Middlefield Banc Corp 10-Q
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 March 31, 2008
Commission File Number 33-23094
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, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller 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 May 10, 2008: 1,522,691
MIDDLEFIELD BANC CORP.
INDEX
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
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March 31, |
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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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$ |
9,733,382 |
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$ |
9,072,972 |
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Federal funds sold |
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4,090,687 |
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8,631,963 |
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Interest-bearing deposits in other institutions |
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|
110,387 |
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|
110,387 |
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Cash and cash equivalents |
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13,934,456 |
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17,815,322 |
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Investment securities available for sale |
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98,848,546 |
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85,967,764 |
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Loans |
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314,915,193 |
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309,445,922 |
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Less allowance for loan losses |
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3,351,137 |
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3,299,276 |
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Net loans |
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311,564,056 |
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306,146,646 |
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Premises and equipment |
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7,371,350 |
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7,044,685 |
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Goodwill |
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4,371,207 |
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4,371,206 |
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Bank-owned life insurance |
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7,223,471 |
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7,153,381 |
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Accrued interest and other assets |
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6,424,829 |
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5,774,052 |
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TOTAL ASSETS |
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$ |
449,737,915 |
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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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$ |
39,525,150 |
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$ |
41,348,219 |
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Interest-bearing demand |
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24,092,145 |
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19,566,035 |
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Money market |
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24,036,386 |
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22,684,041 |
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Savings |
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73,299,591 |
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76,895,857 |
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Time |
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216,819,834 |
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202,423,848 |
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Total deposits |
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377,773,106 |
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362,918,000 |
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Short-term borrowings |
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2,090,086 |
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1,510,607 |
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Other borrowings |
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32,423,165 |
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32,395,319 |
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Accrued interest and other liabilities |
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2,202,547 |
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2,487,746 |
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TOTAL LIABILITIES |
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414,488,904 |
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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,
1,707,015 and 1,701,546 shares issued |
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26,848,601 |
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26,650,123 |
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Retained earnings |
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14,096,814 |
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13,746,956 |
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Accumulated other comprehensive income |
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179,015 |
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(52,969 |
) |
Treasury stock, at cost; 165,208 shares in 2008 and
151,745 shares in 2007 |
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(5,875,419 |
) |
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(5,382,726 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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35,249,011 |
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34,961,384 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
449,737,915 |
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$ |
434,273,056 |
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See accompanying unaudited notes to the consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
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Three Months Ended |
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March 31, |
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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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$ |
5,455,274 |
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$ |
4,530,229 |
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Interest-bearing deposits in
other institutions |
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5,203 |
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55,889 |
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Federal funds sold |
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79,304 |
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131,235 |
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Investment securities: |
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Taxable interest |
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565,079 |
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266,114 |
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Tax-exempt interest |
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453,943 |
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382,785 |
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Dividends on FHLB stock |
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29,400 |
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25,495 |
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Total interest income |
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6,588,203 |
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5,391,747 |
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INTEREST EXPENSE |
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Deposits |
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3,333,980 |
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2,314,671 |
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Short-term borrowings |
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9,895 |
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152,292 |
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Other borrowings |
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414,111 |
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312,335 |
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Total interest expense |
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3,757,986 |
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2,779,298 |
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NET INTEREST INCOME |
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2,830,217 |
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2,612,449 |
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Provision for loan losses |
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75,000 |
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45,000 |
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
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2,755,217 |
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2,567,449 |
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NONINTEREST INCOME |
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Service charges on deposit accounts |
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465,528 |
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451,947 |
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Earnings on bank-owned life insurance |
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|
70,088 |
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72,079 |
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Other income |
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|
101,835 |
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97,602 |
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Total noninterest income |
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637,451 |
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621,628 |
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NONINTEREST EXPENSE |
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Salaries and employee benefits |
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1,194,419 |
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1,104,908 |
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Occupancy expense |
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231,183 |
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169,230 |
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Equipment expense |
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146,110 |
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121,791 |
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Data processing costs |
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209,280 |
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151,248 |
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Ohio state franchise tax |
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117,000 |
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96,000 |
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Other expense |
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617,680 |
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630,525 |
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Total noninterest expense |
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2,515,672 |
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2,273,702 |
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Income before income taxes |
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876,996 |
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|
915,375 |
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Income taxes |
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140,000 |
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163,000 |
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NET INCOME |
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$ |
736,996 |
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$ |
752,375 |
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EARNINGS PER SHARE |
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Basic |
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$ |
0.48 |
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$ |
0.50 |
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Diluted |
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0.47 |
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0.49 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.250 |
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$ |
0.224 |
|
See accompanying unaudited notes to the consolidated financial statements.
