AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
Ohio 34-1585111
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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Securities to be registered pursuant to Section 12(g) of the Act:
Correspondence concerning this Registration Statement should be sent to:
Thomas G. Caldwell With a Copy to: President and Chief Executive Officer Francis X. Grady, Esq. Middlefield Banc Corp. Grady & Associates 15985 East High Street 20950 Center Ridge Road, Suite 100 Middlefield, Ohio 44062-9263 Rocky River, Ohio 44116-4307 (440) 632-1666 (440) 356-7255 |
TABLE OF CONTENTS
CAPTION PAGE
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Middlefield Banc Corp. ................................................ 1
Risk Factors .......................................................... 1
Business .............................................................. 4
Middlefield Banc Corp. ........................................... 4
The Middlefield Banking Company .................................. 4
Market Area .................................................. 4
Competition .................................................. 4
Lending ...................................................... 5
Nonperforming Loans .......................................... 8
Investments .................................................. 11
Sources of Funds ............................................. 15
Personnel .................................................... 15
Supervision and Regulation ....................................... 15
Regulation of Bank Holding Companies ......................... 16
Federal Deposit Insurance .................................... 18
Interstate Banking and Branching ............................. 18
Capital ...................................................... 18
Limits on Dividends and Other Payments ....................... 20
Transactions with Affiliates ................................. 20
Community Reinvestment Act ................................... 21
Federal Home Loan Banks ...................................... 21
State Banking Regulation ..................................... 21
Monetary Policy .............................................. 21
Financial Information ................................................. 22
Selected Financial Data of Middlefield ........................... 22
Selected Quarterly Financial Data ................................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 23
Results of Operations ........................................ 23
Net Interest Income .......................................... 23
Loan Loss Provision .......................................... 26
Noninterest Income ........................................... 26
Noninterest Expense .......................................... 27
Provision for Income Taxes ................................... 27
Financial Condition .......................................... 27
Liquidity .................................................... 28
New Accounting Pronouncements ................................ 28
Impact of Inflation and Changing Prices ...................... 29
Quantitative and Qualitative Disclosures About Market Risk.... 29
Recent Developments .............................................. 31
Properties ............................................................ 32
Security Ownership of Certain Beneficial Owners and Management ........ 32
Directors and Executive Officers ...................................... 33
Directors ........................................................ 33
Executive Officers ............................................... 35
Executive Compensation ................................................ 36
Certain Relationships and Related Party Transactions .................. 39
Legal Proceedings ..................................................... 39
Market Price of and Dividends on Common Stock ......................... 39
Description of Securities ............................................. 41
Changes in Control ............................................... 42
Indemnification of Directors and Officers ............................. 45
Where to Find More Information ........................................ 46
Forward-Looking Statements ............................................ 47
Recent Sales of Unregistered Securities ............................... 48
Independent Auditor's Report .......................................... F-1
Consolidated Financial Statements ..................................... F-2
Index to Exhibits
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MIDDLEFIELD BANC CORP.
Incorporated in 1988 under the Ohio General Corporation Law, Middlefield Banc Corp. is a one-bank holding company registered under the Bank Holding Company Act of 1956. Its sole subsidiary is The Middlefield Banking Company, an Ohio-chartered commercial bank that began operations in 1901. The bank engages in a general commercial banking business through its main office and three branch offices in northeastern Ohio. Our principal executive offices are located at 15985 East High Street, Middlefield, Ohio 44062-9263, and our telephone number is (440) 632-1666.
RISK FACTORS
Investment in Middlefield common stock involves risk, including the risks described below.
OUR MARKET IS VERY COMPETITIVE
We face competition both in making loans and in attracting deposits. Competition is based on interest rates and other credit and service charges, the quality of services rendered, the convenience of banking facilities, the range and type of products offered and, in the case of loans to larger commercial borrowers, lending limits, among other factors. Our competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and savings and loan associations. We face additional competition for deposits from non-depository institutions such as mutual funds, securities and brokerage firms, and insurance companies.
Competition among financial institutions and other financial service organizations is increasing with the continuing consolidation of the financial services industry. Additionally, legislative and regulatory changes could affect competition. Congress' elimination in 1994 of many restrictions on interstate branching could increase competition from large banks headquartered outside of northeastern Ohio. Congress' repeal in late 1999 of the Glass-Steagall Act (which had separated the commercial and investment banking industries) and elimination of the barriers between the banking and insurance industries might make competition even more intense. See, "BUSINESS -- SUPERVISION AND REGULATION." Because of our smaller size, we may have less opportunity to take advantage of the flexibility offered by that new legislation.
THE BANK DOES NOT HAVE THE FINANCIAL AND OTHER RESOURCES THAT LARGER COMPETITORS HAVE; THIS COULD AFFECT ITS ABILITY TO COMPETE FOR LARGE COMMERCIAL LOAN ORIGINATIONS AND ITS ABILITY TO OFFER PRODUCTS AND SERVICES COMPETITORS PROVIDE TO CUSTOMERS
The northeastern Ohio market in which The Middlefield Banking Company operates has a high concentration of financial institutions. Many of the financial institutions operating in our market are branches of significantly larger institutions headquartered in Cleveland or in other major metropolitan areas, with significantly greater financial resources and higher lending limits. More geographically diversified than The Middlefield Banking Company, they are therefore less vulnerable to adverse changes in our local economy. And many of these institutions offer services that we do not or cannot provide. For example, the larger competitors' greater resources offer advantages such as the ability to price services at lower, more attractive levels and the ability to provide larger credit facilities than The Middlefield Banking Company can provide. Likewise, some of the competitors are not subject to the same kind and amount of regulatory restrictions and supervision to which The Middlefield Banking Company is subject. Because The Middlefield Banking Company is smaller than many commercial lenders in its market, it is on occasion prevented from making commercial loans in amounts competitors can offer. The Middlefield Banking Company accommodates loan volumes in excess of its lending limits from time to time through the sale of loan participations to other banks.
THE BUSINESS OF BANKING IS CHANGING RAPIDLY WITH CHANGES IN TECHNOLOGY, WHICH POSES FINANCIAL AND TECHNOLOGICAL CHALLENGES TO SMALL AND MID-SIZED INSTITUTIONS
With frequent introductions of new technology-driven products and services, the banking industry is undergoing rapid technological changes. In addition to enhancing customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Financial institutions' success is increasingly dependent upon use of technology to provide products and services that satisfy customer demands and to create additional operating efficiencies. Many of The Middlefield Banking Company's competitors have substantially greater resources to invest in technological improvements, which could enable them to perform various banking functions at lower costs than The Middlefield Banking Company, or to provide products and services that The Middlefield Banking Company is not able to provide economically. We cannot assure you that we will be able to
develop and implement new technology-driven products or services or that we will be successful in marketing these products or services to customers.
Because of the demand for technology-driven products, banks rely increasingly on unaffiliated vendors to provide data processing services and other core banking functions. The use of technology-related products, services, delivery channels and processes exposes banks to various risks, particularly transaction, strategic, reputation and compliance risk. We cannot assure you that we will be able to successfully manage the risks associated with our dependence on technology.
THE BANKING INDUSTRY IS HEAVILY REGULATED; THE COMPLIANCE BURDEN TO THE INDUSTRY IS CONSIDERABLE; THE PRINCIPAL BENEFICIARY OF FEDERAL AND STATE REGULATION IS THE PUBLIC AT LARGE AND DEPOSITORS, NOT STOCKHOLDERS
Middlefield Banc Corp. and The Middlefield Banking Company are and will remain subject to extensive state and federal government supervision and regulation. Affecting many aspects of the banking business, including permissible activities, lending, investments, payment of dividends, the geographic locations in which our services can be offered, and numerous other matters, state and federal supervision and regulation are intended principally to protect depositors, the public and the deposit insurance funds administered by the FDIC. Protection of stockholders is not a goal of banking regulation.
Applicable statutes, regulations, agency and court interpretations and agency enforcement policies have undergone significant changes, some retroactively applied, and could change significantly again. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or Middlefield and The Middlefield Banking Company in particular. The burdens of federal and state banking regulation could place banks in general at a competitive disadvantage compared to less regulated competitors. We give you no assurance that we will be able to adapt successfully to industry changes caused by governmental actions. See, "BUSINESS -- SUPERVISION AND REGULATION."
Federal and state banking agencies require banks and bank holding companies to maintain capital. Failure to maintain adequate capital or to comply with applicable laws, regulations and supervisory agreements could subject a bank or bank holding company to federal or state enforcement actions, including termination of deposit insurance, imposition of fines and civil penalties and, in the most severe cases, appointment of a conservator or receiver for a depositary institution.
SUCCESS IN THE BANKING INDUSTRY REQUIRES DISCIPLINED MANAGEMENT OF LENDING RISKS
There are many risks in the business of lending, including risks
associated with the duration over which loans may be repaid, risks resulting
from changes in economic conditions, risks inherent in dealing with individual
borrowers, and risks resulting from changes in the value of loan collateral. We
maintain an allowance for loan losses based on historical experience, an
evaluation of economic conditions, and regular reviews of delinquencies and loan
portfolio quality, among other things. Our judgment about the adequacy of the
loan loss allowance is based on assumptions that we believe are reasonable but
that might nevertheless prove to be incorrect. We can give you no assurance that
the allowance will be sufficient to absorb future charge-offs. Additions to the
loan loss allowance could occur, which would decrease net income and capital.
See, "BUSINESS -- THE MIDDLEFIELD BANKING COMPANY -- Lending."
CHANGING INTEREST RATES HAVE A DIRECT AND IMMEDIATE IMPACT ON FINANCIAL INSTITUTIONS
The risk of nonpayment of loans -- or credit risk -- is not the only lending risk. Lenders are subject also to interest rate risk. Fluctuating rates of interest prevailing in the market affect a bank's net interest income, which is the difference between interest earned from loans and investments, on one hand, and interest paid on deposits and borrowings, on the other. In the early 1990s, many banking organizations experienced historically high interest rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings. More recently, however, interest rate spreads have generally narrowed due to changing market conditions and competitive pricing pressures. It has become increasingly difficult for depository institutions to maintain deposit growth at the same rate as loan growth. Under these circumstances, to maintain deposit growth an institution might have to offer more attractive deposit terms, further narrowing the institution's interest rate spread. Middlefield cannot assure you that interest rate spreads will not narrow even more or that higher interest rate spreads will return. See, "FINANCIAL INFORMATION -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Banks manage interest rate risk exposure by closely monitoring assets and liabilities, altering from time to time the mix and maturity of loans, investments and funding sources. Our existing asset/liability mix is such that we
are more likely to benefit from rising interest rates, rather than falling rates. Changes in interest rates could result in an increase in higher-cost deposit products within a bank's existing portfolio, as well as a flow of funds away from bank accounts into direct investments (such as U.S. Government and corporate securities, and other investment instruments such as mutual funds) if the bank does not pay competitive interest rates. The percentage of household financial assets held in the form of deposits is shrinking. Banking customers are investing a growing portion of their financial assets in stocks, bonds, mutual funds and retirement accounts. Changes in interest rates also affect the volume of loans originated, as well as the value of loans and other interest-earning assets, including investment securities.
