Filed by Bowne Pure Compliance
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-Q
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended September 30, 2008
Commission File Number 000-32561
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
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Ohio
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34 - 1585111 |
(State or other jurisdiction
of incorporation or organization)
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(IRS Employer Identification No.) |
15985 East High Street, Middlefield, Ohio 44062-9263
(Address of principal executive offices)
(440) 632-1666
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act:
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Small reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
State the number of shares outstanding of each of the issuers classes of common equity as of the latest practicle date:
Class: Common Stock, without par value
Outstanding at November 12, 2008: 1,529,292
MIDDLEFIELD BANC CORP.
INDEX
1
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Cash and due from banks |
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$ |
8,263,756 |
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$ |
9,072,972 |
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Federal funds sold |
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4,570,826 |
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8,631,963 |
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Interest-bearing deposits in other institutions |
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112,215 |
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110,387 |
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Cash and cash equivalents |
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12,946,797 |
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17,815,322 |
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Investment securities available for sale |
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96,371,351 |
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85,967,764 |
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Loans |
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320,151,943 |
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309,445,922 |
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Less allowance for loan losses |
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3,613,857 |
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3,299,276 |
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Net loans |
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316,538,086 |
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306,146,646 |
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Premises and equipment |
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8,018,503 |
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7,044,685 |
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Goodwill |
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4,371,205 |
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4,371,206 |
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Bank-owned life insurance |
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7,371,180 |
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7,153,381 |
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Accrued interest and other assets |
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8,450,812 |
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5,774,052 |
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TOTAL ASSETS |
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$ |
454,067,935 |
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$ |
434,273,056 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing demand |
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$ |
40,929,373 |
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$ |
41,348,219 |
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Interest-bearing demand |
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27,409,745 |
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19,566,035 |
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Money market |
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26,831,740 |
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22,684,041 |
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Savings |
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69,835,964 |
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76,895,857 |
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Time |
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214,957,328 |
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202,423,848 |
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Total deposits |
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379,964,150 |
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362,918,000 |
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Short-term borrowings |
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1,693,699 |
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1,510,607 |
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Other borrowings |
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36,687,924 |
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32,395,319 |
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Accrued interest and other liabilities |
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2,340,455 |
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2,487,746 |
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TOTAL LIABILITIES |
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420,686,228 |
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399,311,672 |
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STOCKHOLDERS EQUITY |
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Common stock, no par value; 10,000,000 shares authorized,
1,718,822 and 1,701,546 shares issued |
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27,159,602 |
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26,650,123 |
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Retained earnings |
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14,793,600 |
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13,746,956 |
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Accumulated other comprehensive loss |
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(1,837,888 |
) |
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(52,969 |
) |
Treasury stock, at cost; 189,530 shares in 2008 and
151,745 shares in 2007 |
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(6,733,607 |
) |
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(5,382,726 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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33,381,707 |
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34,961,384 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
454,067,935 |
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$ |
434,273,056 |
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See accompanying unaudited notes to the consolidated financial statements.
2
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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INTEREST INCOME |
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Interest and fees on loans |
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$ |
5,425,266 |
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$ |
5,604,206 |
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$ |
16,273,630 |
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$ |
15,449,822 |
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Interest-bearing deposits in
other institutions |
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1,949 |
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22,159 |
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10,790 |
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127,772 |
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Federal funds sold |
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22,181 |
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122,029 |
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124,467 |
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383,464 |
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Investment securities: |
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Taxable interest |
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622,184 |
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323,806 |
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1,793,645 |
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844,454 |
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Tax-exempt interest |
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449,351 |
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468,552 |
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1,360,226 |
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1,310,932 |
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Dividends on FHLB stock |
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29,514 |
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32,426 |
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88,526 |
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84,193 |
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Total interest income |
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6,550,445 |
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6,573,178 |
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19,651,284 |
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18,200,637 |
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INTEREST EXPENSE |
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Deposits |
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2,948,998 |
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3,176,508 |
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9,381,666 |
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8,360,623 |
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Short-term borrowings |
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17,610 |
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35,750 |
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34,793 |
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|
75,420 |
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Other borrowings |
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432,055 |
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453,853 |
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1,254,040 |
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1,368,738 |
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Total interest expense |
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3,398,663 |
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3,666,111 |
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10,670,499 |
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9,804,781 |
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NET INTEREST INCOME |
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3,151,782 |
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2,907,067 |
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8,980,785 |
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8,395,856 |
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Provision for loan losses |
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187,000 |
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60,000 |
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357,000 |
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174,391 |
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
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2,964,782 |
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2,847,067 |
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8,623,785 |
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8,221,465 |
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NONINTEREST INCOME |
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Service charges on deposit accounts |
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493,228 |
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494,456 |
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1,417,789 |
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1,427,458 |
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Investment securities gains, net |
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|
25,758 |
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|
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|
34,508 |
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Earnings on bank-owned life insurance |
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|
75,336 |
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|
69,909 |
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|
217,798 |
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|
210,162 |
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Other income |
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|
85,925 |
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|
89,445 |
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|
284,820 |
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|
286,061 |
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Total noninterest income |
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680,247 |
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|
653,810 |
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1,954,915 |
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1,923,681 |
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NONINTEREST EXPENSE |
|
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Salaries and employee benefits |
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1,322,026 |
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1,220,646 |
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|
3,643,199 |
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|
3,365,646 |
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Occupancy expense |
|
|
203,298 |
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|
184,078 |
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|
643,884 |
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|
551,586 |
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Equipment expense |
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|
150,334 |
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|
139,197 |
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|
435,770 |
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|
393,411 |
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Data processing costs |
|
|
193,033 |
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|
186,213 |
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|
591,098 |
|
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|
498,932 |
|
Ohio state franchise tax |
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|
117,000 |
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|
109,673 |
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|
351,000 |
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|
313,873 |
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Other expense |
|
|
743,890 |
|
|
|
577,126 |
|
|
|
2,159,276 |
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|
1,888,020 |
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Total noninterest expense |
|
|
2,729,581 |
|
|
|
2,416,933 |
|
|
|
7,824,227 |
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|
7,011,468 |
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Income before income taxes |
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|
915,448 |
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|
1,083,944 |
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|
2,754,473 |
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|
3,133,678 |
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Income taxes |
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|
211,000 |
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|
223,000 |
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|
530,000 |
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|
621,128 |
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NET INCOME |
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$ |
704,448 |
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$ |
860,944 |
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$ |
2,224,473 |
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$ |
2,512,550 |
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EARNINGS PER SHARE |
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Basic |
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$ |
0.46 |
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$ |
0.54 |
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$ |
1.45 |
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$ |
1.61 |
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Diluted |
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|
0.46 |
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|
|
0.53 |
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|
|
1.44 |
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|
|
1.59 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.260 |
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$ |
0.233 |
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$ |
0.770 |
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$ |
0.690 |
|
See accompanying unaudited notes to the consolidated financial statements.
3
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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Accumulated |
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Other |
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Total |
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Common |
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Retained |
|
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Comprehensive |
|
|
Treasury |
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Stockholders |
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Comprehensive |
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|
Stock |
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Earnings |
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Loss |
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Stock |
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Equity |
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Income (Loss) |
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|
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|
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|
|
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|
Balance, December 31, 2007 |
|
$ |
26,650,123 |
|
|
$ |
13,746,956 |
|
|
$ |
(52,969 |
) |
|
$ |
(5,382,726 |
) |
|
$ |
34,961,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
2,224,473 |
|
|
|
|
|
|
|
|
|
|
|
2,224,473 |
|
|
$ |
2,224,473 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Unrealized loss on available for sale
securities net of tax benefit of $919,483 |
|
|
|
|
|
|
|
|
|
|
(1,784,919 |
) |
|
|
|
|
|
|
(1,784,919 |
) |
|
|
(1,784,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
439,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
recognized in earnings |
|
|
11,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,286 |
|
|
|
|
|
Purchase of treasury stock (37,785 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,350,881 |
) |
|
|
(1,350,881 |
) |
|
|
|
|
Dividend reinvestment and purchase plan |
|
|
498,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498,193 |
|
|
|
|
|
Cash dividends ($0.77 per share) |
|
|
|
|
|
|
(1,177,829 |
) |
|
|
|
|
|
|
|
|
|
|
(1,177,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
$ |
27,159,602 |
|
|
$ |
14,793,600 |
|
|
$ |
(1,837,888 |
) |
|
$ |
(6,733,607 |
) |
|
$ |
33,381,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying unaudited notes to the consolidated financial statements.
