10-Q 1 l06938ae10vq.txt MIDDLEFIELD BANC CORP UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20552 FORM 10 - Q [X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from to Commission File Number 33-23094 ------------------------------- Middlefield Banc Corp. (Exact name of registrant as specified in its charter) Ohio (State or other jurisdiction of 34 -1585111 incorporation or organization) (IRS Employer Identification No.) 15985 East High Street, Middlefield, Ohio 44062-9263 (Address of principal executive offices) (440) 632-1666 (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Act). Yes [ ] No [X] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: Class: Common Stock, without par value Outstanding at May 6, 2004: 1,283,054 MIDDLEFIELD BANC CORP. INDEX
Page Number ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet (Unaudited) as of March 31, 2004 and December 31, 2003 3 Consolidated Statement of Income (Unaudited) for the Three Months ended March 31, 2004 and 2003 4 Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 5 Consolidated Statement of Cash Flows (Unaudited) for the Three Months ended March 31, 2004 and 2003 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 19 Item 3. Default Upon Senior Securities 19 Item 4. Submissions of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8 - K 19 SIGNATURES
MIDDLEFIELD BANC CORP. CONSOLIDATED BALANCE SHEET (Unaudited)
March 31, December 31 2004 2003 ------------ ------------ ASSETS Cash and due from banks $ 2,894,259 $ 3,956,453 Federal funds sold 5,505,000 930,000 ------------ ------------ Cash and cash equivalents 8,399,259 4,886,453 Interest-bearing deposits in other institutions 539,429 539,147 Investment securities available for sale 49,233,341 49,966,511 Investment securities held to maturity (estimated market value of $1,359,894 and $4,913,502) 1,312,121 1,858,904 Loans 201,925,285 192,880,153 Less allowance for loan losses 2,545,450 2,521,270 ------------ ------------ Net loans 199,379,835 190,358,883 Premises and equipment 6,706,848 6,807,930 Bank-owned life insurance 5,269,381 5,202,385 Accrued interest and other assets 2,668,560 2,749,235 ------------ ------------ TOTAL ASSETS $273,508,774 $262,369,448 ============ ============ LIABILITIES Deposits: Noninterest-bearing demand $ 29,889,636 29,423,027 Interest-bearing demand 9,588,145 7,369,754 Money market 15,809,319 15,708,932 Savings 71,017,095 69,570,895 Time 102,178,414 97,767,302 ------------ ------------ Total deposits 228,482,609 219,839,910 Short-term borrowings 436 444,819 Other borrowings 19,727,567 17,665,661 Accrued interest and other liabilities 957,511 914,744 ------------ ------------ TOTAL LIABILITIES 249,168,123 238,865,134 ------------ ------------ STOCKHOLDERS' EQUITY Common stock, no par value; 5,000,000 shares authorized, 1,282,732 and 1,279,128 shares issued 10,153,493 10,038,156 Retained earnings 15,514,124 15,085,868 Accumulated other comprehensive income 417,943 125,199 Treasury stock, at cost 55,309 shares (1,744,909) (1,744,909) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 24,340,651 23,504,314 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $273,508,774 $262,369,448 ============ ============
MIDDLEFIELD BANC CORP. CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended March 31, 2004 2003 ------------ ------------ INTEREST INCOME Interest and fees on loans $ 3,297,718 $ 3,129,988 Interest-bearing deposits in other institutions 339 7,101 Federal funds sold 5,107 9,307 Investment securities: Taxable interest 357,477 308,608 Tax-exempt interest 125,303 119,590 Dividends on FHLB stock 12,984 12,929 ------------ ------------ Total interest income 3,798,928 3,587,523 ------------ ------------ INTEREST EXPENSE Deposits 1,187,799 1,245,359 Short-term borrowings 658 2,290 Other borrowings 194,614 203,384 ------------ ------------ Total interest expense 1,383,071 1,451,033 ------------ ------------ NET INTEREST INCOME 2,415,857 2,136,490 Provision for loan losses 30,000 105,000 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,385,857 2,031,490 ------------ ------------ NONINTEREST INCOME Service charges on deposit accounts 281,479 238,651 Investment securities gains - 542 Earnings on bank-owned life insurance 66,996 - Other income 48,244 37,386 ------------ ------------ Total noninterest income 396,719 276,579 ------------ ------------ NONINTEREST EXPENSE Salaries and employee benefits 920,803 646,471 Occupancy expense 144,481 98,552 Equipment expense 93,986 80,026 Data processing costs 129,345 116,472 Ohio state franchise tax 82,500 75,050 Other expense 410,203 294,187 ------------ ------------ Total noninterest expense 1,781,318 1,310,758 ------------ ------------ Income before income taxes 1,001,258 997,311 Income taxes 316,000 344,565 ------------ ------------ NET INCOME $ 685,258 $ 652,746 ============ ============ EARNINGS PER SHARE Basic $ 0.56 $ 0.53 Diluted 0.56 0.53 DIVIDENDS DECLARED PER SHARE $ 0.21 $ 0.20