AN ECONOMIC DOWNTURN IN OUR MARKET AREA WOULD ADVERSELY AFFECT OUR LOAN PORTFOLIO AND OUR GROWTH PROSPECTS
Our lending market area is concentrated in northeastern Ohio, particularly Geauga, Portage, Trumbull and Ashtabula Counties. A high percentage of our loan portfolio is secured by real estate collateral, primarily residential mortgage loans. Commercial and industrial loans to small and medium-sized businesses also represent a significant percentage of our loan portfolio. The asset quality of our loan portfolio is largely dependent upon the area's economy and real estate markets. A downturn in the economy in our primary lending area would adversely affect our operations and limit our future growth potential.
MIDDLEFIELD COMMON STOCK IS VERY THINLY TRADED, AND IT IS THEREFORE SUSCEPTIBLE TO WIDE PRICE SWINGS
Middlefield's common stock is not traded or authorized for quotation on any exchanges or on Nasdaq. However, bid prices for Middlefield common stock appear from time to time in the pink sheets under the symbol "MBCN." The "pink sheets" is a static paper quotation service for over-the-counter securities that is printed weekly and distributed by the National Quotation Bureau, LLC to broker-dealers. Thinly traded, illiquid stocks are more susceptible to significant and sudden price changes than stocks that are widely followed by the investment community and actively traded on an exchange or Nasdaq.
The liquidity of the common stock depends upon the presence in the marketplace of willing buyers and sellers. We cannot assure you that you will be able to find a buyer for your shares. Two regional broker/dealers facilitate trades of Middlefield common stock, matching interested buyers and sellers.
We currently do not intend to seek listing of the common stock on a securities exchange and we do not intend to seek authorization for trading of the shares on Nasdaq. Even if we successfully list the common stock on a securities exchange or obtain Nasdaq trading authorization, we nevertheless could not assure you that an organized public market for the securities will develop or that there will be any private demand for the common stock. We could also fail subsequently to satisfy the standards for continued exchange listing or Nasdaq trading, such as standards having to do with the minimum number of public shareholders or the aggregate market value of publicly held shares.
A stock that is not listed on a securities exchange or authorized for Nasdaq trading might not be accepted as collateral for loans. If accepted as collateral, the stock's value could nevertheless be substantially discounted. Consequently, investors should regard the common stock as a long-term investment and should be prepared to bear the economic risk of an investment in the common stock for an indefinite period. Investors who need or desire to dispose of all or a part of their investments in the common stock might not be able to do so except by private, direct negotiations with third parties.
GOVERNMENT REGULATION COULD RESTRICT OUR ABILITY TO PAY CASH DIVIDENDS
Dividends from the bank are the only significant source of cash for Middlefield. Statutory and regulatory limits could prevent the bank from paying dividends or transferring funds to Middlefield. As of December 31, 2000 the bank could have declared dividends of approximately $2.1 million to Middlefield without having to obtain advance regulatory approval. We cannot assure you that the bank's profitability will continue to allow it to pay dividends to Middlefield, and we therefore cannot assure you that Middlefield will be able to continue paying regular, quarterly cash dividends.
WE COULD INCUR LIABILITIES UNDER FEDERAL AND STATE ENVIRONMENTAL LAWS IF WE FORECLOSE ON COMMERCIAL PROPERTIES
A high percentage of the bank's loans are secured by real estate. Although the vast majority of these loans are residential mortgage loans with little associated environmental risk, some are commercial loans secured by property on which manufacturing and other commercial enterprises are carried on. The bank currently does not
own any property acquired by foreclosure. However, the bank has in the past and could again acquire property by foreclosing on loans in default. Under federal and state environmental laws, the bank could face liability for some or all of the costs of removing hazardous substances, contaminants or pollutants from properties acquired in this fashion. Although other persons might be primarily responsible for these costs, they might not be financially solvent or they might be unable to bear the full cost of clean up. Regardless of whether it forecloses on property, it is also possible that a lender exercising unusual influence over a borrower's commercial activities could be required to bear a portion of the clean-up costs under federal or state environmental laws.
MIDDLEFIELD DOES NOT HAVE ACQUISITION EXPERIENCE
Many financial institutions and holding companies achieve growth through mergers and acquisitions. Although Middlefield has never undertaken acquisition of another institution, from time to time Middlefield explores potential acquisitions. Management holds informal discussions about possible acquisitions of other institutions with some frequency, as it believes management of many institutions do. In the vast majority of cases, however, those discussions never progress beyond the most preliminary or exploratory stages. Sometimes preliminary discussions do progress beyond that point, but for one reason or another they nevertheless do not progress to the point of negotiating terms of an acquisition. Discussions of this sort have become routine among financial institutions both large and small. Investors may generally assume that these discussions have occurred and will occur again, but Middlefield cautions investors not to assume that discussions will actually lead to an acquisition by Middlefield, although that could occur.
There are risks associated with assessing the values, strengths, weaknesses and profitability of acquisition candidates, including adverse short-term effects of acquisitions on operating results, diversion of management's attention, dependence on retaining key personnel, and risks associated with unanticipated problems. An acquisition's success depends in part on the acquiror's ability to integrate the operations of the acquired institution or assets and capitalize on synergies for cost savings. Without experience integrating acquired companies, Middlefield therefore would face greater risk that acquisition costs will exceed projections and that the benefits will be less than projected or harder to attain.
BUSINESS
MIDDLEFIELD BANC CORP.
Middlefield became the holding company for The Middlefield Banking Company in 1988. The principal source of Middlefield's income and funds is earnings of and dividends paid by The Middlefield Banking Company. Middlefield's business currently is limited to acting as holding company for the bank.
THE MIDDLEFIELD BANKING COMPANY
The Middlefield Banking Company was chartered under Ohio law in 1901. The bank offers its customers a broad range of banking services, including checking, savings and negotiable order of withdrawal (NOW) accounts; money market accounts; time certificates of deposit, commercial loans, real estate loans and various types of consumer loans; safe deposit facilities and travelers' checks.
The bank engages in a general commercial banking business in northeastern Ohio, offering commercial banking services principally to small and medium-sized businesses, professionals and small business owners and retail customers. The bank has developed and continues to monitor and update a marketing program to attract and retain consumer accounts, and to offer banking services and facilities compatible with the needs of its customers.
The bank's loan products include operational and working capital loans; loans to finance capital purchases; term business loans; residential construction loans; selected guaranteed or subsidized loan programs for small businesses; professional loans; residential mortgage and commercial mortgage loans, and consumer installment loans to purchase automobiles, boats, and for home improvement and other personal expenditures. Although the bank makes agricultural loans, it currently has no significant agricultural loans.
MARKET AREA. The Middlefield Banking Company's market area consists principally of Geauga, Portage, Trumbull, and Ashtabula Counties. Benefitting from the area's proximity both to Cleveland and Akron, population and income levels have maintained steady growth over the years.
COMPETITION. The banking industry has been changing for many reasons, including continued consolidation within the banking industry, legislative and regulatory changes and advances in technology. To deliver banking products and services more effectively and efficiently, banking institutions are opening in-store branches, installing more automated teller machines (ATMs) and investing in technology to permit telephone,
personal computer and internet banking. While all banks are experiencing the effects of the changing competitive and technological environment, the manner in which banks choose to compete is increasing the gap between large national and super-regional banks, on one hand, and community banks on the other. Large institutions are committed to becoming national or regional "brand names," providing a broad selection of products at low cost and with advanced technology, while community banks provide most of the same products but with a commitment to personal service and with local ties to the customers and communities they serve. The Middlefield Banking Company seeks to take competitive advantage of its local orientation and community banking profile. It competes for loans principally through responsiveness to customers and its ability to communicate effectively with them and understand and address their needs. The bank competes for deposits principally by offering customers personal attention, a variety of banking services, attractive rates and strategically located banking facilities. The bank seeks to provide high quality banking service to professionals and small and mid-sized businesses, as well as individuals, emphasizing quick and flexible responses to customer demands.
LENDING -- Loan Portfolio Composition and Activity. The Middlefield Banking Company makes residential mortgage and commercial mortgage loans, home equity loans, secured and unsecured consumer installment loans, commercial and industrial loans, and real estate construction loans for owner-occupied and rental properties. Historically, real estate-based lending has been the primary focus of the bank's lending activities. The bank's loan policy aspires to a loan composition mix consisting of approximately 60% to 70% residential real estate loans, 35% to 40% commercial loans, consumer loans of 5% to 15%, and credit card accounts of up to 5%.
The bank offers specialized loans for business and commercial customers, including equipment and inventory financing, real estate construction loans and Small Business Administration loans for qualified businesses. A substantial portion of the bank's commercial loans are designated as real estate loans for regulatory reporting purposes because they are secured by mortgages on real property. Loans of that type may be made for purpose of financing commercial activities, such as accounts receivable, equipment purchases and leasing, but they are secured by real estate to provide the bank with an extra measure of security. Although these loans might be secured in whole or in part by real estate, they are treated in the discussions to follow as commercial and industrial loans. The bank's consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvements, revolving credit lines, autos, boats, and recreational vehicles.
The following table shows the composition of the loan portfolio in dollar amounts and in percentages at December 31, 2000, 1999 and 1998, along with a reconciliation to loans receivable, net.
LOAN PORTFOLIO COMPOSITION AT DECEMBER 31,
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(Dollars in thousands) 2000 1999 1998
----------------------- ----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- ------- -------- -------
Type of loan:
Commercial and industrial .... $ 21,508 15.90% $ 18,587 15.33% $ 12,706 12.19%
Real estate construction ..... 2,568 1.90 2,259 1.86 2,819 2.70
Mortgage:
Residential ............. 101,404 74.95 89,263 73.63 76,229 73.11
Commercial .............. 4,809 3.55 6,919 5.71 8,759 8.40
Consumer installment ......... 5,015 3.70 4,200 3.47 3,754 3.60
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Total loans .................. 135,304 100.00% 121,228 100.00% 104,267 100.00%
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Less:
Allowance for loan
losses .................... 2,037 1,756 1,539
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Net loans $133,267 $119,472 $102,728
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Net loans as a percent of
total assets 75.51% 72.18% 66.04%
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The following table presents maturity information for the loan portfolio at December 31, 2000. The table does not include prepayments or scheduled principal repayments. All loans are shown as maturing based on contractual maturities.
LOAN PORTFOLIO MATURITY AT DECEMBER 31, 2000
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MORTGAGE
COMMERCIAL REAL ESTATE ------------------------ CONSUMER
(Dollars in thousands) AND INDUSTRIAL CONSTRUCTION RESIDENTIAL COMMERCIAL INSTALLMENT TOTAL
--------------- -------------- ----------- ------------- ------------- --------
Amount due:
In one year or less * .......... $ 6,074 $1,842 $ 15,918 $2,083 $1,618 27,535
After one year through five
years ........................ 9,685 353 49,646 1,401 2,996 64,081
After five years ............... 5,749 373 35,840 1,325 401 43,688
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Total amount due ........... $21,508 $2,568 $101,404 $4,809 $5,015 $135,304
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* Loans due on demand and overdrafts are included in the amount due in one year or less. The Middlefield Banking Company has no loans without a stated schedule of repayment or a stated maturity.
The following table shows the dollar amount of all loans due after December 31, 2001 that have pre-determined interest rates and the dollar amount of all loans due after December 31, 2001 that have floating or adjustable rates
(Dollars in thousands) FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- --------
Commercial and industrial.... $11,151 $ 4,283 $ 15,434
Real estate construction..... 556 170 726
Mortgage:
Residential ............. 44,195 41,291 85,486
Commercial .............. 2,470 256 2,726
Consumer installment ........ 3,290 107 3,397
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Total ................. $61,662 $46,107 $107,769
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Residential Mortgage Loans. A significant portion of the bank's lending consists of origination of conventional loans secured by 1-4 family real estate located in Geauga, Portage, Trumbull, and Ashtabula Counties. These loans approximated $101.4 million or 75.0% of the bank's total loan portfolio at December 31, 2000.