4
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,224,473 |
|
|
$ |
2,512,550 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
357,000 |
|
|
|
174,391 |
|
Depreciation and amortization |
|
|
393,883 |
|
|
|
378,749 |
|
Amortization of premium and
discount on investment securities |
|
|
158,650 |
|
|
|
168,622 |
|
Amortization of deferred loan fees, net |
|
|
(104,138 |
) |
|
|
(49,492 |
) |
Earnings on bank-owned life insurance |
|
|
(217,799 |
) |
|
|
(210,163 |
) |
Compensation for stock option expense |
|
|
11,286 |
|
|
|
|
|
Increase in accrued interest receivable |
|
|
(364,938 |
) |
|
|
(827,231 |
) |
Increase (decrease) in accrued interest payable |
|
|
(223,246 |
) |
|
|
410,189 |
|
Other, net |
|
|
(123,615 |
) |
|
|
(540,786 |
) |
|
|
|
|
|
|
|
Net cash used for operating activities |
|
|
2,077,047 |
|
|
|
2,016,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
Proceeds from repayments and maturities |
|
|
11,598,563 |
|
|
|
5,402,909 |
|
Proceeds from sale of securities |
|
|
2,929,439 |
|
|
|
|
|
Purchases |
|
|
(27,760,155 |
) |
|
|
(24,059,580 |
) |
Investment securities held to maturity: |
|
|
|
|
|
|
|
|
Proceeds from repayments and maturities |
|
|
|
|
|
|
5,954 |
|
Increase in loans, net |
|
|
(11,751,849 |
) |
|
|
(18,373,626 |
) |
Acquisition of subsidiary bank |
|
|
|
|
|
|
(1,828,301 |
) |
Purchase of Federal Home Loan Bank stock |
|
|
(85,200 |
) |
|
|
(56,100 |
) |
Purchase of premises and equipment |
|
|
(1,367,701 |
) |
|
|
(396,347 |
) |
Deposit acquisition premium |
|
|
|
|
|
|
(2,120,612 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(26,436,903 |
) |
|
|
(41,425,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
17,046,151 |
|
|
|
28,361,018 |
|
Increase in short-term borrowings, net |
|
|
183,092 |
|
|
|
902,844 |
|
Repayment of other borrowings |
|
|
(7,707,395 |
) |
|
|
(8,260,732 |
) |
Proceeds from other borrowings |
|
|
12,000,000 |
|
|
|
|
|
Purchase of Treasury Stock |
|
|
(1,350,881 |
) |
|
|
(1,083,895 |
) |
Proceeds from dividend reinvestment & purchase plan |
|
|
498,193 |
|
|
|
462,825 |
|
Cash dividends |
|
|
(1,177,829 |
) |
|
|
(1,060,659 |
) |
Net cash received from deposit acquisition |
|
|
|
|
|
|
19,270,054 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
19,491,331 |
|
|
|
38,591,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(4,868,525 |
) |
|
|
(817,419 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD |
|
|
17,815,322 |
|
|
|
13,639,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
AT END OF PERIOD |
|
$ |
12,946,797 |
|
|
$ |
12,822,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest on deposits and borrowings |
|
$ |
10,901,695 |
|
|
$ |
9,314,016 |
|
Income taxes |
|
|
400,000 |
|
|
|
750,000 |
|
|
|
|
|
|
|
|
|
|
Summary of business acquisition: |
|
|
|
|
|
|
|
|
Fair value of tangible assets acquired |
|
$ |
|
|
|
$ |
42,657,925 |
|
Fair value of core deposit intangible acquired |
|
|
|
|
|
|
103,781 |
|
Fair value of liabilities assumed |
|
|
(38,408,610 |
) |
|
|
|
|
Stock issued for the purchase of acquired
companys common stock |
|
|
|
|
|
|
(3,662,750 |
) |
Cash paid in the acquisition |
|
|
|
|
|
|
(3,887,110 |
) |
|
|
|
|
|
|
|
Goodwill recognized |
|
$ |
|
|
|
$ |
(3,196,764 |
) |
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
MIDDLEFIELD BANC CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements of Middlefield Banc Corp. (Company) includes its two
subsidiaries The Middlefield Banking Company and Emerald Bank. All significant inter-company items
have been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance with U.S. generally accepted
accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In
managements opinion, the financial statements include all adjustments, consisting of normal
recurring adjustments, that the Company considers necessary to fairly state the Companys financial
position and the results of operations and cash flows. The balance sheet at December 31, 2007, 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 U. S. generally accepted
accounting principles. The accompanying financial statements should be read in conjunction with
the financial statements and notes thereto included with the Companys Form 10-K (File No.
33-23094). The results of the Companys operations for any interim period are not necessarily
indicative of the results of the Companys operations for any other interim period or for a full
fiscal year.
Certain items contained in the 2007 financial statements have been reclassified to conform to the
presentation for 2008. Such reclassifications had no effect on the net results of operations.
Recent Accounting Pronouncements
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (FAS 141(R)),
which establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the
impact the adoption of the standard will have on the Companys results of operations.
In December 2007, the FASB issued FAS No. 160, Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary,
which is sometimes referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial statements. Among other
requirements, this statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the amounts of
consolidated net income attributable to the parent and to the non-controlling interest. FAS No.
160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company is currently evaluating the impact the adoption of the standard will have
on the Companys results of operations.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, to require enhanced disclosures about derivative instruments and hedging activities.
The new standard has revised financial reporting for derivative instruments and hedging activities
by requiring more transparency about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows. FAS No. 161
requires disclosure of the fair values of derivative instruments and their gains and losses in a
tabular format. It also requires entities to provide more information about their liquidity by
requiring disclosure of derivative features that are credit risk-related. Further, it requires
cross-referencing within footnotes to enable financial statement users to locate important
information about derivative instruments. FAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with early application
encourage. The adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.
In June 2008, the FASB ratified EITF Issue No. 08-4, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjusted Conversion Ratios. This Issue provides
transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios, that
resulted
from EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and
FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liability
and Equity. The conforming changes are effective for financial statements issued for fiscal years
ending after December 15, 2008, with earlier application permitted. The adoption of this FSP is
not expected to have a material effect on the Companys results of operations or financial
position.
6
In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May
Be Settled in Cash upon Conversion (Including Partial Cash Settlement. This FSP provides guidance
on the accounting for certain types of convertible debt instruments that may be settled in cash
upon conversion. Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
The FSP is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to
have a material effect on the Companys results of operations or financial position.
In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions. This FSP concludes that a transferor and transferee should
not separately account for a transfer of a financial asset and a related repurchase financing
unless (a) the two transactions have a valid and distinct business or economic purpose for being
entered into separately and (b) the repurchase financing does not result in the initial transferor
regaining control over the financial asset. The FSP is effective for financial statements issued
for fiscal years beginning on or after November 15, 2008, and interim periods within those fiscal
years. The adoption of this FSP is not expected to have a material effect on the Companys results
of operations or financial position.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP
142-3). FSP 142-3 amends the factors that should be considered in
developing assumptions about renewal or extension used in estimating the useful life of a
recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This standard
is intended to improve the consistency between the useful life of a recognized intangible asset
under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset
under FAS No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The measurement provisions of this standard will
apply only to intangible assets of the Company acquired after the effective date.
In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify
that instruments granted in share-based payment transactions can be participating securities prior
to the requisite service having been rendered. A basic principle of the FSP is that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and are to be included in the computation of
EPS pursuant to the two-class method. The provisions of this FSP are effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those years. All prior-period EPS data presented (including interim financial statements, summaries
of earnings, and selected financial data) are required to be adjusted retrospectively to conform
with the provisions of the FSP. The adoption of this FSP is not expected to have a material effect
on the Companys results of operations or financial position.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset. This FSP clarifies the application of FAS Statement No. 157, Fair
Value Measurements, in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP shall be effective upon issuance, including prior periods
for which financial statements have not been issued. Revisions resulting from a change in the
valuation technique or its application shall be accounted for as a change in accounting estimate
(FAS Statement No. 154, Accounting Changes and Error Corrections. The disclosure provisions of
Statement 154 for a change in accounting estimate are not required for revisions resulting from a
change in valuation technique or its application. The Company is currently evaluating the impact
the adoption of the FSP will have on the Companys results of operations.