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 |
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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 |
|
Balance, December 31, 2007 |
|
$ |
26,650,123 |
|
|
$ |
13,746,956 |
|
|
$ |
(52,969 |
) |
|
$ |
(5,382,726 |
) |
|
$ |
34,961,384 |
|
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|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
|
|
|
|
|
736,996 |
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|
|
|
|
|
|
|
|
|
|
736,996 |
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|
$ |
736,996 |
|
Other comprehensive income: |
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Unrealized loss on
available for sale
securities net of tax benefit of $119,504 |
|
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|
|
|
|
|
|
|
|
231,984 |
|
|
|
|
|
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|
231,984 |
|
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|
231,984 |
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Comprehensive income |
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$ |
968,980 |
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Stock based compensation expense
recognized in earnings |
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|
3,762 |
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|
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|
3,762 |
|
|
|
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|
Purchase of treasury stock (13,463 shares) |
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|
(492,693 |
) |
|
|
(492,693 |
) |
|
|
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|
Dividend reinvestment and purchase plan |
|
|
194,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,716 |
|
|
|
|
|
Cash dividends ($0.25 per share) |
|
|
|
|
|
|
(387,138 |
) |
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(387,138 |
) |
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|
Balance, March 31, 2008 |
|
$ |
26,848,601 |
|
|
$ |
14,096,814 |
|
|
$ |
179,015 |
|
|
$ |
(5,875,419 |
) |
|
$ |
35,249,011 |
|
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|
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See accompanying unaudited notes to the consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
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|
Three Months Ended |
|
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|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
736,996 |
|
|
$ |
752,375 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
75,000 |
|
|
|
45,000 |
|
Depreciation and amortization |
|
|
126,213 |
|
|
|
114,947 |
|
Amortization of premium and
discount on
investment
securities |
|
|
49,451 |
|
|
|
54,805 |
|
Amortization of deferred loan fees, net |
|
|
(27,932 |
) |
|
|
(4,436 |
) |
Earnings on bank-owned life insurance |
|
|
(70,088 |
) |
|
|
(72,079 |
) |
Compensation for stock option expense |
|
|
3,762 |
|
|
|
|
|
Increase in accrued interest receivable |
|
|
(442,313 |
) |
|
|
(454,521 |
) |
Increase (decrease) in accrued interest payable |
|
|
(40,545 |
) |
|
|
112,025 |
|
Other, net |
|
|
(533,826 |
) |
|
|
(962,728 |
) |
|
|
|
|
|
|
|
Net cash used for operating activities |
|
|
(123,283 |
) |
|
|
(414,612 |
) |
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
Proceeds from repayments and maturities |
|
|
5,565,823 |
|
|
|
1,200,126 |
|
Purchases |
|
|
(18,144,564 |
) |
|
|
(8,783,756 |
) |
Investment securities held to maturity: |
|
|
|
|
|
|
|
|
Proceeds from repayments and maturities |
|
|
|
|
|
|
5,954 |
|
Increase in loans, net |
|
|
(5,464,478 |
) |
|
|
(5,687,505 |
) |
Purchase of Federal Home Loan Bank stock |
|
|
(38,800 |
) |
|
|
(22,700 |
) |
Purchase of premises and equipment |
|
|
(452,880 |
) |
|
|
(61,123 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(18,534,899 |
) |
|
|
(13,349,004 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
14,855,106 |
|
|
|
16,475,633 |
|
Increase in short-term borrowings, net |
|
|
579,479 |
|
|
|
655,619 |
|
Repayment of other borrowings |
|
|
(972,154 |
) |
|
|
(1,319,559 |
) |
Proceeds from other borrowings |
|
|
1,000,000 |
|
|
|
|
|
Purchase of Treasury Stock |
|
|
(492,693 |
) |
|
|
|
|
Proceeds from dividend reinvestment & purchase plan |
|
|
194,716 |
|
|
|
205,206 |
|
Cash dividends |
|
|
(387,138 |
) |
|
|
(329,351 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
14,777,316 |
|
|
|
15,687,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(3,880,866 |
) |
|
|
1,923,932 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD |
|
|
17,815,322 |
|
|
|
13,639,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
AT END OF PERIOD |
|
$ |
13,934,456 |
|
|
$ |
15,563,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest on
deposits and
borrowings |
|
$ |
3,798,531 |
|
|
$ |
2,667,274 |
|
Income taxes |
|
|
150,000 |
|
|
|
450,000 |
|
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements of Middlefield Banc Corp. (Company) includes its two
subsidiaries The Middlefield Banking Company and Emerald Bank. All significant inter-company items
have been eliminated.