The bank makes loans of up to 80% of the value of the real estate and improvements securing a loan (the "loan-to-value" or "LTV" ratio) on 1-4 family real estate. The bank generally does not lend in excess of 80% of the appraised value or sales price (whichever is less) of the property unless additional collateral is obtained, thereby lowering the total LTV. The bank offers residential real estate loans with terms of up to 30 years.
Before 1996, nearly all residential mortgage loans originated by the bank were written on a balloon-note basis. During 1996, the bank began to originate fixed-rate mortgage loans for maturities up to 20 years. In late 1998, the bank began originating adjustable-rate mortgage loans and de-emphasized balloon-note mortgages. Approximately 45.0% of the portfolio of conventional mortgage loans secured by 1-4 family real estate at December 31, 2000 was adjustable rate. The bank's mortgage loans are ordinarily retained in the loan portfolio. The bank's residential mortgage loans have not been originated with loan documentation that would permit their sale to Fannie Mae and Freddie Mac.
The bank's home equity loan policy generally allows for a loan of up to 85% of a property's appraised value, less the principal balance of the outstanding first mortgage loan. The bank's home equity loans generally have terms of 10 years.
At December 31, 2000 there were no loans secured by residential real estate with outstanding balances more than 90 days delinquent or nonaccruing.
Commercial and Industrial Loans and Commercial Real Estate Loans. The bank's commercial loan services include--
o accounts receivable, inventory and working o short-term notes
capital loans o selected guaranteed or
o renewable operating lines of credit subsidized loan programs
o loans to finance capital equipment for small businesses
o term business loans o loans to professionals
o commercial real estate loans
Commercial real estate loans include commercial properties occupied by the proprietor of the business conducted on the premises, and income-producing or farm properties. Although the bank makes agricultural loans, it currently does not have a significant amount of agricultural loans. The primary risks of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Although commercial and commercial real estate loans generally bear somewhat more risk than single-family residential mortgage loans, commercial and commercial real estate loans tend to be higher yielding, tend to have shorter terms and commonly provide for interest-rate adjustments as prevailing rates change. Accordingly, commercial and commercial real estate loans enhance a lender's interest rate risk management and, in management's opinion, promote more rapid asset and income growth than a loan portfolio comprised strictly of residential real estate mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific types of risks are associated with various kinds of loans. One of the primary risks associated with commercial loans is the possibility that the commercial borrower will not generate income sufficient to repay the loan. The bank's loan policy provides that commercial loan applications must be supported by documentation indicating that there will be cash flow sufficient for the borrower to service the proposed loan. Financial statements or tax returns for at least three years must be submitted, and annual reviews are undertaken for loans of $1 million or more. The fair market value of collateral for collateralized commercial loans must exceed the bank's loan exposure. For this purpose fair market value is determined by independent appraisal or by the loan officer's estimate employing guidelines established by the loan policy. Term loans not secured by real estate generally have terms of five years or less, unless guaranteed by the U.S. Small Business Administration or other governmental agency, and terms loans secured by collateral having a useful life exceeding five years may have longer terms. The bank's loan policy allows for terms of up to 15 years for loans secured by commercial real estate, and one year for business lines of credit. The maximum loan-to-value ratio for commercial real estate loans is 75% of the appraised value or cost, whichever is less.
Real estate is commonly a material component of collateral for the bank's loans, including commercial loans. Although the expected source of repayment of these loans is generally the operations of the borrower's business or personal income, real estate collateral provides an additional measure of security. Risks associated with loans secured by real estate include fluctuating land values, changing local economic conditions, changes in tax policies, and a concentration of loans within a limited geographic area.
At December 31, 2000, commercial and commercial real estate loans totaled $26.3 million, or 19.5% of the bank's total loan portfolio. There were no loans secured by commercial and commercial real estate with outstanding balances more than 90 days delinquent or nonaccruing.
Real Estate Construction. The Middlefield Banking Company originates several different types of loans that it categorizes as construction loans, including--
o residential construction loans to borrowers who will occupy the premises upon completion of construction,
o residential construction loans to builders,
o commercial construction loans, and
o real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans are generally recognized as having a higher degree of risk than other forms of real estate lending. The bank's fixed-rate and adjustable-rate construction loans do not provide for the same interest rate terms on the construction loan and on the permanent mortgage loan that follows completion of the construction phase of the loan. It is the norm for the bank to make residential construction loans without an existing written commitment for permanent financing. The bank's loan policy provides that the bank may make construction loans with terms of up to one year, with a maximum loan-to-value ratio for residential construction of 80%.
At December 31, 2000, real estate construction loans totaled $2.6 million, or 1.9% of the bank's total loan portfolio. There were no real estate construction loans with outstanding balances more than 90 days delinquent or nonaccruing.
Consumer Installment Loans. The bank's consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvement, revolving credit lines, autos, boats, and recreational vehicles. The bank does not currently do any indirect lending. Unsecured consumer loans carry significantly higher interest rates than secured loans. The bank maintains a higher loan loss allowance for consumer loans, while maintaining strict credit guidelines when considering consumer loan applications.
According to the bank's loan policy, consumer loans secured by collateral other than real estate generally may have terms of up to five years, and unsecured consumer loans may have terms up to two and one-half years. Real estate security generally is required for consumer loans having terms exceeding five years.
At December 31, 2000, the bank had approximately $5.0 million in its consumer installment loan portfolio, representing 3.7% of total loans. Consumer installment loans of approximately $5,000 were over 90 days delinquent or nonaccruing on that date, representing 0.01% of the installment loan portfolio.
Loan Solicitation and Processing. Loan originations are developed from a number of sources, including continuing business with depositors, other borrowers and real estate builders, solicitations by bank personnel and walk-in customers.
When a loan request is made, the bank reviews the application, credit bureau reports, property appraisals or evaluations, financial information, verifications of income, and other documentation concerning the creditworthiness of the borrower, as applicable to each loan type. The bank's underwriting guidelines are set by senior management and approved by the board. The loan policy specifies each individual officer's loan approval authority, including residential mortgage loans up to $200,000 for the Executive Vice President and the Senior Retail Lender, and secured commercial loans up to $150,000 for the Executive Vice President and the Senior Commercial Lender. Loans exceeding an individual officer's approval authority are submitted to a committee consisting of loan officers, which has authority to approve loans up to $250,000. The full board acts as a loan committee for loans exceeding that amount.
Income from Lending Activities. The bank earns interest and fee income from its lending activities. The bank receives fees for originating loans, which fees, net of origination costs, are amortized over the life of the respective loan. The bank also receives loan fees related to existing loans, including late charges. Income from loan origination and commitment fees and discounts varies with the volume and type of loans and commitments made and with competitive and economic conditions. Note 1 to the Consolidated Financial Statements included herein contains a discussion of the manner in which loan fees and income are recognized for financial reporting purposes.
NONPERFORMING LOANS. The accrual of interest is discontinued on a loan when -- after considering economic and business conditions -- management believes the borrower's financial condition is such that collection of interest is doubtful. Interest received on nonaccrual loans is recorded as income against principal according to management's judgment as to the collectibility of such principal.
A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the bank expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The bank estimates credit losses on impaired loans based on the present value of expected cash flows, or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of collateral. Impaired loans, or portions thereof, are charged off when the bank determines that a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the payment related to interest is recognized as income.
Late charges on residential mortgages and consumer loans are assessed if a payment is not received by the due date plus a grace period. When an advanced stage of delinquency appears on a single-family loan and if repayment cannot be expected within a reasonable time or a repayment agreement is not entered into, a required notice of foreclosure or repossession proceedings may be prepared by the bank's attorney and delivered to the borrower so that foreclosure proceedings may be initiated promptly, if necessary. The bank also collects late charges on commercial loans.
When the bank acquires real estate through foreclosure, voluntary deed, or similar means, it is classified as "other real estate owned" until it is sold. When property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal balance at the date of acquisition) or fair value. Any subsequent write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed. "Other real estate owned" is appraised during the foreclosure process, before acquisition. Losses are recognized for the amount by which the book value of the related mortgage loan exceeds the estimated net realizable value of the property.
The bank undertakes regular review of the loan portfolio to assess its risks, particularly the risks associated with the commercial loan portfolio. This includes annual review of every commercial loan representing credit exposure of $150,000 or more. An independent certified public accounting firm performs semi-annual loan reviews for the bank.
The bank had nonaccrual loans of $125,000 and $118,000 at December 31, 1999 and 1998, respectively. There were no loans on nonaccrual status at December 31, 2000. Interest income recognized on such loans during all of the periods was insignificant.
The following table summarizes nonperforming assets by category.
NONPERFORMING ASSETS AT DECEMBER 31,
-------------------------------------
(Dollars in thousands) 2000 1999 1998
---- ---- ----
LOANS ACCOUNTED FOR ON A NONACCRUAL BASIS:
Commercial and industrial ............................ $- $ 17 $ 35
Real estate-- construction ........................... - -- --
Real estate-- mortgage:
Residential ....................................... - 103 83
Commercial ........................................ - -- --
Consumer installment ................................. - 5 --
---- ---- ----
Total nonaccrual loans .......................... - 125 118
---- ---- ----
ACCRUING LOANS CONTRACTUALLY PAST DUE 90 DAYS OR MORE:
Commercial and industrial ............................ - -- --
Real estate-- construction ........................... - -- --
Real estate-- mortgage:
Residential ....................................... - -- 21
Commercial ........................................ - -- --
Consumer installment ................................. 5 6 11
---- ---- ----
Total accruing loans contractually past due 90
days or more ................................. 5 6 32
---- ---- ----
Total nonperforming loans ............................ 5 131 150
Real estate owned .................................... - -- --
Other nonperforming assets ........................... - -- --
---- ---- ----
Total nonperforming assets ...................... $5 $131 $150
==== ==== ====
Total nonperforming loans to total loans ............. - 0.11% 0.14%
Total nonperforming loans to total assets ............ - 0.08% 0.10%
Total nonperforming assets to total assets ........... - 0.08% 0.10%
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Allowance for Loan Losses. The allowance for loan losses represents the amount that management estimates is adequate to provide for potential loan losses in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses, which is charged to operations. The provision is based on management's periodic evaluation of the adequacy of the allowance for loan losses, taking into account the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the allowance for loan losses -- including the amounts and timing of future cash flows expected on impaired loans -- are particularly susceptible to significant change in the near term. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a formula allowance, and an unallocated allowance.
When applicable, the specific allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures for impaired loans.
The formula allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management's consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss
experience. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
The unallocated allowance is based on management's evaluation of existing economic and business conditions affecting the key lending areas of the bank and other conditions, such as new loan products, credit quality trends, collateral values, specific industry conditions within portfolio segments that existed as of the balance sheet date, and the impact of those conditions on the collectibility of the loan portfolio. Management reviews these conditions quarterly. The unallocated allowance is subject to a higher degree of uncertainty because it is not necessarily identified with specific problem credits or portfolio segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses was adequate at December 31, 2000, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy and employment could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income. Additionally, as an integral part of the examination process bank regulatory agencies periodically review the bank's loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
The allowance for loan losses as a percent of total loans remained relatively constant at 1.51% at December 31, 2000 and 1.45% at December 31, 1999, while total loans increased by $14.1 million from $121.2 million at December 31, 1999 to $135.3 million at December 31, 2000.