NOTE 2 STOCK-BASED COMPENSATION
During the nine months ended September, 2008, the Company recorded $11,286 in compensation cost
As of September 30, 2008 there was approximately $10,093 of unrecognized compensation cost related
to the unvested share-based compensation awards granted. The cost is expected to be recognized in
2008. The Company had 4,487 unvested stock options outstanding as of September 30, 2008.
7
FAS 123R requires that the cash flows from the tax benefits resulting from tax deductions in excess
of the compensation cost recognized for stock-based awards (excess tax benefits) be classified as
financing cash flows. Prior to the adoption of FAS 123R, such excess tax benefits were presented as
operating cash flows. Accordingly, there have been no excess tax benefits that have been classified
as a financing cash inflow for the nine months ended September 30, 2008 in the Consolidated
Statements of Cash Flows.
The Company had 5,824 non-vested stock options outstanding on September 30, 2008.
Stock option activity during the nine months ended September 30, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
2008 |
|
|
Price |
|
|
2007 |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1 |
|
|
88,211 |
|
|
$ |
28.04 |
|
|
|
77,287 |
|
|
$ |
26.23 |
|
Granted |
|
|
1,337 |
|
|
|
36.25 |
|
|
|
10,357 |
|
|
|
37.73 |
|
Exercised |
|
|
(992 |
) |
|
|
19.80 |
|
|
|
(565 |
) |
|
|
25.10 |
|
Forfeited |
|
|
(1,591 |
) |
|
|
23.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30 |
|
|
86,965 |
|
|
$ |
28.34 |
|
|
|
87,079 |
|
|
$ |
27.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 EARNINGS PER SHARE
The Company 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 denominator in calculating basic and
diluted earnings per share; therefore, net income as presented on the Consolidated Statement of
Income (Unaudited) 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 Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
issued |
|
|
1,712,574 |
|
|
|
1,703,114 |
|
|
|
1,707,720 |
|
|
|
1,660,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average treasury stock shares |
|
|
(189,530 |
) |
|
|
(112,275 |
) |
|
|
(173,979 |
) |
|
|
(101,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share |
|
|
1,523,044 |
|
|
|
1,590,839 |
|
|
|
1,533,741 |
|
|
|
1,559,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share |
|
|
2,329 |
|
|
|
19,468 |
|
|
|
12,659 |
|
|
|
21,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share |
|
|
1,525,373 |
|
|
|
1,610,307 |
|
|
|
1,546,400 |
|
|
|
1,580,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Options to purchase 27,234 shares of common stock at prices ranging from $36.25 to $40.24 were
outstanding during the nine months ended September 30, 2008 but were not included in the
computation of diluted earnings per share as they were
anti-dilutive due to the strike price being
greater than the market price as of September 30, 2008. Options to purchase 21,554 shares of
common stock at prices ranging from $39.62 to $42.25 were outstanding during the three and nine
months ended September 30, 2007 but were not included in the computation of diluted earnings per
share as they were anti-dilutive due to the strike price being greater than the market price as of
September 30, 2007.
NOTE 4 COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains and losses on
available for sale securities. For the nine months ended September 30, 2008, this activity is
shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes
in Stockholders Equity (Unaudited).
The following shows the components and activity of comprehensive income during the periods ended
September 30, 2008 and 2007 (net of the income tax effect):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during
the period on securities held |
|
|
(727,463 |
) |
|
|
656,243 |
|
|
|
(1,807,694 |
) |
|
|
(111,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains included in net income |
|
|
17,000 |
|
|
|
|
|
|
|
22,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses) during the period |
|
|
(710,463 |
) |
|
|
656,243 |
|
|
|
(1,784,919 |
) |
|
|
(111,356 |
) |
Unrealized holding losses, beginning of period |
|
|
(1,127,425 |
) |
|
|
(1,288,586 |
) |
|
|
(52,969 |
) |
|
|
(520,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses, end of period |
|
|
(1,837,888 |
) |
|
|
(632,343 |
) |
|
|
(1,837,888 |
) |
|
|
(632,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
704,448 |
|
|
|
860,944 |
|
|
|
2,224,473 |
|
|
|
2,512,550 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period |
|
|
(710,463 |
) |
|
|
656,243 |
|
|
|
(1,784,919 |
) |
|
|
(111,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (losses) |
|
|
(6,015 |
) |
|
|
1,517,187 |
|
|
|
439,554 |
|
|
|
2,401,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued FASB No. 157, Fair Value Measurements, to provide consistency
and comparability in determining fair value measurements and to provide for expanded disclosures
about fair value measurements. The definition of fair value maintains the exchange price notion in
earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit
price is the price that would be received to sell the asset or paid to transfer the liability
adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about
the use of fair value to measure assets and liabilities.
9
The following table presents the balance of certain assets reported at fair value as of September
30, 2008 and indicates the fair value hierarchy of the valuation techniques utilized by the Company
to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
|
|
|
|
Assets Identical |
|
|
Observable |
|
|
Balance as of |
|
|
|
(Level 1) |
|
|
Inputs (Level 2) |
|
|
30-Sep-08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
$ |
1,038,412 |
|
|
$ |
95,332,939 |
|
|
$ |
96,371,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a non-recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans |
|
$ |
|
|
|
$ |
1,493,013 |
|
|
$ |
1,493,013 |
|
As required by FASB No. 157, each financial asset and liability must be identified as having been
valued according to specified level of input, 1, 2 or 3. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date. Fair values determined by Level 2 inputs utilize inputs other
than quoted prices included in Level 1 that are
observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for
similar assets in active markets, and inputs other than quoted prices that are observable for the
asset or liability. Level 3 inputs are unobservable inputs for the asset, and include situations
where there is little, if any, market activity for the asset or liability. In certain cases, the
inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, the level in the fair value hierarchy, within which the fair value measurement in its
entirety falls, has been determined based on the lowest level input that is significant to the fair
value measurement in its entirety. The Companys assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the asset.
The measurement of fair value should be consistent with one of the following valuation techniques:
market approach, income approach, and/or cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets or
liabilities (including a business). For example, valuation techniques consistent with the market
approach often use market multiples derived from a set of comparables. Multiples might lie in
ranges with a different multiple for each comparable. The selection of where within the range the
appropriate multiple falls requires judgment, considering factors specific to the measurement
(qualitative and quantitative). Valuation techniques consistent with the market approach include
matrix pricing. Matrix pricing is a mathematical technique used principally to value debt
securities without relying exclusively on quoted prices for the specific securities, but rather by
relying on the securities relationship to other benchmark quoted securities. As of September 30,
2008, all of the financial assets measured at fair value utilized the market approach.
NOTE 6 ACQUISITIONS
On November 15, 2006 Middlefield Banc Corp. entered into an Agreement and Plan of Merger for the
acquisition of Emerald Bank, an Ohio-chartered savings bank headquartered in Dublin, Ohio.
Middlefield Banc Corp. organized an interim bank subsidiary under Ohio commercial bank law to carry
out the merger with Emerald Bank. The Agreement and Plan of Merger was amended on January 3, 2007
to make the new interim bank subsidiary, known as EB Interim Bank, a party to the agreement. At
the effective time of the merger Emerald Bank merged into the new interim subsidiary, which was the
surviving corporation and which has thereafter operated under the name Emerald Bank as a wholly
owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for Emerald Bank
totaled $7,326,890 with one half of the merger consideration paid in cash and the other half in
shares of Middlefield Banc Corp. common stock. The merger was approved by both bank regulators and
Emerald Bank stockholders. The transaction was completed on April 19, 2007.