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 Companyconsiders necessary to fairly state Middlefields 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 Middlefields Form 10-K (File No.
33-23094). The results of Middlefields operations for any interim period are not necessarily
indicative of the results of Middlefields operations for any other interim period or for a full
fiscal year.
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 September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced
guidance for using fair value to measure assets and liabilities. The standard applies whenever
other standards require or permit assets or liabilities to be measured at fair value. The Standard
does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1, Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,
which removed leasing transactions accounted for under FAS No. 13 and related guidance from the
scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No.157-2, Partial
Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157
for all non-financial assets and non-financial liabilities to fiscal years beginning after November
15, 2008. The adoption of this standard is not expected to have a material effect on the Companys
results of operations or financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115, which provides all
entities with an option to report selected financial assets and liabilities at fair value. The
objective of the FAS No. 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities
differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is
effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on or before November
15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value
Measurements. The adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.
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.
NOTE 2 STOCK-BASED COMPENSATION
During the three months ended March 31, 2008, the Company recorded $3,762 in unrecognized
compensation cost As of March 31, 2008, there was approximately $11,286 of unrealized
compensation cost related to the unvested share-based compensation awards granted. That cost is
expected to be unrealized in 2008.
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 three months ended March 31, 2008 in the Consolidated Statements
of Cash Flows.
Prior to adopting FAS 123R, the Company accounted for share-based payment awards using the
intrinsic value method of APB 25 and related interpretations. Under APB 25, the Company did not
record compensation expense for employee share options, unless the awards were modified, because
the share options were granted with exercise prices equal to or greater than the fair value of our
stock on the date of grant. The Company had 5,824 shares of non-vested stock options outstanding
on March 31, 2008.
Stock option activity during the three months ended March 31, 2008 and 2007 is as follows:
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Weighted- |
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Weighted- |
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average |
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average |
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Exercise |
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Exercise |
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2008 |
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Price |
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2007 |
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Price |
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Outstanding, January 1 |
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88,211 |
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$ |
28.34 |
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77,287 |
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$ |
26.23 |
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Granted |
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1,337 |
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36.25 |
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Exercised |
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(175 |
) |
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23.70 |
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(565 |
) |
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25.10 |
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Forfeited |
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Outstanding, March 31 |
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89,373 |
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$ |
28.47 |
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76,722 |
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$ |
26.24 |
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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.
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For the Three |
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Months Ended |
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March 31, |
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2008 |
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2007 |
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Weighted average common shares
outstanding |
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1,702,587 |
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1,597,250 |
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Average treasury stock shares |
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(154,544 |
) |
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(95,080 |
) |
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Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share |
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1,548,043 |
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1,502,170 |
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Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share |
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20,337 |
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22,495 |
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Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share |
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1,568,380 |
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1,524,665 |
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Options to purchase 25,897 shares of common stock at prices ranging from $36.73 to $40.24 were
outstanding during the three months ended March 31, 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 March 31, 2008. For the three months ended March 31, 2007, there were no anti-dilutive
options outstanding.