The following table sets forth information concerning the bank's allowance for loan losses at the dates and for the periods presented.
LOAN LOSS EXPERIENCE FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
(Dollars in thousands) 2000 1999 1998
-------- -------- --------
Allowance balance at beginning of period ................. $ 1,756 $ 1,539 $ 1,335
Loans charged off:
Commercial and industrial ............................. (3) (22) (55)
Real estate-- construction ............................ -- -- --
Real estate-- mortgage:
Residential ....................................... -- (7) (7)
Commercial ........................................ -- -- --
Consumer installment .................................. (52) (89) (77)
-------- -------- --------
Total loans charged off ............................ (55) (118) (139)
-------- -------- --------
Recoveries of loans previously charged off:
Commercial and industrial ............................. 2 8 8
Real estate-- construction ............................ -- -- --
Real estate-- mortgage:
Residential ....................................... -- -- 42
Commercial ........................................ -- -- --
Consumer installment .................................. 59 31 23
-------- -------- --------
Total recoveries ................................... 61 39 73
-------- -------- --------
Net loans recovered (charged off) ........................ 6 (79) (66)
Provision for loan losses ................................ 275 296 270
-------- -------- --------
Allowance balance at end of period ....................... $ 2,037 $ 1,756 $ 1,539
======== ======== ========
Loans outstanding:
Average ............................................... $128,661 $111,745 $ 96,815
End of period ......................................... $135,304 $121,228 $104,267
Ratio of allowance for loan losses to loans outstanding at
end of period ............................................ 1.51% 1.45% 1.48%
Net recoveries (charge offs) to average loans ............ --% (0.07)% (0.07)%
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The following table illustrates the allocation of the bank's allowance for loan losses for each category of loan. The allocation of the allowance to each category is not necessarily indicative of future loss in a particular category and does not restrict our use of the allowance to absorb losses in other loan categories.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
----------------------------------------------------------------------
2000 1999 1998
------------------- ------------------ -----------------
PERCENT OF PERCENT PERCENT
LOANS IN OF LOANS OF LOANS
EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ -------- ------ --------
Type of loan:
Commercial and industrial ..... $ 723 15.90% $ 340 15.33% $ 300 12.19%
Real estate-- construction .... 26 1.90% 23 1.86% 52 2.70%
Real estate-- mortgage:
Residential .............. 684 74.95% 721 73.63% 552 73.11%
Commercial ............... 281 3.55% 331 5.71% 398 8.40%
Consumer installment .......... 107 3.70% 85 3.47% 78 3.60%
Unallocated ................... 216 -- 256 -- 159 --
------ ------ ------ ------ ------ ------
Total .............................. $2,037 100.00% $1,756 100.00% $1,539 100.00%
====== ====== ====== ====== ====== ======
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Classified Assets. FDIC regulations governing classification of assets require nonmember commercial banks -- including The Middlefield Banking Company -- to classify their own assets and to establish appropriate general and specific allowances for losses, subject to FDIC review. The regulations are designed to encourage management to evaluate assets on a case-by-case basis, and to discourage automatic classifications. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection of principal in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as "loss" are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the bank to risk sufficient to warrant classification in one of the above categories, but that possess some weakness, are required to be designated "special mention" by management.
When an insured institution classifies assets as either "substandard" or "doubtful," it may establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies assets as "loss," it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off that amount. An institution's determination about classification of its assets and the amount of its allowances is subject to review by the Federal Deposit Insurance Corporation, which may order the establishment of additional loss allowances. Management also employs an independent third party to semi-annually review and validate the internal loan review process and loan classifications. As of December 31, 2000 classified assets were as follows:
CLASSIFIED ASSETS AT DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
(Dollars in thousands) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
Classified loans:
Special mention .......... $4,663 3.45% $2,353 1.94% $4,161 3.99%
Substandard .............. 1,784 1.32% 1,445 1.19% 2,163 2.07%
Doubtful ................. 188 0.14% 310 0.26% 197 0.19%
------ ---- ------ ---- ------ ----
Total ................ $6,635 4.91% $4,108 3.39% $6,521 6.25%
====== ==== ====== ==== ====== ====
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INVESTMENTS. Investment securities provide a return on residual funds after lending activities. Investments may be in federal funds sold, corporate securities, U.S. Government and agency obligations, state and local government obligations and government-guaranteed, mortgage-backed securities. The bank generally does not invest in securities that are rated less than investment grade by a nationally recognized statistical rating organization.
All securities-related activity is reported to the board of directors of the bank. General changes in investment strategy are required to be reviewed and approved by the board. Senior management can purchase and sell securities in accordance with the bank's stated investment policy.
Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the bank has the ability at the time of purchase to hold a security until maturity or on a long-term basis, the security is classified as held-to-maturity and is reflected on the balance sheet at historical cost. Securities to be held for indefinite periods and not intended to be held to maturity or on a long-term basis are classified as available-for-sale. Available-for-sale securities are reflected on the balance sheet at their market value.
The following table sets forth the amortized cost and estimated market value of the bank's investment portfolio at the dates indicated.
INVESTMENT PORTFOLIO AMORTIZED COST AND ESTIMATED VALUE AT DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------- ---------------------------------------------
(Dollars in thousands) GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
AVAILABLE FOR SALE:
U.S. Treasury securities ....... $ -- $ -- $ -- $ -- $ 500 $-- $ -- $ 500
U.S. Government agency
securities ..................... 3,990 71 (1) 4,060 3,985 -- (45) 3,940
Obligations of states and
political subdivisions:
Taxable ..................... 1,458 12 (3) 1,467 957 6 (14) 949
Tax-exempt .................. 3,685 42 (17) 3,710 3,550 5 (71) 3,484
Corporate securities ........... 701 3 (3) 701 952 -- (18) 934
Mortgage-backed securities ..... 1,898 30 -- 1,928 -- -- -- --
------- ---- ---- ------- ------- --- ----- -------
Total debt securities ..... 11,732 158 (24) 11,866 9,944 11 (148) 9,807
Equity securities .............. 913 -- -- 913 777 -- -- 777
------- ---- ---- ------- ------- --- ----- -------
Total ..................... $12,645 $158 $(24) $12,779 $10,721 $11 $(148) $10,584
------- ---- ---- ------- ------- --- ----- -------
HELD TO MATURITY:
U.S. Government agency
securities ..................... 1,900 -- (9) 1,891 3,031 -- (72) 2,959
Obligations of states and
political subdivisions:
Taxable ..................... 3,723 18 (20) 3,721 3,994 3 (90) 3,907
Tax-exempt .................. 7,481 26 (7) 7,500 9,275 18 (58) 9,235
Corporate securities ........... 4,525 8 (19) 4,514 5,712 1 (94) 5,619
Mortgage-backed securities ..... 313 2 -- 315 -- -- -- --
------- ---- ---- ------- ------- --- ----- -------
Total ..................... $17,942 $ 54 $(55) $17,941 $22,012 $22 $(314) $21,720
------- ---- ---- ------- ------- --- ----- -------
TOTAL INVESTMENT SECURITIES .... $30,587 $212 $(79) $30,720 $32,733 $33 $(462) $32,304
======= ==== ==== ======= ======= === ===== =======
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INVESTMENT PORTFOLIO AMORTIZED COST AND
ESTIMATED VALUE AT DECEMBER 31,
---------------------------------------------
1998
---------------------------------------------
(Dollars in thousands) GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
AVAILABLE FOR SALE:
U.S. Treasury securities ....... $ 499 $ 5 $ -- $ 504
U.S. Government agency
securities ..................... 2,000 4 (1) 2,003
Obligations of states and
political subdivisions:
Taxable ..................... 100 1 -- 101
Tax-exempt .................. 750 5 -- 755
Corporate securities ........... 1,852 9 (2) 1,859
Mortgage-backed securities ..... -- -- -- --
------- ---- ---- -------
Total debt securities ..... 5,201 24 (3) 5,222
Equity securities .............. 636 -- -- 636
------- ---- ---- -------
Total ................... $ 5,837 $ 24 $ (3) $ 5,858
------- ---- ---- -------
HELD TO MATURITY:
U.S. Government agency
securities ..................... 3,330 19 (11) 3,338
Obligations of states and
political subdivisions:
Taxable ..................... 5,575 117 (11) 5,681
Tax-exempt .................. 13,482 208 (3) 13,687
Corporate securities ........... 9,049 100 (19) 9,130
Mortgage-backed securities ..... -- -- -- --
------- ---- ---- -------
Total ................... $31,436 $444 $(44) $31,836
------- ---- ---- -------
TOTAL INVESTMENT SECURITIES .... $37,273 $468 $(47) $37,694
======= ==== ==== =======
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The contractual maturity of investment securities at December 31, 2000 is shown below. Expected maturities of investment securities could differ from contractual maturities because the borrower, or issuer, could have the right to call or prepay obligations with or without call or prepayment penalties.
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------
ONE YEAR OR LESS MORE THAN ONE TO MORE THAN FIVE TO MORE THAN TEN YEARS
FIVE YEARS TEN YEARS
----------------------- ---------------------- --------------------- ---------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- ----- ----
U.S. Government agency
securities ................. $2,599 5.57% $3,361 6.17% $ -- --% $ -- --%
Obligations of states and
political subdivisions:
Taxable ................. 1,982 6.70 3,208 6.10 -- -- -- --
Tax-exempt .............. 2,348 6.64 8,196 6.50 547 8.58 100 9.85
Corporate securities ....... 2,319 7.09 2,907 6.72 -- -- -- --
Mortgage-backed securities . -- -- 473 5.50 440 5.00 1,328 6.06
------ ------- ---- -----
Total ...................... $9,248 6.46% $18,145 6.38% $987 6.98% $1,428 6.33%
====== ==== ======= ==== ==== ==== ====== ====
|
DECEMBER 31, 2000
-----------------------------------
TOTAL INVESTMENT SECURITIES AND
MORTGAGE-BACKED SECURITIES
-----------------------------------
CARRYING AVERAGE
VALUE YIELD MARKET VALUE
-------- ------- ------------
U.S. Government agency
securities ................. $ 5,960 5.91% $ 5,951
Obligations of states and
political subdivisions:
Taxable ................. 5,190 6.33 5,188
Tax-exempt .............. 11,191 6.66 11,210
Corporate securities ....... 5,226 6.88 5,215
Mortgage-backed securities . 2,241 5.73 2,243
------ -------
Total ...................... $29,808 6.42% $29,807
======= ==== =======
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As of December 31, 2000, the bank also held 91,290 shares of $100 par value Federal Home Loan Bank of Cincinnati stock, which are restricted securities. FHLB stock represents an equity interest in the FHLB, but it does not have a readily determinable market value. The stock can be sold at its par value only, and only to the FHLB or to another member institution. Member institutions are required to maintain a minimum stock investment in the FHLB, based on total assets, total mortgages and total mortgage-backed securities. The bank's minimum investment in FHLB stock at December 31, 2000 was approximately $912,900.
SOURCES OF FUNDS -- Deposit Accounts. Deposit accounts are a major source of funds for the bank. The bank offers a number of deposit products to attract both commercial and regular consumer checking and savings customers, including regular and money market savings accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities ranging from seven days to 60 months. These accounts earn interest at rates established by management based on competitive market factors and management's desire to increase certain types or maturities of deposit liabilities. The bank also provides travelers' checks, official checks, money orders, ATM services and IRA accounts.