10
The following Unaudited pro forma condensed combined financial information presents the results of
operations of the Company had the merger taken place at January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
$ |
19,651,284 |
|
|
$ |
18,906,851 |
|
Interest Expense |
|
|
10,670,499 |
|
|
|
10,230,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
8,980,785 |
|
|
|
8,676,040 |
|
Provision for loan losses |
|
|
357,000 |
|
|
|
220,493 |
|
|
|
|
|
|
|
|
|
|
Net Interest Income after provision for loan losses |
|
|
8,623,785 |
|
|
|
8,455,547 |
|
|
|
|
|
|
|
|
Non Interest Income |
|
|
1,954,915 |
|
|
|
1,945,839 |
|
Non Interest Expense |
|
|
7,824,227 |
|
|
|
7,531,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,754,473 |
|
|
|
2,869,421 |
|
Provision for income taxes |
|
|
530,000 |
|
|
|
621,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,224,473 |
|
|
$ |
2,248,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.45 |
|
|
$ |
1.44 |
|
Diluted |
|
|
1.44 |
|
|
|
1.42 |
|
On June 12, 2008 Emerald Bank filed a Notice of Intent for a Bank to Acquire a Banking Office under
the provisions of Section 1161.05 of the Ohio Revised Code. Emerald Bank, whose address is 6215
Perimeter Drive, Dublin, Franklin County, Ohio 43017, will purchase and assume certain assets and
liabilities associated with the branch office of The Commercial Savings Bank, 118 South Sandusky
Avenue, Upper Sandusky, Wyandot County, Ohio 43351 located at 17 N. State Street, Westerville,
Franklin County, Ohio, 43081 (the Westerville Branch). As of May 12, 2008, total deposits at the
Westerville Branch were approximately $6.4 million, and the combined purchase price for the real
property and the furniture, fixtures, and equipment at net book value was approximately $440,373.
Upon consummation of the proposed transaction, Emerald Bank will operate the Westerville Branch as
a branch office. Emerald Bank and The Commercial Savings Bank desire to complete the transaction by
or as soon after November 10, 2008, as is possible, but in any case no later than December 1, 2008.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides further detail to the financial condition and
results of operations of the Company. The MD&A should be read in conjunction with the notes and
financial statements presented in this report.
CHANGES IN FINANCIAL CONDITION
General. The Companys total assets increased by $19.8 million or 4.6% from December 31, 2007 to
September 30, 2008 to a balance of $454.1 million. Loans receivable and investment securities
increased $10.7 million and $10.4 million respectively. The increase in total assets reflects a
corresponding increase in total liabilities of $21.4 million or 5.4% and a decline in stockholders
equity of $1.8 million or -4.5%. The increase in total liabilities was primarily the result of
deposit growth of $17.1 million. The decline in stockholders equity was the result of increases
in accumulated other comprehensive loss and treasury stock of $1.8 million and $1.4 million
respectively which was partially offset by increases in common stock and retained earnings of
$509,000 and $1.1 million.
Cash on hand and due from banks. Cash on hand and due from banks represent cash equivalents. Cash
equivalents declined a combined $4.9 million or 27.3% to $13.0 million at September 30, 2008 from
$17.8 million at December 31, 2007. Deposits from customers into savings and checking accounts,
loan and security repayments and proceeds from borrowed funds typically increase these accounts.
Decreases result from customer withdrawals, new loan originations, security purchases and
repayments of borrowed funds. The decline for the first nine months can principally be attributed
to a decrease in Federal Funds Sold which was used to fund the loan portfolio.
11
Investment securities. Investment securities available for sale ended the September 30, 2008
quarter at $96.4 million an increase of $10.4 million or 12.1% from $86.0 million at December 31,
2007. During this period the Company recorded purchases of available for sale securities of $27.8
million, consisting of purchases of mortgage-backed securities. Offsetting the purchases of
securities were repayments and maturities of securities of $14.5 million during the nine months
ended September 30, 2008. In addition, the securities portfolio decreased approximately $2.7
million due to a decline in the market value. These fair value adjustments represent temporary
fluctuations resulting from changes in market rates in relation to average yields in the available
for sale portfolio. If securities are held to their respective maturity dates, no fair value gain
or loss will be realized.
Loans receivable. The loans receivable category consists primarily of single family mortgage loans
used to purchase or refinance personal residences located within the Companys market area and
commercial real estate loans used to finance properties that are used in the borrowers businesses
or to finance investor-owned rental properties, and to a lesser extent commercial and consumer
loans. Net loans receivable increased $10.4 million or 3.4% to $316.5 million at September 30, 2008
from $306.1 million at December 31, 2007. Included in this increase were growth in commercial real
estate mortgage loans of $9.7 million or 26.3% and real estate construction loans of $818,000 or
12.2%, as well as an increase in commercial and industrial loans of $219,000 during the nine months
ended September 30, 2008.
The Companys lending philosophy is to focus on the commercial loans and to attempt to grow the
portfolio. To attract and build the commercial loan portfolio, the Corporation has taken a
proactive approach in contacting new and current clients to ensure that the Company is servicing
its clients needs. These lending relationships generally offer more attractive returns than
residential loans and also offer opportunities for attracting larger balance deposit relationships.
However, the shift in loan portfolio mix from residential real estate to commercial oriented loans
may increase credit risk.
Non-performing loans. Non-performing loans include non-accrual loans, renegotiated loans, loans 90
days or more past due, other real estate loans, and repossessed assets. A loan is classified, as
non-accrual 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. The ratio of non-performing loans to total loans stood at 2.1% at
September 30, 2008. This was an increase from the 1.4% reported as of September 30, 2007. Loans
classified as non-accrual at September 30, 2008, were $3.4 million, which
was up from the $2.2 million reported at September 30, 2007. Loans past due 90 days and still
accruing interest, as of September 30, 2008, were $3.3 million which is $1.1 million above the
prior year figure. Additionally, the Company held $1.1 million in other real estate owned most of
which came from its Emerald Bank affiliate.
Deposits. The Company considers various sources when evaluating funding needs, including but not
limited to deposits, which are a significant source of funds totaling $380.0 million or 90.8% of
the Companys total funding sources at September 30, 2008. Total deposits increased $17.1 million
or 4.7% to $380.0 million at September 30, 2008 from $362.9 million at December 31, 2007. The
increase in deposits is primarily related to the growth of certificates of deposits that totaled
$215.0 million at September 30, 2008 an increase of $12.5 million or 6.2% for the year.
Interest-bearing demand and money market accounts increased $7.8 and $4.1 while savings and
noninterest demand accounts declined by $7.1 million and $418,000 respectively, during the nine
months ended September 30, 2008.
Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding
for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior
subordinated debt and repurchase agreements. Borrowed funds increased $4.5 million or 13.2% to
$38.4 million at September 30, 2008 from $33.9 million at December 31, 2007. The majority of the
increase came from FHLB borrowings which increased $4.2 million or 17.4%. The increase in FHLB
advances was the result of additional borrowings by both banks in order to take advantage of lower
rates currently being offered by the FHLB.
Stockholders equity. Stockholders equity declined $1.6 million or 4.5% to $33.4 million at
September 30, 2008 from $35.0 million at December 31, 2007. The decrease in stockholders equity
was the result of increases in common stock and retained earnings of $509,000 and $1.1 million,
respectively, offset by increases in accumulated other comprehensive loss and treasury stock of
$1.8 million and $1.4 million respectively.
The increase of accumulated other comprehensive loss was the result of a reduction in the mark to
market value of the Companys securities available for sale portfolio. The decrease in treasury
stock was the result of the purchase of 37,785 shares of the Companys common stock at an average
price of $35.75 since December 31, 2007. The increase in common stock was due to stock purchased
through the dividend reinvestment plan and stock based compensation expense recognized in earnings
of $498,193 and $11,286 respectively. The increase in retained earnings was the result of $2.2
million in net income for the nine months which was partially offset by $1.2 million in cash
dividends.
RESULTS OF OPERATIONS
General. Net income for the third quarter of 2008 totaled $704,448, or 18.2 percent less than the
$860,944 reported for the same period in 2007. Diluted earnings per share for the third quarter of
2008 were $0.46, a 13.2% decrease from 2007s third quarter diluted earnings per share of $0.53.
These third quarter results include the operations of Emerald Bank of Dublin, Ohio, which became a
subsidiary of the Company on April 19, 2007.