NOTE 4 COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains and losses on
available for sale securities. For the three and three months ended March 31, 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
March 31, 2008 and 2007 (net of the income tax effect):
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For the Three Months |
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Ended March 31, |
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2008 |
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2007 |
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Unrealized holding gains arising during
the period on securities held |
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231,984 |
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28,204 |
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Reclassification adjustment for gains included in net income |
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Net change in unrealized gains during the period |
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231,984 |
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28,204 |
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Unrealized holding losses, beginning of period |
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(52,969 |
) |
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(520,987 |
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Unrealized holding gain (losses), end of period |
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179,015 |
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(492,783 |
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Net income |
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736,996 |
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752,375 |
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Other comprehensive income, net of tax: |
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Unrealized holding gains arising during the period |
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231,984 |
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28,204 |
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Comprehensive income |
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968,980 |
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780,579 |
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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.
The following table presents information about the Companys assets measured at fair value on a
recurring basis as of March 31, 2008 and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value:
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Quoted Prices in Active |
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Significant Other |
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Markets for Identical |
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Observable Inputs |
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Balance as of |
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Assets (Level 1) |
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(Level 2) |
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31-Mar-08 |
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Securities
available-for-sale |
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$ |
1,327,310 |
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$ |
97,521,236 |
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$ |
98,848,546 |
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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.
As of March 31,2008, the Company did not have any assets measured at fair value on a nonrecurring
basis. 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 March 31, 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 will be
the surviving corporation and which will thereafter operate under the name Emerald Bank as a wholly
owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for Emerald Bank
totaled $7,326,890 with one half of the merger consideration payable in cash and the other half in
shares of Middlefield Banc Corp. common stock. The merger was approved by both bank regulators and
Emerald Bank stockholders. The transaction was completed on April 19, 2007. Emerald Bank will
operate as a separate banking subsidiary of Middlefield Banc Corp. under the Emerald Bank name,
employing a commercial bank charter.
The following Unaudited pro forma condensed combined financial information presents the results of
operations of the Company had the merger taken place at January 1, 2007.
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Three Months Ended |
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2008 |
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2007 |
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Interest Income |
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$ |
6,588,203 |
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$ |
6,097,961 |
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Interest Expense |
|
|
3,757,986 |
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|
3,205,328 |
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Net Interest Income |
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|
2,830,217 |
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|
2,892,633 |
|
Provision for loan losses |
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|
75,000 |
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|
91,102 |
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Net Interest Income after provision for loan losses |
|
|
2,755,217 |
|
|
|
2,801,531 |
|
|
|
|
|
|
|
|
Non Interest Income |
|
|
637,451 |
|
|
|
643,786 |
|
Non Interest Expense |
|
|
2,515,672 |
|
|
|
2,794,199 |
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|
Income before income taxes |
|
|
876,996 |
|
|
|
651,118 |
|
Provision for income taxes |
|
|
140,000 |
|
|
|
163,000 |
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Net income |
|
$ |
736,996 |
|
|
$ |
488,118 |
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EARNINGS PER SHARE |
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Basic |
|
$ |
0.48 |
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$ |
0.32 |
|
Diluted |
|
|
0.47 |
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|
0.32 |
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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 ended the March 31, 2008 quarter at $449.7 million an
increased of $15.5 million or 3.6% from end of year December 31, 2007. Investment securities
available for sale, loans receivable, and accrued interest and other assets increased $12.9
million, $5.4 million and $651,000, respectively. The increase in total assets reflected a
corresponding increase in total liabilities of $15.2 million or 3.8% and an increase in
stockholders equity of $288,000 or .8%. The increase in total liabilities was primarily the
result of deposit growth of $14.9 million along with an increase in short term borrowing of
$580,000 for the quarter. This was partially offset by decreases to accrued interest and other
liabilities of $285,000. The increase in stockholders equity was the result of increases in
retained earnings,
accumulated other comprehensive income and common stock of $350,000, 232,000 and
$199,000, respectively. The increase was practically offset by an increase in treasury stock
purchased of $493,000.
Cash and cash equivalents. Cash on hand and due from banks, Federal funds sold and interest-bearing
deposits in other institutions represent cash and cash equivalents. Cash equivalents declined a
combined $3.9 million or 21.8% to $13.9 million at March 31, 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
three months can principally be attributed to a decrease in Federal Funds Sold which was used to
fund the loan and investment portfolios.
Investment securities. Investment securities available for sale ended the March 31, 2008 quarter
at $98.9 million an increase of $12.9 million or 15.0% from $86.0 million at December 31, 2007.