The following table shows the amount of time deposits of $100,000 or more as of December 31, 2000, including certificates of deposit, by time remaining until maturity.
(Dollars in thousands) MATURITY OF TIME DEPOSITS OF $100,000 OR
MORE AT DECEMBER 31, 2000
-------------------------------------
TIME REMAINING TO MATURITY AMOUNT PERCENT OF TOTAL
------------------------------------- ---------------- -------------------
Three months or less ............ $ 2,047 17.76%
Over three through 12 months .... 5,318 46.12
Over 12 months .................. 4,165 36.12
------- ------
Total ...................... $11,530 100.00%
======= ======
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Borrowings. Deposits and repayment of loan principal are the bank's primary sources of funds for lending activities and other general business purposes. However, when the supply of lendable funds or funds available for general business purposes cannot meet the demand for loans or such general business purposes, the bank can obtain funds from the FHLB of Cincinnati. In addition to borrowing from the FHLB on a term-loan basis, the bank has a line of credit with the FHLB that allows the bank to borrow in an amount up to 10.0 % of the bank's total assets. Interest and principal are payable monthly, and the line of credit is secured by a blanket pledge collateral agreement. At December 31, 2000, the bank had $9.9 million of FHLB borrowings outstanding. Middlefield also has established a $2.0 million secured credit line through the discount window with the Federal Reserve Bank of Cleveland and a $4.0 million line of credit at an adjustable rate, currently 9.00 percent, from The State Bank and Trust Company. At December 31, 2000 and 1999, there were no outstanding balances on these lines.
The outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase and federal funds purchased, are summarized as follows:
2000 1999 1998
---------- ---------- ----------
Balance at year end .................................... $ 543,222 $2,507,670 $ --
Average balance outstanding ............................ 1,059,042 143,438 54,082
Maximum month-end balance .............................. 3,581,491 2,507,670 2,480,000
Weighted-average rate at year end ...................... 5.43% 4.75% 5.62%
Weighted average rate during the year .................. 6.05% 5.87% 6.40%
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PERSONNEL. As of December 31, 2000 Middlefield and the bank had 60 full-time equivalent employees. None of the employees is represented by a collective bargaining group. Management considers its relations with employees to be excellent.
SUPERVISION AND REGULATION
The following discussion of bank supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of Middlefield and the bank.
Middlefield is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, Middlefield is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System, acting primarily through the Federal Reserve Bank of Cleveland. Middlefield is required to file annual reports and other information with the Federal Reserve. The Middlefield Banking Company is an Ohio-chartered commercial bank. As a state-chartered, nonmember bank, the bank is primarily regulated by the FDIC and by the Ohio Division of Financial Institutions.
Middlefield and the bank are subject to federal banking laws, and the bank is subject also to Ohio bank law. These federal and state laws are intended to protect depositors, not stockholders. Federal and state laws applicable to holding companies and their financial institution subsidiaries regulate the range of permissible business activities, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, establishment of branches, mergers, dividends and a variety of other important matters. The bank is subject to detailed, complex and sometimes overlapping federal and state statutes and regulations affecting routine banking operations. These statutes and regulations include but are not limited to state usury and consumer credit laws, the Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act and the Community Reinvestment Act. The bank must comply with Federal Reserve Board regulations requiring depository institutions to maintain reserves against their transaction accounts (principally NOW and regular checking accounts). Because required reserves are commonly maintained in the form of vault cash or in a noninterest-bearing account (or pass-through account) at a Federal Reserve Bank, the effect of the reserve requirement is to reduce an institution's earning assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded significantly the authority of federal agencies to regulate the activities of federally chartered and state-chartered financial institutions and their holding companies. The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.
REGULATION OF BANK HOLDING COMPANIES -- Bank and Bank Holding Company Acquisitions. The Bank Holding Company Act requires every bank holding company to obtain approval of the Federal Reserve before --
o directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring company would own or control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of the shares),
o acquiring all or substantially all of the assets of another bank, or
o merging or consolidating with another bank holding company.
The Federal Reserve will not approve an acquisition, merger or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in Bank Control Act and the Federal Reserve Board's Regulation Y require advance approval of the Federal Reserve to acquire "control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of a class of voting securities of the bank holding company. If the holding company has securities registered under Section 12 of the Securities Exchange Act of 1934, as Middlefield will, or if no other person owns a greater percentage of the class of voting securities, control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities. Approval of the Ohio Division of Financial Institutions is also necessary to acquire control of an Ohio-chartered bank.
Nonbanking Activities. With some exceptions, the Bank Holding Company Act has for many years also prohibited a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve non-bank activities that, by statute or by Federal Reserve Board regulation or order, are held to be closely related to the business of banking or of managing or controlling banks. In making its determination that a particular activity is closely related to the business of banking, the Federal Reserve considers whether the performance of the activities by a bank holding company can be expected to produce benefits to the public -- such as greater convenience, increased competition or gains in efficiency in resources -- that will outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts
of interest or unsound banking practices. Some of the activities determined by Federal Reserve Board regulation to be closely related to the business of banking are: making or servicing loans or leases; engaging in insurance and discount brokerage activities; owning thrift institutions, performing data processing services; acting as a fiduciary or investment or financial advisor; and making investments in corporations or projects designed primarily to promote community welfare.
Recent Legislation -- Financial Holding Companies. On November 12, 1999 the Gramm-Leach-Bliley Act became law, repealing the 1933 Glass-Steagall Act's separation of the commercial and investment banking industries. The Gramm-Leach-Bliley Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a "financial holding company." Financial holding companies may engage in any activity that is --
o financial in nature or incidental to that financial activity, or
o complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Activities that are financial in nature include--
o acting as principal, agent or broker for insurance,
o underwriting, dealing in or making a market in securities, and
o providing financial and investment advice.
The Federal Reserve Board and the Secretary of the Treasury have authority to decide that other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services and so on. A bank holding company cannot be a financial holding company unless it satisfies the following criteria:
1) all of the depository institution subsidiaries must be well capitalized and well managed,
2) the holding company must file with the Federal Reserve a declaration that it elects to be a financial holding company to engage in activities that would not have been permissible before the Gramm-Leach-Bliley Act, and
3) all of the depository institution subsidiaries must have a Community Reinvestment Act rating of "satisfactory" or better.
Middlefield is engaged solely in activities that were permissible for a bank holding company before enactment of the Gramm-Leach-Bliley Act. Middlefield's election to become a financial holding company recently became effective, but Middlefield has no immediate plans to use the expanded authority to engage in activities other than those in which it is currently engaged.
Holding Company Capital and Source of Strength. The Federal Reserve considers the adequacy of a bank holding company's capital on essentially the same risk-adjusted basis as capital adequacy is determined by the FDIC at the bank subsidiary level. In general, bank holding companies are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and Tier 1 capital -- consisting principally of stockholders' equity -- of at least 4%. Bank holding companies are also subject to a leverage ratio requirement. The minimum required leverage ratio for the very highest rated companies is 3%, but as a practical matter the minimum required leverage ratio for most bank holding companies is 4% or higher. See " -- Capital." It is also Federal Reserve Board policy that bank holding companies serve as a source of strength for their subsidiary banking institutions.
Under Bank Holding Company Act Section 5(e), the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the Federal Reserve Board determines that the activity or control constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank. And with the Federal Deposit Insurance Corporation Improvement Act of 1991's addition of the prompt corrective action provisions to the Federal Deposit Insurance Act, Section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal bank regulatory authority may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the bank's financial condition and prospects.
FEDERAL DEPOSIT INSURANCE. The FDIC insures deposits of federally insured banks, savings banks and savings associations, and it safeguards the safety and soundness of the banking industry. Two separate insurance funds are maintained and administered by the FDIC. In general, bank deposits are insured through the Bank Insurance Fund. Deposits in savings associations are insured through the Savings Association Insurance Fund.
As an FDIC member institution, deposits in the bank are insured to a maximum of $100,000 per depositor. The banks are required to pay semiannual deposit insurance premium assessments to the FDIC. In general terms, each institution is assessed insurance premiums according to how much risk to the insurance fund the institution represents. Well-capitalized institutions with few supervisory concerns are assessed lower premiums than other institutions. The premium range is currently from $0.00 for the highest-rated institutions to $0.27 per $100 of domestic deposits.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC also may suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.
INTERSTATE BANKING AND BRANCHING. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act eased restrictions on interstate banking. The Riegle-Neal Act allows the Federal Reserve to approve an application by an adequately capitalized and adequately managed bank holding company to acquire a bank located in a state other than the acquiring company's home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (up to five years) specified by the statutory law of the acquired, or "target," bank's state. The Riegle-Neal Act also prohibits the Federal Reserve from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank or bank holding company if the limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% statewide concentration limit contained in the Riegle-Neal Act.
Branching between states may be accomplished by merging commonly controlled banks located in different states into one legal entity. Branching may also be accomplished by establishing de novo branches or acquiring branches in another state. Under Section 24(j) of the Federal Deposit Insurance Act, a branch of a bank operating out-of-state -- in a "host state" -- is subject to the law of the host state regarding community reinvestment, fair lending, consumer protection and establishment of branches. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by state-chartered banks solely in states that specifically allow it. Ohio bank law allows de novo branching in Ohio by an out-of-state bank. The FDIC has adopted regulations under the Riegle-Neal Act to prohibit an out-of-state bank from using the new interstate branching authority primarily for the purpose of deposit production. These regulations include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities served by the out-of-state bank.
CAPITAL -- Risk-Based Capital Requirements. The Federal Reserve Board and the FDIC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and financial institutions. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. Failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of "brokered deposits."
In the calculation of risk-based capital, assets and off-balance sheet items are assigned to broad risk categories, each with an assigned weighting (0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% risk-weight. Off-balance sheet items are also taken into account in the calculation of risk-based capital, with each class of off-balance sheet item being converted to a balance sheet equivalent according to established "conversion factors." From these computations, the total of risk-weighted assets is derived. Risk-based capital ratios therefore state capital as a percentage of total risk-weighted assets and off-balance sheet items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies and banks to maintain a minimum risk-based total capital ratio equal to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage servicing rights are generally deducted from capital. Tier 1 capital includes stockholders' equity, qualifying perpetual preferred stock (within limits and subject to conditions, particularly if the preferred stock is cumulative preferred stock), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, identified losses, investments in securities subsidiaries and certain other assets. Tier 2 capital includes --
o the allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets,
o any qualifying perpetual preferred stock exceeding the amount includable in Tier 1 capital,
o mandatory convertible securities, and
o subordinated debt and intermediate term preferred stock, up to 50% of Tier 1 capital.
The FDIC also employs a market risk component in its calculation of capital requirements for nonmember banks. The market risk component could require additional capital for general or specific market risk of trading portfolios of debt and equity securities and other investments or assets. The FDIC's evaluation of an institution's capital adequacy takes account of a variety of other factors as well, including interest rate risks to which the institution is subject, the level and quality of an institution's earnings, loan and investment portfolio characteristics and risks, risks arising from the conduct of nontraditional activities and a variety of other factors.