12
Results from the nine months of 2008 reflect a net income of $2,224,473 an 11.5% decrease compared
to $2,512,550 for the first three quarters of 2007. Diluted earnings per share for the nine months
of 2008 were $1.44, or 9.4% less than diluted earnings per share of $1.59 for the first nine months
of 2007. These figures include Emerald Banks operations from April 19, 2007 through September 30,
2007.
Net interest income. Net interest income, the primary source of revenue for the Company, is
determined by the Companys interest rate spread, which is defined as the difference between income
on earning assets and the cost of funds supporting those assets, and the relative amounts of
interest earning assets and interest bearing liabilities. Management periodically adjusts the mix
of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in
order to manage and improve net interest income. The level of interest rates and changes in the
amount and composition of interest earning assets and liabilities affect the Companys net interest
income. Historically from an interest rate risk perspective, it has been managements perception
that differing interest rate environments can cause sensitivity to the Companys net interest
income, these being extended low long-term interest rates or rapidly rising short-term interest
rates.
Net interest income totaled $3.2 million for the third quarter of 2008, an increase of 8.4% from
the $2.9 million reported for the comparable period of 2007. The net interest margin of 3.20% for
the third quarter of 2008 showed improvement over the 3.15% reported for the same quarter of 2007.
The increase in the net interest margin is primarily attributable to higher loan volume along with
a 21 basis point increase in the investment portfolio yield during a substantial decline in the
interest rate environment.
Net interest income increased $585,000, or 7.0%, for the nine months ended September 30, 2008
compared to the same period in the prior year. This increase in net interest income can be
attributed to an increase in interest income of $1.5 million, partially offset by an increase in
interest expense of $866,000. The net interest margin was 3.08% for the first three quarters 2008,
down from the 3.29% reported for the same period of 2007. The declining margin for the first nine
months of the year is primarily attributable to the changing interest rate environment in which the
market experienced a 325 basis point decline in the prime rate.
Interest income. Interest income declined $23,000, or .3%, for the three months ended September 30,
2008, compared to the same period in
the prior year. This decrease can be attributed to a 39 basis point drop in the yield on
interest-earning assets for the quarter. The largest factor in this decline was the 57 basis point
loan yield reduction due to the falling prime rate for the period. This decline was partly offset
by a 21 basis point increase in the investment portfolio. Interest income increased $1.5 million,
or 8.0%, for the nine months ended September 30, 2008, compared to the same period in the prior
year. This increase can be attributed to increases in interest earned on loans receivable and
investment securities of $824,000 and $998,000 respectively.
Interest earned on loans declined 179,000, or 3.2%, for the three months ended September 30, 2008,
compared to the same period in the prior year. This decline was the result of both an increase in
income due to a higher average balance in the loan portfolio which was more than offset by a
reduction of interest income due to the lower rate environment.
For the nine months ended September 30, 2008, interest earned on loans receivable increased
$824,000, or 5.3%, , compared to the same period in the prior year. This increase was attributable
to an increase in the average balance of loans outstanding of $33.9 million, or 12.0%, to $316.0
million for the nine months ended September 30, 2008 compared to $282.2 million for the same period
in the prior year. Loan interest income was reduced by a decline in the yield on the loans to 6.86%
for the nine months ended September 30, 2008 from 7.32% for the same period in the prior year.
Interest earned on securities increased $281,000, or 35.5%, for the three months ended September
30, 2008, compared to the same period in the prior year. This increase was primarily the result of
an increase in the average balance of the securities portfolio of $16.6 million, or 21.4%, to $94.5
million at September 30, 2008 from $77.9 million for the same period in the prior year. Interest
earned on securities was enhanced by an increase in the yield on the investments to 5.48 for the
three months ended September 30, 2008 from 5.27% for the same period in the prior year.
Interest earned on securities increased $1.0 million, or 46.9%, for the nine months ended September
30, 2008, compared to the same period in the prior year. This increase was primarily the result of
an increase in the average balance of the securities portfolio of $23.4 million, or 32.6%, to $95.4
million at September 30, 2008 from $72.0 million for the same period in the prior year. Interest
earned on securities was enhanced by an increase in the yield on the investments to 5.40% for the
nine months ended September 30, 2008 from 5.26% for the same period in the prior year.
Interest expense. Interest expense declined $267,000, or 7.3%, for the three months ended September
30, 2008, compared to the same period in the prior year. The decrease in interest expense can be
attributed to a combination of two factors:
|
1. |
|
A volume increase in the balance of interest-bearing liabilities of $32.5 million
resulting in $377,000 of additional interest cost. |
|
|
2. |
|
The interest rate on interest-bearing liabilities declining by 86 basis points from
4.28% for the third quarter of 2007 to 3.62% for the same period in 2008. |
13
Interest expense increased $866,000, or 8.8%, for the nine months ended September 30, 2008,
compared to the same period in the prior year. The increase in interest expense can be attributed
to a combination of two factors:
|
1. |
|
A volume increase in the balance of interest-bearing liabilities of $57.8 million
resulting in $1.8 million of additional interest cost. |
|
|
2. |
|
The interest rate on interest-bearing liabilities declining by 36 basis points from
4.21% for the first three quarters of 2007 to 3.85% for the same period in 2008. |
Interest incurred on deposits, the largest component of the Companys interest-bearing liabilities,
decreased $228,000, or 7.2%, for the three months ended September 30, 2008, compared to the same
period in the prior year. This reduced cost was primarily attributable to the average balance of
interest-bearing deposits which increased by $32.8 million, or 10.1%, to $334.4 million for the
three months ended September 30, 2008, compared to $301.5 million for the same period in the prior
year. Interest expense was positively affected by a reduction in the
cost of interest-bearing
deposits to 3.50% from 4.18% for the quarters ended September 30, 2008 and 2007, respectively. The
Company diligently monitors the interest rates on its products as well as the rates being offered
by its competition and utilize rate surveys to keep its total interest expense costs down.
For the nine months ended September 30, 2008 interest incurred on deposits increased $1.0 million,
or 12.2%, compared to the same period in the prior year. This increase was primarily attributable
to an increase in the average balance of interest-bearing deposits of $60.5 million, or 22.1%, to
$333.8 million for the nine months ended September 30,
2008, compared to $273.4 million for the same
period in the prior year. Interest expense was positively affected by a reduction in the cost of
interest-bearing deposits to 3.74% from 4.09% for the nine months September 30, 2008 and 2007,
respectively.
Interest incurred on borrowed funds, declined by $40,000 or 8.2%, for the three months ended
September 30, 2008, compared to the same period in the prior year. This decline was due to both a
decrease in the average balance of borrowing and a reduction in the rate paid. The rate of the
borrowings declined to 4.5% from 4.90% for the quarters ended September 30, 2008 and 2007,
respectively. Adding to the reduction in
the cost of these funds was a decline in the average balance of borrowed funds of $584,000, or
1.5%, to $38.1 million for the three months ended September 30, 2008, compared to $38.7 million for
the same period in the prior year. This decline is reflected in the quarterly rate volume report
presented below which compares the decrease to the costs associated with the interest-bearing
liabilities.
For the nine months ended September 30, 2008, interest incurred on borrowed funds decreased by
$155,000, or 10.7%, compared to the same period in the prior year. As with the third quarter
results this decline was due to both a decrease in the average balance of borrowing and a reduction
in the rate paid. The average balance of borrowed funds declined by $2.7 million, or 7.0%, to
$35.7 million for the nine months ended September 30, 2008, compared to $38.4 million for the nine
months ended September 30, 2007.
Provision for loan losses. The provision is maintained at a level to absorb managements estimate
of probable inherent credit losses within the Companys loan portfolio. At September 30, 2008, the
allowance for loan losses as a percentage of total loans was 1.13%, which represented an 11.9%
increase over the 1.01% reported at September 30, 2007. The ratio of non-performing loans to total
loans stood at 2.11% at September 30, 2008. This was an increase from the 1.24% reported as of
September 30, 2007. Loans classified as non-accrual at September 30, 2008, were $3.4 million, which
was $1.3 million increase over the total reported at September 30, 2007. Loans past due 90 days and
still accruing interest, as of September 30, 2008, were $3.3 million, or $1.6 million more than the
prior year figure. The majority of the increase in this category was in residential secured real
estate loans.