During this period the Company recorded purchases of available for sale securities of $18.1
million, consisting of purchases of municipal and U. S. government bonds. Offsetting some of the
purchases of securities were repayments and maturities of $5.6 million during the three months
ended March 31, 2008. In addition, the securities portfolio increased approximately $352,000 due
to a increase 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 is
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 $5.4 million or 1.76% to $311.7 million as of March 31, 2008
from $306.2 million at December 31, 2007. Included in this increase were improvements in the
commercial and industrial loan portfolio of $5.1 million or 7.6% and commercial real estate loans
of $556,000 or 1.5%, as well as an increase in real estate construction loans of $418,000 during
the three months ended March 31, 2008. The Corporations 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 Corporation 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 assets. Non-performing assets included non-accrual loans, renegotiated loans, loans
90 days or more past due, other real estate, 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. Non-performing loans amounted to $6.7 million or 2.12% and $5.6
million or 1.83% of total loans at March 31, 2008 and December 31, 2007, respectively. The
majority of the increase in this category was in residential secured real estate loans.
Deposits. The Company considers various sources when evaluating funding needs, including but not
limited to deposits, which are a significant source of funds totaling $377.8 million or 91.6% of
the Companys total funding sources at March 31, 2008. Total deposits increased $14.9 million or
4.1% to $377.8 million at March 31, 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 $216.8 million
at March 31, 2008 an increase of $14.4 million or 7.1% for the year. Interest-bearing demand and
money market accounts increased $4.5 million and $1.4 million respectively. These increases were
partially offset by declines in savings and non-interest-bearing demand of $3.6 million and $1.8
million respectively during the three months ended March 31, 2008.
Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding
used for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior
subordinated debt and repurchase agreements. Short-term borrowings increased $579,000 or 38.4% to
$2.1 million as of March 31, 2008 from $1.5 million at December 31, 2007. The increase was to to
the growth of repurchase accounts at Middlefield Bank. Other borrowings increased slightly for the
quarter which represents advances from the Federal Home Loan Bank of Cincinnati. The increase in
FHLB advances was the result of $972,000 of maturing advances to the Middlefield Bank which was
offset with advances to Emerald Bank that totaled $1.0 million.
Stockholders equity. Stockholders equity increased $288,000 or .8% to $35.3 million at March 31,
2008 from $35.0 million at December 31, 2007. The increase in stockholders equity was the result
of increases in common stock, retained earnings and accumulated other comprehensive income of
$198,000, $350,000 and $232,000, respectively, partially offset by an increase in treasury stock of
$493,000. The increase of accumulated other comprehensive income was the result of a increase in
the mark to market of the Companys securities available for sale portfolio. The increase in
treasury stock was the result of the purchase of 13,463 shares of the banks common stock at an
average price of $36.60 since December 31, 2007.
RESULTS OF OPERATIONS
General. The first quarter continued to prove to be a difficult period for the banking community
with a continually changing yield curve and a challenging competitive environment. Net income for
the first quarter of 2008 totaled $736,996, or 2.0% less than the $752,375 reported for the same
period in 2007. Diluted earnings per share for the first quarter of 2008 was $0.47, a 4.1% decrease
from 2007s first quarter diluted earnings per share of $0.49. These results include the operations
of Emerald Bank of Dublin, Ohio, which became a subsidiary of the Company on April 19, 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 for the first quarter was $2.8 million, an increase of 8.3% from the $2.6
million reported for the comparable period of 2007. The net interest margin was 2.96% for the first
quarter of 2008, down from the 3.46% reported for the same quarter of 2007. The decline is
primarily attributable to higher deposit costs and competitive pricing on lending opportunities
associated with the current interest rate environment. Deposit growth at the banks has primarily
been in products such as time deposits and money market accounts, which generally carry higher
interest costs than other deposit alternatives.
Interest income. Interest income increased $1.2 million, or 22.2%, for the three months ended
March 31, 2008, compared to the same period in the prior year. This increase can be attributed to
growth in interest earned on loans receivable and investment securities of $925,000 and $370,000
respectively.