Accordingly, the FDIC's final supervisory judgment concerning an institution's capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution's risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios discussed above. This is particularly true for institutions contemplating significant expansion plans and institutions that are subject to high or inordinate levels of risk. Moreover, although the FDIC does not impose explicit capital requirements on holding companies of institutions regulated by the FDIC, the FDIC can take account of the degree of leverage and risks at the holding company level. If the FDIC determines that the holding company (or another affiliate of the institution regulated by the FDIC) has an excessive degree of leverage or is subject to inordinate risks, the FDIC may require the subsidiary institution(s) to maintain additional capital or the FDIC may impose limitations on the subsidiary institution's ability to support its weaker affiliates or holding company.
The banking agencies have also established a minimum leverage ratio of 3%, which represents Tier 1 capital as a percentage of total assets, less intangibles. However, for bank holding companies and financial institutions seeking to expand and for all but the most highly rated banks and bank holding companies, the banking agencies expect an additional cushion of at least 100 to 200 basis points. At December 31, 2000, the bank was in compliance with all regulatory capital requirements.
Prompt Corrective Action. To resolve the problems of undercapitalized institutions and to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system known as "prompt corrective action." Under the prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories, depending on its total risk-based capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio and subjective factors. The categories are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A financial institution's operations can be significantly affected by its capital classification. For example, an institution that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized institution must guarantee, in part, aspects of the institution's capital plan. Financial institution regulatory agencies generally are required to appoint a receiver or conservator shortly after an institution enters the category of weakest capitalization. The Federal Deposit Insurance Corporation Improvement Act of 1991 also authorizes the regulatory agencies to reclassify an institution from one category into a lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance funds.
The following table illustrates the capital and prompt corrective action guidelines applicable to the bank, as well as its total risk-based capital ratio, Tier 1 capital ratio and leverage ratio as of December 31, 2000.
MINIMUM NECESSARY TO BE MINIMUM NECESSARY TO BE
AT DECEMBER 31, 2000 WELL CAPITALIZED ADEQUATELY CAPITALIZED
-------------------- ----------------------- -----------------------
Total Risk-Based Capital Ratio ...... 17.75% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio ..... 16.50% 6.00% 4.00%
Leverage Ratio ...................... 10.32% 5.00% 4.00%
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LIMITS ON DIVIDENDS AND OTHER PAYMENTS. Middlefield's ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid to it by the bank. Under Ohio bank law, an Ohio-chartered bank may not pay a cash dividend if the amount of the dividend exceeds "undivided profits," which is defined in Ohio bank law to mean the cumulative undistributed amount of the bank's net income. But with the approval of two thirds of the outstanding shares and approval of the superintendent of the Division of Financial Institutions, an Ohio-chartered bank may pay cash dividends from surplus. Lastly, approval of the superintendent is also required if the total of all dividends and distributions declared on the bank's shares in any year exceeds the total of the bank's net income for the year plus retained net income for the two preceding years.
State-chartered banks' ability to pay dividends may be affected also by capital maintenance requirements of their primary federal bank regulatory agency as well. See " -- Capital." Moreover, regulatory authorities may prohibit banks and bank holding companies from paying dividends if payment of dividends would constitute an unsafe and unsound banking practice.
A 1985 policy statement of the Federal Reserve Board provides that a bank holding company should not pay cash dividends on common stock unless the organization's net income for the past year is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition.
TRANSACTIONS WITH AFFILIATES. Although the bank is not a member bank of the Federal Reserve System, it is required by the Federal Deposit Insurance Act to comply with Section 23A and Section 23B of the Federal Reserve Act -- pertaining to transactions with affiliates -- as if it were a member bank. These statutes are intended to protect banks from abuse in financial transactions with affiliates, preventing federally insured deposits from being diverted to support the activities of unregulated entities engaged in nonbanking businesses. An affiliate of a bank includes any company or entity that controls or is under common control with the bank. Generally, Section 23A and Section 23B of the Federal Reserve Act --
o limit the extent to which a bank or its subsidiaries may lend to or engage in various other kinds of transactions with any one affiliate to an amount equal to 10% of the institution's capital and surplus, limiting the aggregate of covered transactions with all affiliates to 20% of capital and surplus,
o impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company,
o impose restrictions on the use of a holding company's stock as collateral for loans by the subsidiary bank, and
o require that affiliate transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate.
The bank's authority to extend credit to insiders -- meaning executive officers, directors and greater than 10% stockholders -- or to entities those persons control, is subject to Section 22(g) and Section 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these laws require insider loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans a bank may make to insiders based in part on the bank's capital position, and require that specified approval procedures be followed. Loans to an individual insider may not exceed the bank's loans-to-one-borrower limit, which in general terms is 15% of tangible capital but can be higher in some circumstances. And the aggregate of all loans to all insiders may not exceed the bank's unimpaired capital and surplus. Insider loans exceeding the greater of 5% of capital or $25,000 must be approved in advance by a majority of the board, with any "interested" director not participating in the voting. Lastly, loans to executive officers are subject to special limitations. Executive officers may borrow in unlimited amounts to finance their children's education or to finance the purchase or improvement of their residence, and they may borrow no more than $100,000 for any other purpose. Loans to executive officers exceeding $100,000 may be allowed if the loan is fully secured by government securities or a segregated deposit account. A violation of these restrictions could result in the assessment of substantial civil monetary penalties, the imposition of a cease-and-desist order or other regulatory sanctions.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act of 1977 and implementing regulations of the banking agencies, a financial institution has a continuing and affirmative obligation -- consistent with safe and sound operation -- to meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services it believes to be best suited to its particular community. The CRA requires that bank regulatory agencies conduct regular CRA examinations and provide written evaluations of institutions' CRA performance. The CRA also requires that an institution's CRA performance rating be made public. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance.
Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. Over the 23 years that the CRA has existed, and particularly in the last few years, institutions have faced increasingly difficult regulatory obstacles and public interest group objections in connection with their regulatory applications, including institutions that have received the highest possible CRA ratings.
A bank holding company cannot elect to be a "financial holding company" -- with the expanded securities, insurance and other powers that designation entails -- unless all of the depository institutions owned by the holding company have a CRA rating of satisfactory or better. The Gramm-Leach-Bliley Act also provides that a financial institution with total assets of $250 million or less will be subject to CRA examinations no more frequently than every 5 years if its most recent CRA rating was "outstanding," or every 4 years if its rating was "satisfactory." Following a CRA examination as of August 10, 1999, the bank received a rating of "Outstanding." Lastly, the Gramm-Leach-Bliley Act requires public disclosure of private CRA agreements entered into between banking organizations and other parties, and annual reporting by banking organizations of actions taken under the private CRA agreements. This last provision of the Gramm-Leach-Bliley Act addresses the increasingly common practice whereby a bank or holding company undertaking acquisition of another bank or holding company enters into an agreement with parties who might otherwise file with bank regulators a CRA protest of the acquisition. The details of these agreements have not been universally disclosed by acquiring institutions in the past.
FEDERAL HOME LOAN BANKS. The Federal Home Loan Banks serve as credit sources for their members. As a member of the FHLB of Cincinnati, The Middlefield Banking Company is required to maintain an investment in the capital stock of the FHLB of Cincinnati in an amount calculated by reference to the member institution's assets and the amount of loans, or "advances," from the FHLB. The bank is in compliance with this requirement, with an investment in FHLB stock of $912,900 at December 31, 2000. See, "BUSINESS -- THE MIDDLEFIELD BANKING COMPANY -- Sources of Funds."
Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers.
STATE BANKING REGULATION. As an Ohio-chartered bank, the bank is subject to regular examination by the Ohio Division of Financial Institutions. State banking regulation affects the internal organization of the bank as well as its savings, lending, investment and other activities. State banking regulation may contain limitations on an institution's activities that are in addition to limitations imposed under federal banking law. The Ohio Division of Financial Institutions may initiate supervisory measures or formal enforcement actions, and if the grounds provided by law exist it may take possession and control of an Ohio-chartered bank.
MONETARY POLICY. The earnings of financial institutions are affected by the policies of regulatory authorities, including monetary policy of the Federal Reserve Board. An important function of the Federal Reserve System is regulation of aggregate national credit and money supply. The Federal Reserve Board accomplishes these goals with measures such as open market dealings in securities, establishment of the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of financial institutions' loans, investments and deposits, and they also affect interest rates charged on loans or paid on deposits. Monetary policy is influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government. Federal Reserve Board monetary policy has had a significant effect on the operating results of financial institutions in the past, and it can be expected to influence operating results in the future.
FINANCIAL INFORMATION
SELECTED FINANCIAL DATA OF MIDDLEFIELD
The summary financial information to follow is not a substitute for Middlefield's historical financial information and other detailed financial information we provide elsewhere in this document. You should read the summary financial information together with the historical financial information and other detailed financial information we provide elsewhere in this document. We derived the financial data from Middlefield's audited financial statements for the fiscal years ended December 31, 1996 through 2000.
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
(In thousands, except share and per share amounts and
ratios) 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Interest income .......................................... $ 12,770 $ 11,449 $ 10,901 $ 10,600 $ 10,375
Interest expense ......................................... 5,910 5,048 5,085 5,084 4,985
---------- ---------- ---------- ---------- ----------
Net interest income ...................................... 6,860 6,400 5,817 5,516 5,390
Provision for loan losses ................................ 275 296 270 200 351
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ............................................ 6,585 6,104 5,547 5,316 5,039
Noninterest income, including securities
gains (losses) ......................................... 983 804 599 546 586
Noninterest expense ...................................... 4,409 4,254 3,825 3,493 3,246
---------- ---------- ---------- ---------- ----------
Income before income taxes ............................... 3,159 2,654 2,321 2,369 2,379
Income taxes ............................................. 923 735 630 624 657
---------- ---------- ---------- ---------- ----------
Net income .......................................... $ 2,237 $ 1,920 $ 1,690 $ 1,745 $ 1,722
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Investment securities .................................... $ 30,724 $ 32,595 $ 37,435 $ 38,460 $ 35,698
Loans, net ............................................... $ 133,267 $ 119,472 $ 102,728 $ 88,320 $ 83,947
Total deposits ........................................... $ 147,166 $ 135,094 $ 128,828 $ 121,482 $ 119,254
FHLB Cincinnati advances ................................. $ 9,862 $ 9,602 $ 9,576 $ 4,849 $ --
Total stockholders' equity ............................... $ 18,243 $ 17,689 $ 16,657 $ 15,465 $ 14,136
Total assets ............................................. $ 176,489 $ 165,512 $ 155,558 $ 142,276 $ 133,867
PER COMMON SHARE DATA: (1)
Basic net income ......................................... $ 2.02 $ 1.68 $ 1.47 $ 1.52 $ 1.50
Diluted net income ....................................... $ 2.02 $ 1.68 N/A N/A N/A
Book value ............................................... $ 16.54 $ 15.49 $ 14.50 $ 13.46 $ 12.30
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic .................................................... 1,105,972 1,145,250 1,148,676 1,148,676 1,148,676
Diluted .................................................. 1,105,972 1,145,250 N/A N/A N/A
SELECTED RATIOS:
Return on average total stockholders' equity ............. 12.83% 11.17% 10.43% 11.79% 14.21%
Return on average total assets ........................... 1.31% 1.21% 1.15% 1.26% 1.30%
Dividend payout ratio .................................... 26.61% 29.82% 29.53% 24.98% 22.61%
Efficiency ratio (2) ..................................... 56.21% 59.05% 59.62% 57.62% 54.31%
ASSET QUALITY RATIOS:
Reserve for loan losses to ending total loans ............ 1.51% 1.45% 1.48% 1.49% 1.34%
Net loan charge-offs to average loans .................... --% 0.07% 0.07% --% 0.33%
CAPITAL RATIOS:
Average stockholders' equity to average assets ........... 10.20% 10.83% 11.04% 10.72% 9.15%
Leverage ratio (3) ....................................... 10.32% 10.93% 11.35% 10.80% 10.51%
Total risk-based capital ratio (3) ....................... 17.75% 18.39% 18.37% 18.54% 17.52%
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(1) Per share amounts are adjusted for a 10% stock dividend paid in 1998 and 1997 and a 2-for-1 stock split in 2000.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest income plus noninterest income minus nonrecurring items.