Non-interest income. Non-interest income increased $26,400 for the third quarter of 2008 over the
comparable 2007 period. This increase of 4.0% was primarily the result of a gain realized on
investment securities. Service charges on deposit accounts decreased $1,200, with other
non-interest income being $3,500 lower. Earnings on bank-owned life insurance were $5,400 higher
during the third quarter of 2008 than the same period of 2007.
For the nine months ended September 30, 2008, non-interest income increased by $31,000 or 1.6% to
$2.0 million. This increase was the result of investment security gains taken in the first three
quarters of 2008 of $35,000.
Non-interest expense. Non-interest expense for the third quarter of 2008 was 12.9%, or $312,600,
higher than the third quarter of 2007. Increases in salary and employee benefits of $101,400 were
largely attributable to increased staffing, including the opening of the Cortland banking office,
normal wage adjustments, and an additional payroll in the third quarter of 2008 that did not exist
in 2007. Other expense items contributing to the overall increase were costs associated with
compliance with Section 404 of the Sarbanes-Oxley Act, primarily centered in audit and legal
functions, higher fees associated with the increased level of ATM/Debit card usage, amortization of
the core deposit intangible associated with acquisitions made by the company, and higher postage.
Significantly increasing were FDIC premiums, with further increases anticipated as that agency
works to meet statutory minimums.
For the nine months ended September 30, 2008 non-interest expense increased $813,000 or 11.6% from
the same period in the prior year.
14
Provision for income taxes. The Company recognized $530,000 in income tax expense, which reflected
an effective tax rate of 17.35% for the nine months, ended September 30, 2008, as compared to
$621,000 with an effective tax rate of 19.24% for the respective 2007 period.
CRITICAL ACCOUNTING ESTIMATES
The Companys critical accounting estimates involving the more significant judgments and
assumptions used in the preparation of the consolidated financial statements as of September 30,
2008, have remained unchanged from December 31, 2007.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods
indicated, information concerning the total dollar amounts of interest income from interest-earning
assets and the resultant average yields, the total dollar amounts of interest expense on
interest-bearing liabilities and the resultant average costs, net interest income, interest rate
spread and the net interest margin earned on average interest-earning assets. For purposes of this
table, average balances are calculated using monthly averages and the average loan balances include
non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion
of net deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt for federal
income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%.
Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.
Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest
income and interest expense, between the three and nine month periods ended September 30, 2008 and
2008, in terms of: (1) changes in volume of interest-earning assets and interest-bearing
liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in
the Companys interest income and interest expense are attributable to changes in rate (change in
rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior
period rate) and changes attributable to the combined impact of volume/rate (change in rate
multiplied by change in volume). The changes attributable to the combined impact of volume/rate are
allocated on a consistent basis between the volume and rate variances. Changes in interest income
on securities reflects the changes in interest income on a fully tax equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
|
|
|
|
|
|
|
|
|
(4) |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Yield/Cost |
|
|
Balance |
|
|
Interest (1) |
|
|
Yield/Cost |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
318,761 |
|
|
$ |
5,425 |
|
|
|
6.75 |
% |
|
|
303,872 |
|
|
$ |
5,604 |
|
|
|
7.32 |
% |
Investments securities |
|
|
94,532 |
|
|
|
1,073 |
|
|
|
5.48 |
% |
|
|
77,861 |
|
|
|
792 |
|
|
|
5.27 |
% |
Interest-bearing deposits with other
banks |
|
|
5,897 |
|
|
|
52 |
|
|
|
3.48 |
% |
|
|
15,187 |
|
|
|
177 |
|
|
|
4.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
419,191 |
|
|
|
6,550 |
|
|
|
6.42 |
% |
|
|
396,920 |
|
|
|
6,573 |
|
|
|
6.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
29,782 |
|
|
|
|
|
|
|
|
|
|
|
20,392 |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
448,973 |
|
|
|
|
|
|
|
|
|
|
$ |
417,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
|
25,962 |
|
|
|
78 |
|
|
|
1.19 |
% |
|
$ |
17,025 |
|
|
|
91 |
|
|
|
2.12 |
% |
Money market deposits |
|
|
25,789 |
|
|
|
197 |
|
|
|
3.02 |
% |
|
|
26,090 |
|
|
|
257 |
|
|
|
3.91 |
% |
Savings deposits |
|
|
70,001 |
|
|
|
318 |
|
|
|
1.80 |
% |
|
|
77,539 |
|
|
|
573 |
|
|
|
2.93 |
% |
Certificates of deposit |
|
|
212,605 |
|
|
|
2,357 |
|
|
|
4.40 |
% |
|
|
180,867 |
|
|
|
2,255 |
|
|
|
4.95 |
% |
Borrowings |
|
|
38,111 |
|
|
|
450 |
|
|
|
4.68 |
% |
|
|
38,695 |
|
|
|
490 |
|
|
|
5.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
372,468 |
|
|
|
3,399 |
|
|
|
3.62 |
% |
|
|
340,216 |
|
|
|
3,666 |
|
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
44,376 |
|
|
|
|
|
|
|
|
|
|
|
42,867 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
32,129 |
|
|
|
|
|
|
|
|
|
|
|
34,228 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
448,973 |
|
|
|
|
|
|
|
|
|
|
$ |
417,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
3,152 |
|
|
|
|
|
|
|
|
|
|
$ |
2,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (2) |
|
|
|
|
|
|
|
|
|
|
2.80 |
% |
|
|
|
|
|
|
|
|
|
|
2.54 |
% |
Net yield on interest-earning assets (3) |
|
|
|
|
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
|
|
3.15 |
% |
Ratio of average interest-earning assets
to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
112.54 |
% |
|
|
|
|
|
|
|
|
|
|
116.67 |
% |
|
|
|
(1) |
|
Interest income and expense are for the period that
banking operations were in effect.
|
|
(2) |
|
Interest rate spread represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
|
|
(3) |
|
Net yield on interest-earning assets represents net interest income as a percentage of average
interest-earning assets. |
|
(4) |
|
Average yields are computed using annualized interest income and expense for the periods.
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 versus 2007 |
|
|
|
Increase (decrease) due to |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
275 |
|
|
|
-453 |
|
|
|
-179 |
|
Investments securities |
|
|
221 |
|
|
|
60 |
|
|
|
281 |
|
Interest-bearing deposits with
other banks |
|
|
-108 |
|
|
|
-17 |
|
|
|
-125 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
388 |
|
|
|
-410 |
|
|
|
-23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
|
48 |
|
|
|
-61 |
|
|
|
-13 |
|
Money market deposits |
|
|
-3 |
|
|
|
-57 |
|
|
|
-60 |
|
Savings deposits |
|
|
-56 |
|
|
|
-200 |
|
|
|
-255 |
|
Certificates of deposit |
|
|
396 |
|
|
|
-293 |
|
|
|
102 |
|
Borrowings |
|
|
-7 |
|
|
|
-33 |
|
|
|
-40 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
377 |
|
|
|
-645 |
|
|
|
-267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
10 |
|
|
$ |
235 |
|
|
$ |
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
|
|
|
|
|
|
|
|
|
(4) |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Yield/Cost |
|
|
Balance |
|
|
Interest (1) |
|
|
Yield/Cost |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
316,032 |
|
|
$ |
16,274 |
|
|
|
6.86 |
% |
|
|
282,169 |
|
|
$ |
15,450 |
|
|
|
7.32 |
% |
Investments securities |
|
|
95,419 |
|
|
|
3,165 |
|
|
|
5.40 |
% |
|
|
71,969 |
|
|
|
2,155 |
|
|
|
5.26 |
% |
Interest-bearing deposits with other
banks |
|
|
6,803 |
|
|
|
213 |
|
|
|
4.17 |
% |
|
|
14,730 |
|
|
|
596 |
|
|
|
5.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
418,255 |
|
|
|
19,651 |
|
|
|
6.48 |
% |
|
|
368,868 |
|
|
|
18,201 |
|
|
|
6.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
28,141 |
|
|
|
|
|
|
|
|
|
|
|
18,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
446,396 |
|
|
|
|
|
|
|
|
|
|
$ |
387,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
|
23,310 |
|
|
|
220 |
|
|
|
1.26 |
% |
|
$ |
14,201 |
|
|
|
265 |
|
|
|
2.49 |
% |
Money market deposits |
|
|
24,418 |
|
|
|
588 |
|
|
|
3.21 |
% |
|
|
25,557 |
|
|
|
801 |
|
|
|
4.19 |
% |
Savings deposits |
|
|
71,834 |
|
|
|
1,100 |
|
|
|
2.04 |
% |
|
|
66,403 |
|
|
|
1,187 |
|
|
|
2.39 |
% |
Certificates of deposit |
|
|
214,270 |
|
|
|
7,474 |
|
|
|
4.65 |
% |
|
|
167,217 |
|
|
|
6,108 |
|
|
|
4.88 |
% |
Borrowings |
|
|
35,677 |
|
|
|
1,289 |
|
|
|
4.81 |
% |
|
|
38,352 |
|
|
|
1,444 |
|
|
|
5.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
369,509 |
|
|
|
10,670 |
|
|
|
3.85 |
% |
|
|
311,730 |
|
|
|
9,805 |
|
|
|
4.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
43,114 |
|
|
|
|
|
|
|
|
|
|
|
42,445 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
33,773 |
|
|
|
|
|
|
|
|
|
|
|
32,979 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
|
446,396 |
|
|
|
|
|
|
|
|
|
|
$ |
387,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
8,981 |
|
|
|
|
|
|
|
|
|
|
$ |
8,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (2) |
|
|
|
|
|
|
|
|
|
|
2.64 |
% |
|
|
|
|
|
|
|
|
|
|
2.64 |
% |
Net yield on interest-earning assets (3) |
|
|
|
|
|
|
|
|
|
|
3.08 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
Ratio of average interest-earning assets
to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
113.19 |
% |
|
|
|
|
|
|
|
|
|
|
118.33 |
% |
|
|
|
(1) |
|
Interest income and expense are for the period that banking operations were in effect.
