========== ==========
Net Income 1,120,833 1,028,689 571,923 491,432
========== =========== ========== ==========
Options to purchase 9,975 shares of common stock at prices from $31.00 to $31.75
per share were outstanding during for all periods of 2002 and 2001 but were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the three months ended June 30,
2002, 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 ended June 30, 2001, comprehensive income totaled $1,132,239.
For the three months ended June 30, 2002 and 2001, comprehensive income totaled
$789,583 and $493,054, respectively.
NOTE 4- STOCK DIVIDEND
The Board of Directors approved a five percent stock dividend to stockholders of
record as of June 1, 2002 payable June 14, 2002. As a result of the dividend,
54,997 additional shares of the Company's common stock were issued, common stock
was increased by $1,429,922 and retained earnings decreased by $1,434,607.
Fractional shares paid were paid in cash. All average shares outstanding and all
per share amounts included in the financial statements are based on the
increased number of shares after giving retroactive effect to the stock
dividend.
NOTE 5- 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. FAS No. 141 also specifies criteria which
must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. The adoption of
FAS No. 141 did not have a material effect on the Company's financial position
or results of operations.
On January 1, 2002, the Company adopted FAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
This 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, this new statement did not amend FAS No. 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
undertaken a limited scope project to reconsider the provisions of FAS No. 72 in
2002 and has issued an exposure draft of a proposed statement, Acquisitions of
Certain Financial Institutions, that would remove acquisitions of financial
institutions from the scope of FAS No. 72. The adoption of this proposed
statement would require all goodwill originating from acquisitions that meet the
definition of a business combination as
defined in Emerging Issues Task Force Issue ("EITF") No. 98-3 to be
discontinued. The adoption of FAS No. 142 did not 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 new statement takes effect for
fiscal years beginning after June 15, 2002. 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.
On January 1, 2002, the Company adopted 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. The adoption of FAS
No. 144 did not have a material effect on the Company's financial statements.
In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FASB FAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting practice. FAS No. 145 is
effective for transactions occurring after May 15, 2002. The adoption of FAS No.
145 did not have a material effect on the Company's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of 2002
(the Act), following an investigative order proposed by the SEC on chief
financial officers and chief executive officers of 947 large public companies on
June 27, 2002. Additional regulations are expected to be promulgated by the SEC.
As a result of the accounting restatements by large public companies, the
passage of the Act and regulations expected to be implemented by the SEC,
publicly-registered companies, such as the Company, will be subject to
additional and more cumbersome reporting regulations and disclosure. These new
regulations, which are intended to curtail corporate fraud, will require certain
officers to personally certify certain SEC filings and financial statements and
will require additional measures to be taken by our outside auditors, officers
and directors. The loss of investor confidence in the stock market and the new
laws and regulations will increase non-interest expenses of the Company and
could adversely affect the prices of publicly-traded stocks, such as the
Company. .
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 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 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, 2002 and December 31, 2001.
Total assets increased $16.8 million to $214.6 million at June 30, 2002 from
$197.9 million at December 31, 2001. This increase primarily resulted from an
increase in net loans receivable of $11.5 million and cash and cash equivalents
of $3.5 million that was funded by net increases in deposits and borrowings of
$11.4 million and $4.3 million, respectively.
Cash and cash equivalents increased to $9.4 million at June 30, 2002 as compared
to $5.9 million at December 31, 2001. This increase resulted from temporary
fluctuations with correspondent banks due to the timing of customer activity.
Investment securities available for sale increased to $25.4 million at June 30,
2002 from $21.2 million at December 31, 2001. Meanwhile, investment securities
held to maturity decreased to $7.6 million at June 30, 2002 from $10.2 million
at December 31, 2001. The net increases in the investment securities portfolios
were funded with an influx of deposits coupled with the reinvestment of called
and matured securities during the year.
Total loans increased to $164.4 million at June 30, 2002 from $152.8 million at
December 31, 2001. 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 the increased lending activity is predominately residential
mortgage and commercial real estate loans. Such loans grew $7.8 million and $7.2
million, respectively, at June 30, 2002. The increased lending is attributed to
continued customer referrals and Middlefield's overall relationship with its
customers. Offsetting these increases were net repayments on commercial loans of
approximately $2.5 million.