(3) Computed in accordance with Federal Reserve Board and FDIC guidelines.
SELECTED QUARTERLY FINANCIAL DATA
The following table shows quarterly results of operations for 2000 and 1999.
2000 QUARTERS 1999 QUARTERS
------------------------------------ ------------------------------------
(In thousands, except
per share data) FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------ ----- ------ ----- ------ ----- ------ -----
Interest income ............. $3,310 $3,269 $3,141 $3,050 $2,954 $2,941 $ 2,838 $2,715
Net interest income ......... 1,709 1,726 1,732 1,693 1,675 1,674 1,585 1,466
Provision for loan losses ... 50 75 75 75 2 78 108 108
Income before income taxes .. 757 826 784 793 829 775 629 422
Net income .................. 556 572 552 557 567 559 469 324
Basic earnings per
common share (1) ...... 0.50 0.52 0.50 0.50 0.50 0.49 0.41 0.28
Diluted earnings per
common share (1) ...... 0.50 0.52 0.50 0.50 0.50 0.49 0.41 0.28
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(1) Per share amounts are adjusted for a 2-for-1 stock split in 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Middlefield conducts customary retail and commercial banking services through its subsidiary bank, gathering deposits from the general public, and applying those funds to the origination of loans for real estate, commercial, and consumer loans and investments.
The bank's profitability depends primarily on net interest income, which is the difference between--
1) interest income generated by interest-earning assets (principally loans and investments), and
2) interest expense incurred on interest-bearing liabilities (principally customer deposits and borrowed funds).
Net interest income is affected by the difference -- the "interest rate spread" -- between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities, as well as the relative amounts of interest-earning assets and interest-bearing liabilities. Financial institutions traditionally use interest rate spreads as a measure of net interest income. Another indication of an institution's net interest income is its "net yield on interest-earning assets" or "net interest margin," which is net interest income divided by average interest-earning assets.
To a lesser extent, the bank's profitability is also affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the provision for income taxes. Noninterest income consists primarily of service charges and fees on deposit accounts. Noninterest expense consists primarily of salaries and employee benefits, professional fees, equipment, occupancy-related expenses, data processing, advertising and other operating expenses.
Middlefield's management's discussion and analysis of financial condition and results of operations is presented to assist investors in understanding Middlefield's consolidated financial condition and results of operations for the fiscal years ended December 31, 2000, 1999 and 1998. This discussion should be read in conjunction with the consolidated financial statements and related footnotes presented elsewhere herein.
RESULTS OF OPERATIONS. Middlefield recorded net income of $2.2 million in 2000, which represents an increase of $318,000, or 16.5%, over 1999. Net income for 1999 increased $229,000, or 13.5%, over 1998 to $1.9 million. These increases were primarily due to increases of $460,000 and $584,000 in net interest income for 2000 and 1999, respectively, while offset somewhat by the costs associated with operating a larger organization. Basic and diluted earnings per share have increased each of the past three years to $1.47 per share, $1.68 per share, and $2.02 per share, for 1998, 1999, and 2000, respectively.
NET INTEREST INCOME -- 2000 Compared to 1999. Net interest income for 2000 was $6.9 million, a 7.2% increase over 1999. Interest income of $12.8 million in 2000 represents an increase of $1.3 million, or 11.5%, over 1999. Interest expense of $5.9 million in 2000 increased by $0.8 million, or 17.1%, over 1999. Although there was an increase in general interest rate levels during these periods, interest income and expense were both primarily driven by increases in the average balances of related interest-earning assets and interest-bearing liabilities. The average balances of loans receivable, specifically real estate mortgages, increased $16.9 million, or 15.1%, to $128.7
million as of December 31, 2000. The tax-equivalent yield on interest earning assets increased to 8.02% for the year ended 2000 from 7.84% for the year ended 1999 and was mainly driven by a 16 basis-point increase in investment securities. Partially offsetting increases to net interest income was an increase in the average balance of certificates of deposit of $9.5 million, coupled with a 36 basis-point increase in the cost of such funds. This increase to interest expense is attributed to marketing efforts and higher-yielding promotional products, and resulted in an overall increase in the cost of funds from 4.26% to 4.58% from 1999 to 2000.
1999 Compared to 1998. Net interest income for 1999 was $6.4 million, a 10.0% increase over 1998. Interest income of $11.4 million in 1999 represents an increase of $547,000, or 5.0%, over 1998. Interest expense of $5.0 million in 1999 represents a $36,000 reduction, or 0.7%, from 1998. The increase in interest income resulted almost entirely from an increase in the average balances of interest-earning assets of $10.9 million. This consisted of an increase in the average balance of loans receivable of $14.9 million, or 15.4%, that was offset slightly by a decline in the average balances of investment securities and other interest-earning assets totaling $4.0 million. The effects of the overall increase in average interest-earning assets was reduced by a decline in the tax-equivalent yield on interest earning assets from 8.07% in 1998 to 7.84% in 1999. This decrease was primarily stimulated by a 45 basis point decline in the yield on loans receivable. Although there was an increase in the average balances of interest-bearing liabilities of $8.3 million, a 35 basis-point decline in the average cost of funds netted a slight decrease in interest expense.
Average Balances, Interest Rates and Yields. The following table sets forth certain information relating to our average balance sheet, and it reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily average balances.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- --------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ---- ------- -------- ----
INTEREST-EARNING ASSETS:
Loans receivable (1) ................ $128,661 $10,853 8.44% $111,745 $ 9,409 8.42% $ 96,815 $ 8,591 8.87%
Investment securities ............... 31,026 1,991 6.42% 34,683 2,170 6.26% 37,921 2,337 6.16%
Other interest-earning assets (2) ... 2,969 196 6.60% 3,554 172 4.84% 4,296 290 6.75%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets .... 162,656 13,040 8.02% 149,982 11,751 7.84% 139,032 11,218 8.07%
------- ------- -------
NON-INTEREST-EARNING ASSETS ......... 8,231 8,674 7,902
-------- -------- --------
Total assets ..................... $170,887 $158,656 $146,934
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ............. $ 6,268 174 2.78% $ 5,473 139 2.54% $ 5,760 200 3.47%
Money market ........................ 10,310 308 2.99% 15,249 454 2.98% 17,462 591 3.38%
Savings ............................. 32,036 855 2.67% 28,183 726 2.58% 23,950 711 2.97%
Certificates of deposit ............. 69,866 3,975 5.69% 60,390 3,220 5.33% 57,094 3,194 5.59%
Other borrowings .................... 10,641 598 5.62% 9,224 509 5.52% 5,964 389 6.52%
-------- ------- ------ -------- ------- ------ -------- -------- ------
Total interest-bearing
liabilities ................... 129,121 5,910 4.58% 118,519 5,048 4.26% 110,230 5,085 4.61%
------- ------- -------
NON INTEREST-BEARING LIABILITIES:
Other liabilities ................ 24,336 22,950 20,489
-------- -------- --------
Total liabilities .............. 153,457 141,469 130,719
-------- -------- --------
Stockholders' equity ................ 17,430 17,187 16,215
-------- -------- --------
Total liabilities and
stockholders' equity ................ $170,887 $158,656 $146,934
======== ======== ========
Net interest income ................. $7,130 $6,703 $6,133
====== ====== ======
Interest rate spread (3) 3.44% 3.58% 3.46%
====== ====== ======
Net yield on interest-earning
assets (4) .......................... 4.38% 4.47% 4.41%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities ......................... 125.97% 126.55% 126.13%
====== ====== ======
|
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
Rate/Volume Analysis. The following table sets forth certain
information regarding the changes in our interest income and interest expense
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume (changes in average volume multiplied by prior year rate),
and (2) changes in rates (changes in rate multiplied by prior year average
volume). Increases and decreases due to both rate and volume have been allocated
proportionally to the change due to volume and the change due to rate.
CHANGES IN NET INTEREST INCOME FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2000 VS. 1999 1999 VS. 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------------- ------------------------------------------
(Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
Interest income attributable to:
Loans receivable ..................... $ 1,427 $ 17 $ 1,444 $ 1,224 $(406) $ 818
Investment securities ................ (237) 58 (179) (203) 36 (167)
Other interest-earning assets ........ (20) 44 24 (45) (73) (118)
------- ----- ------- ------- ----- -----
Total interest income ............. 1,170 119 1,289 976 (443) 533
------- ----- ------- ------- ----- -----
Interest expense attributable to:
Interest-bearing demand .............. 21 14 35 (10) (51) (61)
Money market ......................... (148) 2 (146) (70) (67) (137)
Savings .............................. 102 27 129 60 (45) 15
Certificates of deposit .............. 529 226 755 138 (112) 26
Other interest-bearing liabilities 79 10 89 167 (47) 120
------- ----- ------- ------- ----- -----
Total interest expense ............ 583 279 862 285 (322) (37)
------- ----- ------- ------- ----- -----
Change in net interest income ........... $ 587 $(160) $ 427 $ 691 $(121) $ 570
======= ===== ======= ======= ===== =====
|
LOAN LOSS PROVISION -- 2000 Compared to 1999. The provision for loan losses was $275,000 in 2000, compared to $296,000 in 1999, a 7.1% reduction. The loan loss provision is based upon management's assessment of a variety of factors, including types and amounts of nonperforming loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management's judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations. The change in the loan loss provision in 2000 was principally a result of a reduction in the amount of new commercial and commercial real estate loans originated during 2000 as compared to 1999. Furthermore, there was an improvement in asset quality reflected by a decrease in nonperforming loans from $131,000 at the end of 1999 to $5,000 at the end of 2000.
1999 Compared to 1998. The provision for loan losses was $296,000 in 1999, compared to $270,000 in 1998, a 9.6% increase that primarily reflects growth in the commercial and commercial real estate loan portfolios.
NONINTEREST INCOME -- 2000 Compared to 1999. Total noninterest income was $983,000 in 2000, an increase of 22.2% over 1999. The increase is accounted for principally by fee income from deposit accounts, which grew commensurate with deposit growth.
1999 Compared to 1998. Total noninterest income was $804,000 in 1999, a 34.3% increase over 1998. There was an increase in service charges on deposit accounts of 38.8% that was attributable to both an increase in the volume of related transactions as well as to changes in the bank's fee schedule.
Transaction deposit accounts grew at a steady pace in 2000, 1999 and 1998. In general, management prices deposits at rates competitive with rates offered by the leading banks in the bank's market, which rates tend to be somewhat lower than rates offered by thrift institutions and credit unions. The bank generally has not imposed service charges and fees to the same extent as other local institutions. Although a wider range of service charges and fees and higher service charges and fees would yield more income for each dollar of deposits, imposing service charges and fees on a basis equivalent to those imposed by many other area banks might adversely affect deposit growth. To promote deposit growth and provide cross-selling opportunities to customers, the bank has not adopted the most aggressive fee structure. Deposit growth has been generated by developing strong customer relationships and cross-selling deposit relationships to loan customers. Management intends to continue promoting demand deposit products, particularly noninterest bearing deposit products, in order to obtain additional interest-free lendable funds.