|
|
(2) |
|
Interest rate spread represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
|
|
(3) |
|
Net yield on interest-earning assets represents net interest income as a percentage of average
interest-earning assets. |
|
(4) |
|
Average yields are computed using annualized interest income and expense for the periods.
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 versus 2007 |
|
|
|
Increase (decrease) due to |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
1,854 |
|
|
|
-1,031 |
|
|
|
824 |
|
Investments securities |
|
|
922 |
|
|
|
87 |
|
|
|
1,010 |
|
Interest-bearing deposits with
other banks |
|
|
-321 |
|
|
|
-62 |
|
|
|
-383 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,456 |
|
|
|
-1,005 |
|
|
|
1,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
|
170 |
|
|
|
-215 |
|
|
|
-45 |
|
Money market deposits |
|
|
-36 |
|
|
|
-177 |
|
|
|
-213 |
|
Savings deposits |
|
|
97 |
|
|
|
-184 |
|
|
|
-87 |
|
Certificates of deposit |
|
|
1,719 |
|
|
|
-353 |
|
|
|
1,366 |
|
Borrowings |
|
|
-101 |
|
|
|
-54 |
|
|
|
-155 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,849 |
|
|
|
-984 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
606 |
|
|
$ |
(22 |
) |
|
$ |
585 |
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
Managements objective in managing liquidity is maintaining the ability to continue meeting the
cash flow needs of its customers, such as borrowings or deposit withdrawals, as well as its own
financial commitments. The principal sources of liquidity are net income, loan payments, maturing
and principal reductions on securities and sales of securities available for sale, federal funds
sold and cash and deposits with banks. Along with its liquid assets, the Company has additional
sources of liquidity available to ensure that adequate funds are available as needed. These
include, but are not limited to, the purchase of federal funds, the ability to borrow funds under
line of credit agreements with correspondent banks, a borrowing agreement with the Federal Home
Loan Bank of Cincinnati, Ohio and the adjustment of interest rates to obtain depositors. Management
feels that it has the capital adequacy, profitability and reputation to meet the current and
projected needs of its customers.
For the nine months ended September 30, 2008, the adjustments to reconcile net income to net cash
from operating activities consisted mainly of depreciation and amortization of premises and
equipment, the provision for loan losses, net amortization of securities and net changes in other
assets and liabilities. Cash and cash equivalents increased as a result of the purchasing of
government agency securities. For a more detailed illustration of sources and uses of cash, refer
to the condensed consolidated statements of cash flows.
INFLATION
Substantially all of the Companys assets and liabilities relate to banking activities and are
monetary in nature. The consolidated financial statements and related financial data are presented
in accordance with U.S. Generally Accepted Accounting Principles or GAAP. GAAP currently requires
the Company to measure the financial position and results of operations in terms of historical
dollars, with the exception of securities available for sale, impaired loans and other real estate
loans that are measured at fair value. Changes in the value of money due to rising inflation can
cause purchasing power loss.
Managements opinion is that movements in interest rates affect the financial condition and results
of operations to a greater degree than changes in the rate of inflation. It should be noted that
interest rates and inflation do affect each other, but do not always move in correlation with each
other. The Companys ability to match the interest sensitivity of its financial assets to the
interest sensitivity of its liabilities in its asset/liability management may tend to minimize the
effect of changes in interest rates on the Companys performance.
REGULATORY MATTERS
The Company is subject to the regulatory requirements of The Federal Reserve System as a multi-bank
holding company. The affiliate banks are subject to regulations of the Federal Deposit Insurance
Corporation (FDIC) and the State of Ohio, Division of Financial Institutions.
17
REGULATORY CAPITAL REQUIREMENTS
The Company is subject to regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures
of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors and the regulators can lower
classifications in certain cases. Failure to meet various capital requirements can trigger
regulatory action that could have a direct material effect on the Companys operations.
The prompt corrective action regulations provide five classifications, including well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized, although these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and expansion and plans for
capital restoration are required.
The following table illustrates the Companys risk-weighted capital ratios at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middlefield Banc Corp. |
|
|
The Middlefield Banking Co. |
|
|
Emerald Bank |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
Total Capital
(to Risk-weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
$ |
42,881,146 |
|
|
|
13.98 |
% |
|
$ |
33,069,404 |
|
|
|
12.60 |
% |
|
$ |
7,913,660 |
|
|
|
17.97 |
% |
For Capital Adequacy Purposes |
|
|
24,532,435 |
|
|
|
8.00 |
|
|
|
21,000,160 |
|
|
|
8.00 |
|
|
|
3,522,319 |
|
|
|
8.00 |
|
To Be Well Capitalized |
|
|
30,665,544 |
|
|
|
10.00 |
|
|
|
26,250,200 |
|
|
|
10.00 |
|
|
|
4,402,899 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I
Capital
(to Risk-weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
$ |
39,096,390 |
|
|
|
12.75 |
% |
|
$ |
30,109,199 |
|
|
|
11.47 |
% |
|
$ |
7,362,022 |
|
|
|
16.72 |
% |
For Capital Adequacy Purposes |
|
|
12,266,218 |
|
|
|
4.00 |
|
|
|
10,500,080 |
|
|
|
4.00 |
|
|
|
1,761,159 |
|
|
|
4.00 |
|
To Be Well Capitalized |
|
|
18,399,327 |
|
|
|
6.00 |
|
|
|
15,750,120 |
|
|
|
5.00 |
|
|
|
2,641,739 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
$ |
39,096,390 |
|
|
|
8.83 |
% |
|
$ |
30,109,199 |
|
|
|
7.78 |
% |
|
$ |
7,362,022 |
|
|
|
14.06 |
% |
For Capital Adequacy Purposes |
|
|
17,707,847 |
|
|
|
4.00 |
|
|
|
15,473,487 |
|
|
|
4.00 |
|
|
|
2,094,131 |
|
|
|
4.00 |
|
To Be Well Capitalized |
|
|
22,134,809 |
|
|
|
5.00 |
|
|
|
19,341,858 |
|
|
|
5.00 |
|
|
|
2,617,664 |
|
|
|
5.00 |
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
ASSET AND LIABILITY MANAGEMENT
The primary objective of the Companys asset and liability management function is to maximize the
Companys net interest income while simultaneously maintaining an acceptable level of interest rate
risk given the Companys operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the exposure of the Companys
earnings to interest rate risk is the timing difference between the repricing and maturity of
interest-earning assets and the repricing or maturity of its interest-bearing liabilities. The
Companys asset and liability management policies are designed to decrease interest rate
sensitivity primarily by shortening the maturities of interest-earning assets while at the same
time extending the maturities of interest-bearing liabilities. The Board
of Directors of the Company continues to believe in strong asset/liability management in order to
insulate the Company from material and prolonged increases in interest rates. As a result of this
policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans
in the form of mortgage-backed securities. Mortgage-backed securities generally increase the
quality of the Companys assets by virtue of the insurance or guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company.