Interest earned on loans receivable increased $925,000, or 20.4%, for the three months ended March
31, 2008, compared to the same period in the prior year. This increase was attributable to an
increase in the average balance of loans outstanding of $58.9 million, or 23.4%, to $311.2 million
for the three months ended March 31, 2008 compared to $252.3 million for the same period in the
prior year. Loan interest income was affected negatively by a decline in the yield on the total
loan portfolio to 7.03% for the three months ended March 31, 2008 from 7.28% for the same period in
the prior year. The decline in the loan portfolio yield was due to the 300 basis point decline in
the prime rate since the end of the year.
Interest earned on securities increased $370,000, or 57.0%, for the three months ended March 31,
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 $28.9 million, or 44.2%, to $94.4
million at March 31, 2008 from $65.4 million for the same period in the prior year. As was
experienced with the loan portfolio, interest income on investment securities was affected
negatively by a decline in the portfolio yield. The total securities portfolio yield of 5.35% for
the three months ended March 31, 2008 declined by 24 basis points from 5.59% for the same period in
the prior year.
Interest expense. Interest expense increased $979,000, or 35.2%, for the three months ended March
31, 2008, compared to the same period in the prior year. This increase in interest expense can be
attributed to increases in interest incurred on deposits and other borrowing $1.0 million and
$102,000, respectively.
Interest incurred on deposits, the largest component of the Companys interest-bearing liabilities,
increased $1.0 million , or 44.0%, for the three months ended March 31, 2008, compared to the same
period in the prior year. This increase was primarily attributable to average balance of
interest-bearing deposits increased by $90.8 million, or 37.8%, to $330.9 million for the three
months ended March 31, 2008, compared to $240.1 million for the same period in the prior year.
Additionally the Company experienced an increase in the cost of interest-bearing deposits to 4.13%
from 4.07% for the quarters ended March 31, 2008 and 2007, respectively. This increase is reflected
in the quarterly rate volume report presented below which depicts that the increase to the costs
associated with the interest-bearing liabilities. The Company diligently monitors the interest
rates on its products as well as the rates being offered by its competition and utilizing rate
surveys to keep its total interest expense costs down.
Interest incurred on borrowed funds, declined by $41,000, or 8.7%, for the three months ended March
31, 2008, compared the same period in the prior year. This decline was primarily attributable to
the reduction in the average balance of borrowed funds of $2.7 million, or 7.2%, to $34.5 million
for the three months ended March 31, 2008, compared to $37.1 million for the same period in the
prior year. Interest cost on borrowed funds were also affected by a reduction in the cost of these
funds to 4.93% from 5.07% for the quarters ended March 31, 2008 and 2007, respectively.
Provision for loan losses. Provision for loan losses totaled $75,000 for the first three month
period in 2008. The provision is maintained at a level to absorb managements estimate of probable
inherent credit losses within the banks loan portfolio. At March 31, 2008, the allowance for loan
losses as a percentage of total loans was 1.06%, which was down slightly from the 1.07% reported at
March 31, 2007. The ratio of non-performing loans to total loans stood at 1.30% at March 31, 2008.
This was an increase from the 0.67% reported as of March 31, 2007. Loans classified as non-accrual
at March 31, 2008, were $4.1 million, which was $336,000 more than the total reported at March 31,
2007.
Non-interest income. Non-interest income increased $16,000 for the three-month period of 2008 over
the comparable 2007 period. This increase of 2.5% was primarily the result of higher service charge
revenue associated with an increase in the number of deposit accounts, expanded ATM/Debit card
usage, and an increase in revenue from investment services.
Non-interest expense. Non-interest expense for the first quarter of 2008 was 10.6%, or $242,000,
higher than the first quarter of 2007. Increases in salary and employee benefits of $90,000,
occupancy expense of $62,000, and data processing expense of $58,000, were largely attributable to
the opening of the Cortland loan production office, as well as the acquisition of Emerald Bank.
Other associated expense items contributing to the increase were legal, printing, and transfer
agent costs, as well as the ongoing costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act.
Provision for income taxes. The Company recognized $140,000 in income tax expense, which reflected
an effective tax rate of 16.0% for the three months, ended March 31, 2008, as compared to $163,000
with an effective tax rate of 17.8% for the respective 2007 period. The decline in the tax
provision can be associated with a 16.5% or $6.7 million increase in the average balance of the
municipal tax-free investment portfolio.