See accompanying notes to unaudited consolidated financial statements. MIDDLEFIELD BANC CORP. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Other Total Common Retained Comprehensive Treasury Stockholders' Comprehensive Stock Earnings Income Stock Equity Income ------------ ----------- ------------- ----------- ------------- ------------- Balance, December 31, 2003 $ 10,038,156 $15,085,868 $ 125,199 $(1,744,909) $ 23,504,314 Net income 685,258 685,258 $ 685,258 Other comprehensive income: Unrealized gain on available for sale securities net of taxes of $150,808 292,744 292,744 292,744 ------------- Comprehensive income $ 978,002 ============= Common stock issued 67,335 67,335 Dividend reinvestment plan 48,002 48,002 Cash dividends ($0.21 per share) (257,002) (257,002) ------------ ----------- ------------- ----------- ------------- Balance, March 31, 2004 $ 10,153,493 $15,514,124 $ 417,943 $(1,744,909) $ 24,340,651 ============ =========== ============= =========== =============
See accompanying notes to unaudited consolidated financial statements. MIDDLEFIELD BANC CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three Months Ended March 31, March 31, 2004 2003 ------------- ------------- OPERATING ACTIVITIES Net income $ 685,258 $ 652,746 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 30,000 105,000 Depreciation and amortization 103,482 96,571 Amortization of premium and discount on investment securities 45,256 52,212 Amortization of net deferred loan costs (fees) 22,950 (17,220) Investment security gains - (542) Earnings on bank-owned life insurance (66,996) - Increase in accrued interest receivable (140,501) (113,713) Decrease in accrued interest payable (13,232) (39,616) Other, net 152,790 137,068 ------------- ------------- Net cash provided by operating activities 819,007 872,506 ------------- ------------- INVESTING ACTIVITIES Increase in interest-bearing deposits in other institutions, net (282) (2,433) Investment securities available for sale: Proceeds from repayments and maturities 3,108,391 3,651,370 Proceeds from sales - 1,991,917 Purchases (1,980,145) (8,003,820) Investment securities held to maturity: Proceeds from repayments and maturities 550,000 1,449,805 Increase in loans, net (9,087,321) (4,488,756) Purchase of bank-owned life insurance - (5,000,000) Purchase of Federal Home Loan Bank stock (13,000) (14,100) Purchase of premises and equipment (2,401) (335,910) ------------- ------------- Net cash used for investing activities (7,424,758) (10,751,927) ------------- ------------- FINANCING ACTIVITIES Net increase in deposits 8,642,700 7,317,966 Increase in short-term borrowings, net (9,037) 1,603,798 Repayment of other borrowings (1,373,441) (507,138) Proceeds from other borrowings 3,000,000 5,000,000 Purchase of treasury stock - (81,624) Common stock issued 67,336 24,269 Proceeds from dividend reinvestment plan 48,001 36,792 Cash dividends (257,002) (231,309) ------------- ------------- Net cash provided by financing activities 10,118,557 13,162,754 ------------- ------------- Increase in cash and cash equivalents 3,512,806 3,283,333 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,886,453 2,125,324 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,399,259 $ 5,408,657 ============= ============= SUPPLEMENTAL INFORMATION Cash paid during the year for: Interest on deposits and borrowings $ 1,396,303 $ 1,490,649 Income taxes 280,000 50,000
See accompanying notes to unaudited consolidated financial statements. MIDDLEFIELD BANC CORP. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of Middlefield Banc Corp. ("Middlefield") includes its wholly owned subsidiary, The Middlefield Banking Company (the "Bank"). All significant inter-company items have been eliminated. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. In Management's opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that Middlefield considers necessary to fairly state Middlefield's financial position and the results of operations and cash flows. The balance sheet at December 31, 2003, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by accounting principles generally accepted in the United States of America. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with Middlefield's Form 10-K (File No. 33-23094). The results of Middlefield's operations for any interim period are not necessarily indicative of the results of Middlefield's operations for any other interim period or for a full fiscal year. Stock-Based Compensation The Company maintains a stock option plan for key officers, employees, and non-employee directors. Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of FAS No. 123, Accounting for Stock-Based Compensation, net income applicable to common stock, basic, and diluted net income per common share would have been as follows:
Three Months Ended March 31, 2004 2003 ---- ---- Net income, as reported: $ 685,258 $ 652,746 Less proforma expense related to stock options 28,519 19,871 ----------- ----------- Proforma net income $ 656,739 $ 632,875 =========== =========== Basic net income per common share: As reported $ 0.56 $ 0.53 Pro forma 0.54 0.52 Diluted net income per common share: As reported $ 0.56 $ 0.53 Pro forma 0.53 0.52
NOTE 2 - EARNINGS PER SHARE Middlefield provides dual presentation of Basic and Diluted earnings per share. Basic earnings per share utilizes net income as reported as the numerator and the actual average shares outstanding as the denominator. Diluted earnings per share includes any dilutive effects of options, warrants, and convertible securities. There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income (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 Months Ended March 31, 2004 2003 ------------- ------------- Weighted average common shares outstanding 1,279,762 1,267,630 Average treasury stock shares (55,309) (53,379) ------------ ----------- Weighted average common shares and common stock equivalents used to calculate basic earnings per share 1,224,453 1,214,251 ============ =========== Additional common stock equivalents (stock options) used to calculate diluted earnings per share 6,816 2,151 ------------ ----------- Weighted average common shares and common stock equivalents used to calculate diluted earnings per share 1,231,269 1,216,402 ============ ===========
Options to purchase 10,462 shares of common stock at prices from $28.12 to $28.80 per share were outstanding for the 2003 period but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. NOTE 3 - COMPREHENSIVE INCOME The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the three months ended March 31, 2004, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders' Equity (Unaudited). For the three months ended March 31, 2003, comprehensive income totaled $534,141. MANAGEMENT'S DISCUSSION AND ANALYSIS General The following discusses the financial condition of the Company as of March 31, 2004, as compared to December 31, 2003 and the results of operations for the three months ended March 31, 2004 compared to the same period in 2003. This discussion should be read in conjunction with the interim condensed consolidated financial statements and related footnotes included herein. Business Middlefield is an Ohio corporation organized to become the holding company of The Middlefield Banking Company ("Bank"). The Bank is a state-chartered bank located in Middlefield, Ohio. Middlefield and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earnings on residential real estate, commercial mortgage, commercial, and consumer financings as well as interest earnings on investment securities and deposit services to its customers through six locations. Forward Looking Statement The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. Forward-looking statements can be identified by terminology such as "believes," "expects," "anticipates," "estimates," "intends," "should," "will," "plans," "potential" and similar words. Forward-looking statements are also statements that are not statements of historical fact. Forward-looking statements necessarily involve risks and uncertainties. They are merely predictive or statements of probabilities, involving known and unknown risks, uncertainties and other factors. If one or more of these risks of uncertainties occurs or if the underlying assumptions prove incorrect, actual results could differ materially from those expressed in or implied by the forward-looking statements. Forward-looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond Middlefield's control. Although Middlefield believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a representation by Middlefield or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information. Earning Assets - Loans At March 31, 2004, gross loans were $201,925,000 compared to $192,880,000 at year-end 2003, an increase of $9,045,000 or 4.7%. The increase in total outstanding loans was the result of an increase in the commercial, home equity and real estate portfolios. Management attributes the relatively significant increase in loans to the general economic improvement in the lending markets served. Commercial loans comprised 27.5% of total loans at March 31, 2004 compared to 25.5% at