The allowance for loan losses represents the amount that management estimates is
adequate to provide for probable losses inherent in the loan portfolio, as of
the balance sheet date. Accordingly, all loan losses are charged to the
allowance, and all recoveries are credited to it. At June 30, 2002,
Middlefield's allowance for loan losses increased approximately $100,000 to $2.2
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 $178.8 million at June 30, 2002 from $167.4 million
at December 31, 2001. Growth was primarily concentrated in savings and time
deposits and resulted from the continual marketing efforts by management, as
well as customer
preferences to readily accessible deposit products. Such accounts grew by $5.3
million and $2.5 million, respectively, during the period.
Other borrowings increased to $13.1 million at June 30, 2002 from $9.3 million
at December 31, 2001. This increase was the result of an additional $4.0 million
in Federal Home Loan Bank borrowings to be repaid over a ten-year period. As
noted previously, the proceeds from this borrowing were used to fund loan
demand.
Total stockholders' equity increased to $20.7 million at June 30, 2002 due to
net income of $1,121,000 that was offset partially by dividend payments of
$412,000 and an increase in accumulated other comprehensive income of $159,000.
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.
Middlefield declared a 5.0% stock dividend during the period that resulted in a
transfer between retained earnings and common stock of approximately $1.4
million. 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.
Comparison of Results of Operations for the Six and Three Months Ended June 30,
2002 and 2001.
Middlefield recorded net income of $1,121,000 for the six month period ended
June 30, 2002 as compared to net income of $1,029,000 for the same period ended
June 30, 2001. This increase in net income was due to the significant growth in
net interest income of $496,000 while offset by increases in noninterest expense
and the provision for loan losses of $277,000 and $70,000 respectively. Basic
and diluted earnings per share increased to $.97 per share for the six months
ended June 30, 2002 from $.89 per share for the same period ended 2001. For the
three months ended June 30, 2002, Middlefield recorded net income of $572,000,
or $.49 per share from $491,000 or $.42 per share for the same period ended June
30, 2001.
Net interest income for the six months ended June 30, 2002 increased to
$3,877,000, compared to $3,381,000 for the same period ended 2001. Interest
income for the first six months of 2002 was $6,925,000 as compared to $6,762,000
for the same period ended 2001. This increase of $163,000 was influenced
primarily by an increase in interest earned on loans receivable of $307,000,
while offset by decreases in interest earned on investment securities and
federal funds sold of $72,000 and $71,000, respectively. Although Middlefield
intentionally caused a decrease to its interest rate yields, interest income was
driven by increases in average balances of interest-earning assets. The average
balance of loans receivable increased $19.8 million to $157.9 million during
2002, as compared to $138.1 million for the 2001 period. The tax-equivalent
yield on interest earning assets decreased to 7.21% for the six months ended
2002 from 7.87% for same period ended 2001, and primarily resulted from a 66
basis point and 52 basis point
decrease in loans receivable and investment securities, respectively. During
2001, the Federal Reserve Board adopted a policy of aggressive interest rate
reduction that resulted in this adverse impact on the yield on earning assets.
Interest expense decreased $332,000 for the six months ended June 30, 2002 to
$3,048,000 from $3,381,000 for the same period ended 2001. Interest expense
incurred on deposits decreased $355,000 for the six months ended June 30, 2002
as compared to the same period ended 2001. This was primarily attributable to a
declining interest rate environment which resulted in the cost of funds
decreasing to 3.92% for the six months ended June 30, 2002 from 4.84% for the
same period 2001. Offsetting the declining rates was an increase in the average
balance of interest-bearing liabilities of $19.7 million to $158.9 million for
the six months ended June 30, 2002. In particular, the average balance of
savings and certificates of deposits increased $11.1 million and $5.6 million,
respectively. As noted previously, such increases were the result of the
competitively priced products being marketed throughout Middlefield's market
area.