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 March 31, 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 analyzes the changes in interest
income and interest expense, between the three periods ended March 31, 2008 and 2007, 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 March 31, |
|
|
|
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 |
|
|
311,236 |
|
|
$ |
5,455 |
|
|
|
7.03 |
% |
|
|
252,303 |
|
|
$ |
4,530 |
|
|
|
7.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments securities |
|
|
94,357 |
|
|
|
1,024 |
|
|
|
5.35 |
% |
|
|
65,419 |
|
|
|
705 |
|
|
|
5.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with other banks |
|
|
9,402 |
|
|
|
109 |
|
|
|
4.64 |
% |
|
|
11,053 |
|
|
|
156 |
|
|
|
5.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
414,994 |
|
|
|
6,588 |
|
|
|
6.59 |
% |
|
|
328,775 |
|
|
|
5,391 |
|
|
|
6.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
32,307 |
|
|
|
|
|
|
|
|
|
|
|
19,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
447,301 |
|
|
|
|
|
|
|
|
|
|
$ |
348,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
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 bearing demand deposits |
|
|
21,072 |
|
|
|
74 |
|
|
|
1.41 |
% |
|
$ |
12,062 |
|
|
|
69 |
|
|
|
2.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
|
23,048 |
|
|
|
205 |
|
|
|
3.57 |
% |
|
|
22,975 |
|
|
|
256 |
|
|
|
4.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
|
72,391 |
|
|
|
443 |
|
|
|
2.45 |
% |
|
|
52,845 |
|
|
|
205 |
|
|
|
1.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
|
214,372 |
|
|
|
2,612 |
|
|
|
4.89 |
% |
|
|
152,178 |
|
|
|
1,785 |
|
|
|
4.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
34,475 |
|
|
|
424 |
|
|
|
4.93 |
% |
|
|
37,130 |
|
|
|
464 |
|
|
|
5.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
365,357 |
|
|
|
3,758 |
|
|
|
4.13 |
% |
|
|
277,190 |
|
|
|
2,779 |
|
|
|
4.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
46,839 |
|
|
|
|
|
|
|
|
|
|
|
40,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
35,105 |
|
|
|
|
|
|
|
|
|
|
|
30,570 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
447,301 |
|
|
|
|
|
|
|
|
|
|
$ |
348,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
2,830 |
|
|
|
|
|
|
|
|
|
|
$ |
2,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (2) |
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
|
|
|
|
|
|
|
|
|
|
2.83 |
% |
Net yield on interest-earning assets (3) |
|
|
|
|
|
|
|
|
|
|
2.96 |
% |
|
|
|
|
|
|
|
|
|
|
3.46 |
% |
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
113.59 |
% |
|
|
|
|
|
|
|
|
|
|
118.61 |
% |
|
|
|
(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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 versus 2007 |
|
|
|
Increase (decrease) due to |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
1,058 |
|
|
|
-133 |
|
|
|
925 |
|
Investments securities |
|
|
399 |
|
|
|
-80 |
|
|
|
319 |
|
Interest-bearing deposits with other banks |
|
|
-23 |
|
|
|
-24 |
|
|
|
-47 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,434 |
|
|
|
-237 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
|
52 |
|
|
|
-46 |
|
|
|
5 |
|
Money market deposits |
|
|
1 |
|
|
|
-52 |
|
|
|
-51 |
|
Savings deposits |
|
|
76 |
|
|
|
162 |
|
|
|
238 |
|
Certificates of deposit |
|
|
730 |
|
|
|
98 |
|
|
|
827 |
|
Borrowings |
|
|
-33 |
|
|
|
-7 |
|
|
|
-40 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
825 |
|
|
|
154 |
|
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
609 |
|
|
|
($391 |
) |
|
$ |
218 |
|
|
|
|
|
|
|
|
|
|
|
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, and the ability to borrow funds
under line of credit agreements with correspondent banks and 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 three months ended March 31, 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. 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.