18
The Companys Board of Directors has established an Asset and Liability Management Committee
consisting of four outside directors, the President and Chief Executive Officer, Executive Vice
President/ Chief Operating Officer, Senior Vice President /Chief Financial Officer and Senior Vice
President/Commercial Lending. This committee, which meets quarterly, generally monitors various
asset and liability management policies and strategies, which were implemented by the Company over
the past few years. These strategies have included: (i) an emphasis on the investment in
adjustable-rate and shorter duration mortgage-backed securities; (ii) an emphasis on the
origination of single-family residential adjustable-rate mortgages (ARMs), residential construction
loans and commercial real estate loans, which generally have adjustable or floating interest rates
and/or shorter maturities than traditional single-family residential loans, and consumer loans,
which generally have shorter terms and higher interest rates than mortgage loans; (iii) increase in
the duration of the liability base of the Company by extending the maturities of savings deposits,
borrowed funds and repurchase agreements.
The Company has established the following guidelines for assessing interest rate risk:
Net interest income simulation. Given a 200 basis point parallel and gradual increase or decrease
in market interest rates, net interest income may not change by more than 10% for a one-year
period.
Portfolio equity simulation. Portfolio equity is the net present value of the Companys existing
assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in
market interest rates, portfolio equity may not correspondingly decrease or increase by more than
20% of stockholders equity.
The following table presents the simulated impact of a 200 basis point upward and a 200 basis point
downward shift of market interest rates on net interest income and the change in portfolio equity.
This analysis was done assuming that the interest-earning asset and interest-bearing liability
levels at September 30, 2008 remained constant. The impact of the market rate movements was
developed by simulating the effects of rates changing gradually over a one-year period from the
September 30, 2008 levels for net interest income. The impact of market rate movements was
developed by simulating the effects of an immediate and permanent change in rates at September 30,
2008 for portfolio equity:
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
Decrease |
|
|
|
200 |
|
|
200 |
|
|
|
BP |
|
|
BP |
|
|
|
|
|
|
|
|
|
|
Net interest
income increase (decrease) |
|
|
(0.5 |
)% |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
Portfolio
equity increase (decrease) |
|
|
(11.2 |
)% |
|
|
(2.6 |
)% |
ITEM 4.
Controls and Procedures Disclosure
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
As of the end of the period covered by this quarterly report, an evaluation was carried out
under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(e) and 15d-14(e) under the Securities
Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that the Companys disclosure controls and procedures are, to
the best of their knowledge, effective to ensure that information required to be disclosed by
the Corporation in reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that there were no significant changes in internal control or in other
factors that could significantly affect its internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
19
A material weakness is a significant deficiency (as defined in Public Company Accounting
Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that
results in there being more than a remote likelihood that a material misstatement of the annual
or interim financial statements will not be prevented or detected on a timely basis by
management or employees in the normal course of performing their assigned functions.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Companys most
recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1a. There are no material changes to the risk factors set forth in Part I, Item 1A, Risk
Factors, of the Companys Annual Report on Form 10-K for the year ended December 31, 2007. Please
refer to that section for disclosures regarding the risks and uncertainties related to the
Companys business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 12, 2008, the Company announced the adoption of a stock repurchase program that
authorizes the repurchase of up to 4.99% or approximately 76,936 shares of its outstanding common
stock in the open market or in privately negotiated transactions. This program expires in May 2009.
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
20
Item 6. Exhibits
|
|
|
|
|
|
|
exhibit |
|
|
|
|
number |
|
description |
|
location |
|
2 |
|
|
Agreement and Plan of Merger among
Middlefield Banc Corp., EB Interim
Bank, and Emerald Bank, dated as of
November 15, 2007, as amended by
Amendment No. 1
|
|
Incorporated by
reference to the
prospectus/proxy
statement, Appendix
A, contained in
Part I of Form S-4
Registration
Statement Amendment
No. 1 filed on
February 9, 2008.
Disclosure
schedules referred
to in the Agreement
and Plan of Merger
are omitted in
reliance on Item
601(b)(2) of
Regulation S-K.
Upon request of the
SEC, Middlefield
Banc Corp. will
furnish
supplemental to the
SEC a copy of the
disclosure
schedules |
|
|
|
|
|
|
|
|
3.1 |
|
|
Second Amended and Restated Articles
of Incorporation of Middlefield Banc
Corp., as amended
|
|
Incorporated by
reference to
Exhibit 3.1 of
Middlefield Banc
Corp.s Annual
Report on Form 10-K
for the Fiscal Year
Ended December 31,
2005, filed on
March 29, 2007 |
|
|
|
|
|
|
|
|
3.2 |
|
|
Regulations of Middlefield Banc Corp.
|
|
Incorporated by
reference to
Exhibit 3.2 of
Middlefield Banc
Corp.s
registration
statement on Form
10 filed on April
17, 2001 |
|
|
|
|
|
|
|
|
4 |
|
|
Specimen stock certificate
|
|
Incorporated by
reference to
Exhibit 3.2 of
Middlefield Banc
Corp.s
registration
statement on Form
10 filed on April
17, 2001 |
|
|
|
|
|
|
|
|
4.1 |
|
|
Amended and Restated Trust
Agreement, dated as of December 21,
2007, between Middlefield Banc
Corp., as Depositor, Wilmington
Trust Company, as Property Trustee,
Wilmington Trust Company, as
Delaware Trustee, and Administrative
Trustees
|
|
Incorporated by
reference to
Exhibit 4.1 of
Middlefield Banc
Corp.s Form 8-K
Current Report
filed on December
27, 2007 |
|
|
|
|
|
|
|
|
4.2 |
|
|
Junior Subordinated Indenture, dated
as of December 21, 2007, between
Middlefield Banc Corp. and
Wilmington Trust Company
|
|
Incorporated by
reference to
Exhibit 4.2 of
Middlefield Banc
Corp.s Form 8-K
Current Report
filed on December
27, 2007 |
|
|
|
|
|
|
|
|
4.3 |
|
|
Guarantee Agreement, dated as of
December 21, 2007, between
Middlefield Banc Corp. and
Wilmington Trust Company
|
|
Incorporated by
reference to
Exhibit 4.3 of
Middlefield Banc
Corp.s Form 8-K
Current Report
filed on December
27, 2007 |
|
|
|
|
|
|
|
|
99 |
|
|
Report of independent registered
public accounting firm.
|
|
filed herewith |
|
|
|
|
|
|
|
|
31 |
|
|
Rule 13a-14(a) certification of
Chief Executive Officer
|
|
filed herewith |
|
|
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) certification of
Chief Financial Officer
|
|
filed herewith |
|
|
|
|
|
|
|
|
32 |
|
|
Rule 13a-14(b) certification
|
|
filed herewith |
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.
|
|
|
|
|
|
MIDDLEFIELD BANC CORP.
|
|
Date: November 13, 2008 |
By: |
/s/ Thomas G. Caldwell
|
|
|
|
Thomas G. Caldwell |
|
|
|
President and Chief Executive Officer |
|
|
Date: November 13, 2008 |
By: |
/s/ Donald L. Stacy
|
|
|
|
Donald L. Stacy |
|
|
|
Principal Financial and Accounting Officer |
|
22
EXHIBIT INDEX
|
|
|
|
|
|
|
exhibit |
|
|
|
|
number |
|
description |
|
location |
|
99 |
|
|
Report of independent registered public
accounting firm.
|
|
filed herewith |
|
|
|
|
|
|
|
|
31 |
|
|
Rule 13a-14(a) certification of Chief
Executive Officer
|
|
filed herewith |
|
|
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) certification of Chief
Financial Officer
|
|
filed herewith |
|
|
|
|
|
|
|
|
32 |
|
|
Rule 13a-14(b) certification
|
|
filed herewith |
23