Net interest income for the three months ended June 30, 2002 increased to
$1,987,000, compared to $1,737,000 for the same period ended 2001. While
interest income for the three months ended June 30, 2002 remained relatively
unchanged, fluctuations within the earning assets mix resulted in increases in
interest earned on loans of $129,000 that were offset mostly by reductions to
interest earned on investments and federal funds sold of $47,000 and $45,000,
respectively. The average balance of loans receivable increased $20.3 million to
$160.9 million during 2002, as compared to $140.6 million for the 2001 period.
The tax-equivalent yield on interest earning assets decreased to 7.17% for the
three months ended June 30, 2002 from 7.94% for same period ended 2001, and
primarily resulted from a 79 basis point and 73 basis point decrease in
investment securities and loans receivable, respectively. As noted previously,
the Federal Reserve Board adopted a policy of aggressive interest rate reduction
in 2002 that resulted in this adverse impact on the yield on earning assets.
Meanwhile, the decrease in interest expense was primarily the effect of a
declining cost of funds for the three months ended June 30, 2002 to 3.92% from
4.84% for the same period ended 2001. These reductions that resulted in a
$229,000 decline in interest incurred on deposits were offset somewhat by an
increase in the average balance of interest bearing liabilities of $11.7
million. As noted above, the competitive pricing strategy of Middlefield has
contributed to these increases in deposit balances.
Total non-interest income for the six and three months ended June 30, 2002
remained relatively unchanged from 2001. 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.
Total non-interest expenses increased $278,000 and $108,000 for the six and
three months ended June 30, 2002, respectively, as compared to the same period
ended 2001. Compensation and employee benefits increased $102,000 and $55,000,
respectively, primarily as a result of normal merit raises. Occupancy and
equipment expenses increased $49,000 and $20,000, respectively, as a result of
added capital expenditures in
prior years, in particular the Chardon branch which became operational in 2001.
As a result of increased transaction activity from operating a larger
organization, data processing expenses increased $30,000 and $10,000,
respectively, during 2002 as compared to 2001. In addition, other expenses
increased $81,000 and $16,000, respectively, as a result of costs incurred for
professional fees associated with outside assistance in complying with the
increased levels of regulatory compliance of a publicly reported company.
Middlefield has also purchased land for expansion of a new branch network in
early 2003, and anticipates incurring additional capital and operational
expenditures in the next twelve months.
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, 2002, cash and cash equivalents
totaled $9.4 million or 4.4% of total assets while investment securities
classified as available for sale totaled $25.4 million or 11.8% of total assets.
Management believes that the liquidity needs of Middlefield are satisfied by the
current balance of cash and cash equivalents, readily available access to
traditional funding sources, FHLB advances, and the portion of the investment
and loan portfolios that mature within one year. These sources of funds will
enable Middlefield to meet cash obligations and off-balance sheet commitments as
they come due.
Operating activities provided net cash of $1.1 million for both six month
periods ended June 30, 2002 and 2001, and were generated principally from net
income of approximately $1.1 million and $1.0 million for both periods.
Investing activities used $12.9 million and $9.5 million in funds during the six
months of 2002 and 2001, respectively. These cash usages primarily consisted of
loan originations of $11.5 million and $8.1 million, respectively.
Financing activities consist of the solicitation and repayment of customer
deposits, and borrowings and repayment. During the six months ended June 30,
2002, net cash provided by financing activities totaled $15.3 million,
principally derived from an increase in deposit accounts in general, and savings
deposits specifically. Also contributing to this influx of cash was proceeds
from borrowings of $6.0 million that was
offset slightly by repayments of $2.2 million. During the same period ended
2001, net cash provided by financing activities was $7.7 million, and consisted
almost entirely of an increase in deposit accounts.
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, 2002, 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 16.93%, 15.68%, 9.94%, and the bank's were 16.58%, 15.32%,
9.80%, respectively, at June 30, 2002.
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.
June 30, December 31,
2002 2001
------ ------
(Dollars in thousands)
Loans on nonaccrual basis $ 50 $ -
Loans past due 90 days or more and still accruing 475 254
------ ------
Total nonperforming loans $ 525 $ 254
------ ------
Nonperforming loans as a percent of total loans 0.32% 0.17%
====== ======
Nonperforming assets as a percent of total assets 0.24% 0.13%
====== ======
At June 30, 2002 and December 31, 2001, 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, 2002,
impaired loans had no material effect on the Company's financial position or
results of operations.