December 31, 2003. Commercial loans have increased $5,679,000 or 10.21% since December 31, 2003. The Company has originated these types of loans to benefit from consistent economic growth inside the Company's primary market area. The majority of these loans are secured by real estate holdings. Real estate loans were 68.0% of total loans at March 31, 2004 and 69.5% at year-end 2003. In dollar volume real estate loans increased 2.5% since December 31, 2003. Management's position is to focus on adjustable rate products as the overall rate environment reaches historical low levels with the intent these products will adjust as interest rates rise. The allowance for loan losses represents the amount which management and the Board of Directors estimates is adequate to provide for probable losses inherent in the loan portfolio. The allowance balance and the provision charged to expense are reviewed by management and the Board of Directors quarterly using a risk evaluation model that considers borrowers' past due experience, economic conditions and various other circumstances that are subject to change over time. Management believes the current balance of the allowance for loan losses is adequate to absorb probable incurred credit losses associated with the loan portfolio. Net charge-offs for the three months ended March 31, 2004 were $5,820, or less than .25%, of the beginning of the year balance in the allowance for loan losses. Earning Assets - Securities And Federal Funds Sold The securities portfolio is comprised of U.S. Government agency-backed securities, tax-exempt obligations of states and political subdivisions and certain other investments. The Company does not hold any collateralized mortgage-backed securities, other than those issued by U.S. government agencies, or derivative securities. The quality rating of obligations of state and political subdivisions within Ohio is no less than Aaa, Aa, A or BBB+, with all out-of-state bonds rated at AAA. Board policy permits the purchase of certain non-rated bonds of local schools, townships and municipalities, based on their estimated levels of credit risk. Securities available for sale at March 31, 2004 decreased approximately $733,000, or 1.5% from year-end 2003 totals. Securities held to maturity at March 31, 2004, decreased $546,000, or 29% compared to year-end 2003 totals. The decline in the investment portfolio for the quarter, was due to the funding needed to support the growth in the loan portfolio. Sources Of Funds - Deposits The Company's primary source of funds is core deposits from retail and business customers. These core deposits include all categories of interest-bearing and noninterest-bearing deposits, excluding certificates of deposit greater than $100,000. For the period ended March 31, 2004, total core deposits increased approximately $8,224,000 or 4.09% primarily from an increase in interest bearing demand deposits and savings accounts. The Company has a strong deposit base from public agencies, including local school districts, city and township municipalities, and others that may tend to be more seasonal in nature resulting from the receipt and disbursement of state and federal grants. These entities have maintained fairly static balances with the Company due to various funding and disbursement timeframes. Certificates of deposit greater than $100,000 are not considered part of core deposits and as such are used to balance rate sensitivity as a tool of funds management. At March 31, 2004 certificates of deposit greater than $100,000 increased $515,000 or 2.66% from year-end 2003 totals. Sources Of Funds - Securities Sold Under Agreements To Repurchase And Other Borrowings Other interest-bearing liabilities include securities sold under agreements to repurchase, sweep accounts, federal funds purchased, Treasury, Tax & Loan notes payable and Federal Home Loan Bank ("FHLB") advances. In the first three months of 2004, the Company continued to utilize the FHLB programs to manage interest rate risk and liquidity positions. Total other borrowings increased $1,618,000, or 8.9% from year-end 2003 totals. Results Of Operations For Three Months Ended March 31, 2004 Net Income Basic and diluted earnings per share for the three months ended March 31, 2004 totaled $0.56, compared with $0.53 for the three months ended March 31, 2003, an increase of 5.7%. In dollars, net income increased 4.98% for the three months ended March 31, 2004, compared to the same quarter in 2003. Net Interest Income Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Net interest income increased $279,367 for the three months ended March 31, 2004 compared to the same period in 2003. This resulted from growth in earning assets