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 initiate
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 March 31, 2008:
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|
Middlefield Banc Corp. |
|
The Middlefield Banking Co. |
|
Emerald Bank |
|
|
March 31, |
|
March 31, |
|
March 31, |
|
|
2008 |
|
2008 |
|
2008 |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
Total Capital
(to Risk-weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
$ |
42,542,606 |
|
|
|
14.45 |
|
|
$ |
32,231,668 |
|
|
|
12.65 |
|
|
$ |
7,820,079 |
|
|
|
19.68 |
|
For Capital Adequacy Purposes |
|
|
23,556,886 |
|
|
|
8.00 |
|
|
|
20,375,920 |
|
|
|
8.00 |
|
|
|
3,179,200 |
|
|
|
8.00 |
|
To Be Well Capitalized |
|
|
29,446,108 |
|
|
|
10.00 |
|
|
|
25,469,900 |
|
|
|
10.00 |
|
|
|
3,974,000 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk-weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
$ |
39,020,570 |
|
|
|
13.25 |
|
|
$ |
29,372,184 |
|
|
|
11.53 |
% |
|
$ |
7,328,427 |
|
|
|
18.44 |
|
For Capital Adequacy Purposes |
|
|
11,778,443 |
|
|
|
4.00 |
|
|
|
10,187,960 |
|
|
|
4.00 |
|
|
|
1,589,600 |
|
|
|
4.00 |
|
To Be Well Capitalized |
|
|
17,667,665 |
|
|
|
6.00 |
|
|
|
15,281,940 |
|
|
|
5.00 |
|
|
|
2,384,400 |
|
|
|
6.00 |
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets) |
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
$ |
39,020,570 |
|
|
|
8.92 |
|
|
$ |
29,372,184 |
|
|
|
7.66 |
|
|
$ |
7,328,427 |
|
|
|
14.27 |
|
For Capital Adequacy Purposes |
|
|
17,503,409 |
|
|
|
4.00 |
|
|
|
15,344,739 |
|
|
|
4.00 |
|
|
|
2,054,154 |
|
|
|
4.00 |
|
To Be Well Capitalized |
|
|
21,879,261 |
|
|
|
5.00 |
|
|
|
19,180,924 |
|
|
|
5.00 |
|
|
|
2,567,692 |
|
|
|
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.
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
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 March 31, 2007 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 March 31,
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 March 31, 2008 for
portfolio equity:
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|
|
|
|
|
|
|
|
Increase |
|
Decrease |
|
|
+200 |
|
-200 |
|
|
BP |
|
BP |
|
|
|
|
|
|
|
|
|
Net interest income increase (decrease) |
|
|
(0.2 |
)% |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
Portfolio equity increase (decrease) |
|
|
(14.1 |
)% |
|
|
(2.9 |
)% |
ITEM 4.
Controls and Procedures Disclosure
The Corporation maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Corporations 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.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Corporations internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the
Corporations most recent fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the Corporations 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 April 19, 2007, the Corporation announced the adoption of a stock repurchase program that
authorizes the repurchase of up to 4.99% or approximately 76,114 shares of its outstanding common
stock in the open market or in privately negotiated transactions. This program expired in April
2008.
The following table summarizes the treasury stock purchased by the issuer during the first quarter
of 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Shares that May Yet |
|
|
Total Number of |
|
Average Price Paid |
|
Part of Publicly |
|
Be Purchased Under |
Date |
|
Shares Purchased |
|
Per Share |
|
Announced Program |
|
the Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
|
1,190 |
|
|
|
37.25 |
|
|
|
1,100 |
|
|
|
18,349 |
|
March 6, 2008 |
|
|
1,387 |
|
|
|
36.70 |
|
|
|
11,500 |
|
|
|
6,849 |
|
March 12, 2008 |
|
|
1,186 |
|
|
|
36.60 |
|
|
|
1,027 |
|
|
|
5,822 |
|
March 18, 2008 |
|
|
9,700 |
|
|
|
36.50 |
|
|
|
1,000 |
|
|
|
4,822 |
|
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits
|
|
|
|
|
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
supplementally 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 |
|
|
|
|
|
exhibit |
|
|
|
|
number |
|
description |
|
location |
|
|
|
|
|
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 |
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: May 13, 2008 |
By: |
/s/ Thomas G. Caldwell
|
|
|
|
Thomas G. Caldwell |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: May 13, 2008 |
By: |
/s/ Donald L. Stacy
|
|
|
|
Donald L. Stacy |
|
|
|
Principal Financial and Accounting Officer |
|
|