During the six month period ended June 30, 2002, loans increased $11.5 million
while nonperforming loans increased to a total of $271,000. The allowance for
loan losses increased $100,000 during this same period and the resulting
percentage of allowance for loan losses to loans outstanding declined to 1.32%
as compared to 1.35% at December 31, 2001. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other financial institutions, the bank is subject to interest rate risk.
The bank's interest-earning assets could mature or reprice more rapidly than or
on a different basis from its interest-bearing liabilities (primarily borrowings
and deposits with short- and medium-term maturities) in a period of declining
interest rates. Although having assets that mature or reprice more frequently on
average than liabilities will be beneficial in times of rising interest rates,
that asset/liability structure will result in lower net interest income in
periods of declining interest rates.
Interest rate sensitivity, or interest rate risk, relates to the effect of
changing interest rates on net interest income. Interest-earning assets with
interest rates tied to the prime rate for example, or that mature in relatively
short periods of time, are considered interest-rate sensitive. Interest-bearing
liabilities with interest rates that can be repriced in a discretionary manner,
or that mature in relatively short periods of time, are also considered
interest-rate sensitive. The differences between interest-sensitive assets and
interest-sensitive liabilities over various time horizons are commonly referred
to as sensitivity gaps. As interest rates change, a sensitivity gap will have
either a favorable effect or an adverse effect on net interest income. A
negative gap -- with liabilities repricing more rapidly than assets -- generally
should have a favorable effect when interest rates are falling, and an adverse
effect when rates are rising. A positive gap -- with assets repricing more
rapidly than liabilities -- generally should have the opposite
effect: an adverse effect when rates are falling and a favorable effect when
rates are rising.
Middlefield and the bank have no financial instruments entered into for trading
purposes. Interest rates change daily on federal funds purchased and sold.
Federal funds are therefore the most sensitive to the market and have the most
stable fair values. Loans and deposits tied to indices such as the prime rate or
federal discount rate are also market sensitive, with stable fair values. The
least sensitive instruments include long-term, fixed-rate loans and securities
and fixed-rate savings deposits, which have the least stable fair value.
Management of maturity distributions of assets and liabilities between these
extremes is as important as the balances maintained. Management of maturity
distributions involves matching interest rate maturities as well as principal
maturities, and it influences net interest income significantly. In periods of
rapidly changing interest rates, a negative or positive gap can cause major
fluctuations in net interest income and earnings. Managing asset and liability
sensitivities to enhance growth regardless of changes in market conditions is
one of the objectives of the bank's asset/liability management strategy.
Evaluating the bank's exposure to changes in interest rates is the
responsibility of the Asset/Liability Committee, a committee of bank directors
and officers. The Asset/Liability Committee assesses both the adequacy of the
management process used to control interest rate risk and the quantitative level
of exposure, ensuring that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate
risk at appropriate levels. Evaluating the quantitative level of 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, 2002 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.
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 15,
2002:
(a) The following Class III directors were elected to a six year term expiring
in 2005:
Name Shares For Shares Withheld
- ---- ---------- ---------------
Thomas C. Halstead 910,885 13,716
Donald E. Villers 913,859 11,626
Frances H. Frank 914,401 11,184
(b) 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 891,231
shares in favor, and 9,468 shares against, and 24,879 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 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
99.3 Independent Accountants Report
* Incorporated by reference to the identically numbered exhibit to the
December 31, 2001 Form 10-K (File No. 033-23094) filed with the SEC on
March 28, 2002.
(b) ) Reports on Form 8-K.
On May 16, 2002, a Form 8-K (Items 5 and 7) was filed with the Securities
and Exchange Commission to disclose the Company's press release for
declaring a quarterly cash and share dividend.
On July 10, 2002, a Form 8-K (Items 5 and 7) was filed with the Securities
and Exchange Commission to disclose the Company's press release announcing
that the authorization to repurchase up to 4.99% of Middlefield Banc
Corp.'s outstanding common stock.
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 9, 2002 By: /s/ Thomas G. Caldwell
--------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: August 9, 2002 By: /s/ Donald L. Stacy
--------------------------------
Donald L. Stacy
Principal Financial and Accounting
Officer