but was partially offset by a decrease in the net interest margin. Total interest income for the three months ended March 31, 2004 was $3,799,000 compared to $3,588,000 for the same period in 2003. Total interest income increased $211,000, or 5.9%. The increase can be attributed to the growth of the loan portfolio that was 13% larger than during the same period in 2003. Total interest expense for the three months ended March 31, 2004 when compared to the same three-month period ended March 31, 2003, decreased 4.7%, or $68,000. The decrease can be attributed to the overall lower interest rate environment that currently exists. Management has been proactive in lowering deposit product interest rates and has relied less on certificates of deposits to fund asset growth. Provision For Loan Losses The total provision for loan losses was $30,000 for the three months ended March 31, 2004 compared to $105,000 for the same period in 2003. At March 31, 2004, Middlefield's allowance for loan losses increased to $2,545,000 from $2,521,000 at December 31, 2003, and now represents 1.3% of the gross loan portfolio as compared to 1.4% for the previous period. The allowance for loan losses is established through a provision for loan losses, which is charged to operations. The provision is based on management's periodic evaluation of the adequacy of the allowance, taking into account the overall risk characteristics of the various portfolio segments, the bank's loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a formula allowance, and an unallocated allowance. Noninterest Income Total non-interest income is made up of bank related fees and service charges, as well as other income producing services provided, ATM income, early redemption penalties for certificates of deposit, safe deposit rental income, internet bank service fees and other miscellaneous items. Noninterest income for the three months ended March 31, 2004 was $397,000 compared to $277,000 for the same three-month period ended March 31, 2003, an increase of approximately 43.4% or $120,000. The Company invested in Bank Owned Life Insurance on March 27, 2003. For the three months ended March 31, 2004 the Company has recognized $67,000 of income related to this product. The earnings from this investment are reflected in the Company's non-interest income. An increase in fee income from deposit accounts also contributed significantly to 2004's increased non-interest income. Deposit account service fees have progressively increased as the number of accounts and volume of related transactions have increased. Noninterest Expense Non-interest expense for the 2004 first quarter was $1,781,000, up 35.9% from the $1,310,000 recorded in the first quarter of 2003. $274,000 of this increase of $470,000 was in employee compensation and benefit expense. This was the result of increased staffing, higher payroll and health insurance costs, and additional pay periods within the quarter. Reflected within the increased staffing costs, as well as increased occupancy and other costs, is the operation of the bank's Orwell office, which opened in April 2003. Capital Resources Internal capital growth, through the retention of earnings, is the primary means of maintaining capital adequacy for the Company. Shareholders' equity at March 31, 2004, totaled $24,340,651 compared to $23,504,314 at December 31, 2003, a 3.6% increase. Total shareholders' equity in relation to total assets was 8.90% at March 31, 2004 compared to 8.96% at December 31, 2003. The Company has a Dividend Reinvestment Plan ("The Plan") for shareholders under which the Company's common stock will be purchased by the Plan for participants with automatically reinvested dividends. The Plan does not represent a change in the Company's dividend policy or a guarantee of future dividends. 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 Banks' 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 minimum requirements are:
TOTAL TIER 1 TIER 1 CAPITAL TO CAPITAL TO CAPITAL TO RISK-WEIGHTED RISK-WEIGHTED AVERAGE ASSETS ASSETS ASSETS ----------------- ----------------- -------------- Well capitalized 10.00% 6.00% 5.00% Adequately capitalized 8.00% 4.00% 4.00%
The following table illustrates the Company's risk-weighted capital ratios at March 31, 2004:
MARCH 31, (in thousands) 2004 --------- Tier 1 capital $ 23,923 Total risk-based capital $ 26,041 Risk-weighted assets $169,061 Average total assets $264,980 Tier 1 capital to average assets 9.03% Tier 1 risk-based capital ratio 14.15% Total risk-based capital ratio 15.40%
Non-Performing Loans The table below presents information concerning nonperforming assets including nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower.
March 31, December 31, 2004 2003 ---- ---- (Dollars in thousands) Loans on nonaccrual basis $263 $372 Loans past due 90 days or more and still accruing 516 137 ---- ---- Total nonperforming loans $779 $509 ---- ----
Nonperforming loans as a percent of total loans 0.38% 0.26% ==== ==== Nonperforming assets as a percent of total assets 0.28% 0.19% ==== ====
At March 31, 200443 and December 31, 2003, no real estate or other assets were held as foreclosed or repossessed property. Management monitors impaired loans on a continual basis. As of March 31, 2004, impaired loans had no material effect on the Middlefield's financial position or results of operations. Liquidity Management's 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 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 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, 2004, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and intangibles, the provision for loan losses, net amortization of securities and net changes in other assets and liabilities. Changes in cash and cash equivalents are detailed on the consolidated statements of cash flows. Inflation Substantially all of the Company's 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 GAAP in the United States of America (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. Management's 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 effect each other, but do not always move in correlation with each other. The Company's 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 Company's performance. Regulatory Matters The Company is subject to the regulatory requirements of The Federal Reserve System as a multi-bank holding company. The affiliate bank is subject to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State of Ohio, Division of Financial Institutions. Quantitative and Qualitative Disclosures about Market Risk The Bank measures interest-rate risk from the perspectives of earnings at risk and value at risk. The primary purpose of both the loan and investment portfolios is the generation of income, but if credit risk is the principal focus of risk analysis in the loan portfolio, interest-rate risk is the principal focus in the investment portfolio. Because of the greater liquidity of the investment portfolio, it is the vehicle for managing interest-rate risk in the entire balance sheet. The Bank manages interest rate risk position using simulation analysis of net interest income over a one-year period. The Bank also calculates the effect of an instantaneous change in market interest rates on the economic value of equity or net portfolio value. Once these analyses are complete, management reviews the results, with an emphasis on the income-simulation results for purposes of managing interest-rate risk. The rate sensitivity position is managed to avoid wide swings in net interest margins. Measurement and identification of current and potential interest rate risk exposures is conducted quarterly, with reporting and monitoring also occurring quarterly. The Bank applies interest rate shocks to its financial instruments up and down 200 basis points. The following table presents an analysis of the potential sensitivity of the Bank's annual net interest income and present value of the Bank's financial instruments to sudden and sustained increase and decrease of 200 basis point change in market interest rates:
MAXIMUM CHANGE 2004 GUIDELINES One Year Net interest Income Change +200 Basis Points 13% (10)% -200 Basis Points (16)% (10)% Net Present Value of Equity Change +200 Basis Points 6% (20)% -200 Basis Points (13)% (20)%
The projected volatility of net interest income in a -200 basis points change in market rates for the 1st quarter of 2004 falls outside the Board of Directors guidelines. With rates at historic lows it is unlikely that the market can decline 200BP so the potential interest rate risk exposure is considered minimal. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Registrant's principal executive officer and principal financial officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by Middlefield 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. (b) Changes in internal controls. There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in rights of the Company's security holders None Item 3. Defaults by the Company on its senior securities None Item 4. Submission of matters to a vote of security holders None Item 5. Other information None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are included in this Report or incorporated herein by reference: 3.1 Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp. * 3.2 Regulations of Middlefield Banc Corp. * 4 Specimen Stock Certificate * 10.1 1999 Stock Option Plan of Middlefield Banc Corp. * 10.2 Severance Agreement of President and Chief Executive Officer * 10.3 Severance Agreement of Executive Vice President * 10.4 Severance Agreement of Vice President * 10.5 Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000 10.7 Director Retirement Agreement with Richard T. Coyne * 10.8 Director Retirement Agreement with Francis H. Frank * 10.9 Director Retirement Agreement with Thomas C. Halstead * 10.10 Director Retirement Agreement with George F. Hasman * 10.11 Director Retirement Agreement with Donald D. Hunter * 10.12 Director Retirement Agreement with Martin S. Paul * 10.13 Director Retirement Agreement with Donald E. Villers * 10.14 DBO Agreement with Donald L. Stacy ** 10.15 DBO Agreement with Jay P. Giles ** 10.16 DBO Agreement with Alfred S. Thompson, Jr. ** 10.17 DBO Agreement with Nancy C. Snow ** 10.18 DBO Agreement with Teresa M. Hetrick ** 10.19 DBO Agreement with Jack L. Lester ** 10.20 DBO Agreement with James R. Heslop, II ** 10.21 DBO Agreement with Thomas G. Caldwell ** 31.1 Certification Pursuant to Section 302 of the Securities Exchange Act of 1934 - Thomas G. Caldwell 31.2 Certification Pursuant to Section 302 of the Securities Exchange Act of 1934 - Donald L. Stacy 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Form of Indemnification Agreement with directors of Middlefield Banc Corp. and executive officers of Middlefield Banc Corp. and The Middlefield Banking Company * 99.2 Independent Accountants Report * Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K (File No. 033-23094) filed with the SEC on March 28, 2002. ** Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004. (b) ) Reports on Form 8-K. On April 23, 2004, a Form 8-K (Item 12) was filed with the Securities and Exchange Commission to report earnings for the first quarter ended March 31, 2004. 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 10, 2004 By: /s/Thomas G. Caldwell ---------------------------------------- Thomas G. Caldwell President and Chief Executive Officer Date: May 10, 2004 By: /s/Donald L. Stacy ---------------------------------------- Donald L. Stacy Principal Financial and Accounting Officer