NONINTEREST EXPENSE -- 2000 Compared to 1999. Noninterest expense increased 3.6% to $4.4 million for the year ended December 31, 2000 as compared to $4.3 million for the same period ended 1999. The change in total noninterest expense from 1999 to 2000 is attributed to a 12.1% increase in other expenses, which has increased steadily year-to-year primarily as a result of the overall growth of the bank. Such expenses include additional costs relating to an increase in volume of MAC transactions, and increases in various professional fees and regulatory assessments. The bank also accelerated computer equipment depreciation expense in 2000 of approximately $55,000. There were smaller increases in equipment and data processing expenses as a result of added capital expenditures in prior years from building and furnishing a new branch office in Garrettsville, additional ATMs, and increased transaction activity from operating a larger organization. The bank will introduce internet banking and anticipates opening a new branch office in Chardon, Ohio during the fourth quarter of 2001.
1999 Compared to 1998. Total noninterest expense was $4.3 million in 1999, an 11.2% increase over 1998. Salaries and employee benefits increased $185,000, or 8.9%, due principally to the hiring of additional staff, higher insurance benefit costs and normal merit raises. Data processing costs increased $105,000 in 1999, mainly due to Y2K conversion costs. Occupancy expenses increased $73,000, or 28.2%, in 1999, primarily related to operating a larger organization that resulted from the opening of an additional branch during the fourth quarter of 1998 and the expansion of the Garrettsville branch in 1999. Equipment expense decreased $121,000, or 33.9%, in 1999, due to the acceleration of maintenance contracts and depreciation expenses for obsolete equipment stemming from the 1998 conversion to a third party processor. Other noninterest expenses increased $195,000 or 24.3%, in 1999 as increases in advertising, postage and supplies, telephone, and correspondent bank service charges resulted from the general overall growth of the bank.
PROVISION FOR INCOME TAXES. The provision for income taxes fluctuated in 2000, 1999 and 1998 in direct correlation to the changing level of pre-taxable income during these periods.
FINANCIAL CONDITION -- Assets and Liabilities. Middlefield's total assets increased $11.0 million, or 6.6%, to $176.5 million at December 31, 2000, as compared to $165.5 million at December 31, 1999. Net loans receivable increased 11.6% to $133.3 million at December 31, 2000 and was funded primarily by a $12.1 million, or 8.9%, increase in customer deposits, represented particularly by growth in time deposits.
The increase in net loans receivable resulted from the economic health of Middlefield's market area and the strategic, service-oriented marketing approach taken by management to meet the lending needs of the area. The majority of lending activity is predominately mortgage loans secured by one-to-four family residential property. Such loans grew $12.1 to $101.4 million at December 31, 2000. Management attributes the increases in residential real estate properties to continued customer referrals and Middlefield's overall relationship with its customers. As of December 31, 2000, Middlefield had additional commitments to fund residential real estate loan demand of $2.0 million. Although growth in commercial and commercial real estate loans remained relatively stable in 2000, management is evaluating the needs for expansion of such services within its market area. As of December 31, 2000, commercial and commercial real estate loans totaled $26.3 million or 19.5% of the total loan portfolio.
Total investment securities decreased $1.9 million to $30.7 million at December 31, 2000 as a result of principal repayments and maturities. Proceeds that were not invested in mortgage-backed or municipal securities were primarily used to supplement loan demand. The purchase of such investments had varying maturities over 29 years. Furthermore, as of December 31, 2000, interest-bearing deposits in other institutions decreased $2.4 million while cash and cash equivalents increased $1.6 million. As funds became available from interest-bearing deposits in other institutions and current liquidity needs were met, excess funds were temporarily invested in federal funds sold.
Total deposits increased to $147.2 million at December 31, 2000 from $135.1 million at December 31, 1999. As noted previously, this fluctuation was driven by an increase in time deposits that was used to fund loan growth, as well as to repay $2.0 million of short-term borrowings. Approximately $3.8 million resulted from two competitive rate certificate of deposit products with terms of 13 and 21 months that were promoted within Portage County in an effort to increase the customer deposit base. The remaining increase was due to the continued marketing efforts of the bank coupled with a competitive rate product portfolio.
Stockholder's equity increased to $18.2 million at December 31, 2000 from $17.7 million at December 31, 1999. The increase in stockholders' equity was due to net income of $2.2 million, while offset somewhat by cash dividends of $0.6 million and purchases of treasury stock totaling $1.3 million. Future dividend policies will be determined by the board in light of earnings and financial condition, including applicable governmental regulations and policies. Middlefield will use treasury shares for general corporate purposes, including the issuance of shares in connection with the exercise of stock options.
LIQUIDITY. Like other financial institutions, the bank must ensure that sufficient funds are available to meet deposit withdrawals, loan commitments and expenses. Control of cash flow requires that the bank anticipate deposit flows and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, and FHLB borrowings. These funds are used principally to originate loans and acquire investment securities. As of December 31, 2000, the bank had commitments to extend credit of $10.2 million. It is typical for a portion of loan commitments to expire or terminate without funding. Management believes the bank has adequate resources to meet its normal funding requirements.
The Middlefield Banking Company's liquid assets consist of cash and cash equivalents, which include investments in very short-term investments (i.e. federal funds sold), and investment securities classified as available for sale. The level of these assets is dependent on the bank's operating, investing, and financing activities during any given period. At December 31, 2000, cash and cash equivalents totaled $4.8 million or 2.7% of total assets, while investment securities classified as available for sale totaled $12.8 million or 7.2% of total assets. Furthermore, the bank maintains a credit facility with the Federal Home Loan Bank of Cincinnati, which provides for immediately available advances from the FHLB in an amount up to 10% of the bank's total assets. Advances under this credit facility totaled $9.9 million at December 31, 2000. The bank has also established a $2.0 million secured credit line through the discount window with the Federal Reserve Bank of Cleveland and a $4.0 million line of credit with The State Bank and Trust Company, an unaffiliated institution. There are no outstanding balances on either of these lines of credit.
Net cash provided by operating activities for 2000 totaled $3.0 million, as compared to $2.5 million for 1999 and $2.4 million for 1998. Increases in net income during these periods primarily were impacted by fluctuations in accrued interest receivable and payable, as well as depreciation, amortization and accretion.
Net cash used for investing activities in 2000 totaled $9.8 million, compared to $14.1 million in 1999 and $15.4 million in 1998. The decrease of $4.3 million in 2000 was due to a net decline of $3.5 million in interest-bearing deposits in other institutions, a reduction in investment securities purchased of $7.3 million, and a decline in net loan originations of $2.8 million. Offsetting these declines in cash usages were reductions in proceeds from repayments, maturities, and sales of investment securities totaling $9.7 million.
In 1999, the decrease of $1.3 million primarily resulted from a net increase in repayments, maturities, and sales of investment securities of $4.4 million that were offset by an increase in net cash used for loan originations of $2.3 million.
Net cash provided by financing activities for 2000 totaled $8.5 million, compared to $8.0 million and $11.6 million for 1999 and 1998, respectively. The increase of $0.5 million in 2000 resulted from a net increase in deposits of $5.8 million that was offset partially by a net decrease in total borrowings of $4.2 million, coupled with a net increase in treasury stock activity of $1.0 million. Of the total deposit portfolio at December 31, 2000, $76.5 million or 52.0% represents certificates of deposit; and of this amount $49.3 million or 64.4% is due to mature in 2001. Consistent with experience, management believes that the majority of maturing certificates of deposit will be renewed at market rates of interest. In 1999, the total decrease of $3.6 million was primarily due to both a net reduction in proceeds from borrowings and deposits of $2.2 million and $1.1 million, respectively.
Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the bank's commitment to make loans, as well as management's assessment of Middlefield's ability to generate funds. Also, Middlefield is subject to federal regulations that impose certain minimum capital requirements.
NEW ACCOUNTING PRONOUNCEMENTS. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), as amended by Financial Accounting Standards Board Statement No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities-Deferral of the Effective Date of Statement No. 133" (Statement No. 138), is effective in 2001. It requires measuring and recording the change in fair value of derivative instruments. Statement No. 133 is not expected to materially affect Middlefield's financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement replaces Statement No. 125 and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings based on a control-oriented "financial-components" approach. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when
extinguished. The provisions of Statement No. 140 are effective for transactions occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of the provisions of Statement No. 140 is not expected to have a material impact on Middlefield's financial position or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES. Middlefield's consolidated financial statements and related data herein have been prepared in accordance with generally accepted accounting principles, which require measurement of financial condition and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Because the primary assets and liabilities of Middlefield and the bank are monetary in nature, changes in the general level of prices for goods and services have a relatively minor impact on total expenses. Increases in operating expenses such as salaries and maintenance are in part attributable to inflation. However, interest rates have a far more significant effect than inflation on the performance of financial institutions, including the bank. See "Quantitative and Qualitative Disclosures About Market Risk."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Like other financial institutions, the bank is subject to interest rate risk. The bank's interest-earning assets could mature or reprice more rapidly than or on a different basis from its interest-bearing liabilities (primarily borrowings and deposits with short- and medium-term maturities) in a period of declining interest rates. Although having assets that mature or reprice more frequently on average than liabilities will be beneficial in times of rising interest rates, that asset/liability structure will result in lower net interest income in periods of declining interest rates.
Interest rate sensitivity, or interest rate risk, relates to the effect of changing interest rates on net interest income. Interest-earning assets with interest rates tied to the prime rate for example, or that mature in relatively short periods of time, are considered interest-rate sensitive. Interest-bearing liabilities with interest rates that can be repriced in a discretionary manner, or that mature in relatively short periods of time, are also considered interest-rate sensitive. The differences between interest-sensitive assets and interest-sensitive liabilities over various time horizons are commonly referred to as sensitivity gaps. As interest rates change, a sensitivity gap will have either a favorable effect or an adverse effect on net interest income. A negative gap -- with liabilities repricing more rapidly than assets -- generally should have a favorable effect when interest rates are falling, and an adverse effect when rates are rising. A positive gap -- with assets repricing more rapidly than liabilities -- generally should have the opposite effect: an adverse effect when rates are falling and a favorable effect when rates are rising.
Middlefield and the bank have no financial instruments entered into for trading purposes. Interest rates change daily on federal funds purchased and sold. Federal funds are therefore the most sensitive to the market and have the most stable fair values. Loans and deposits tied to indices such as the prime rate or federal discount rate are also market sensitive, with stable fair values. The least sensitive instruments include long-term, fixed-rate loans and securities and fixed-rate savings deposits, which have the least stable fair value. Management of maturity distributions of assets and liabilities between these extremes is as important as the balances maintained. Management of maturity distributions involves matching interest rate maturities as well as principal maturities, and it influences net interest income significantly. In periods of rapidly changing interest rates, a negative or positive gap can cause major fluctuations in net interest income and earnings. Managing asset and liability sensitivities to enhance growth regardless of changes in market conditions is one of the objectives of the bank's asset/liability management strategy.
Evaluating the bank's exposure to changes in interest rates is the responsibility of the Asset/Liability Committee, a committee of bank directors and officers. The members of the committee are Director Hunter (who serves as Chairman) and Directors Caldwell, Frank, and Hasman. Officers serving on the committee are Mr. Heslop, Mr. Stacy, Ms. Johnson, and Ms. Hetrick. The Asset/Liability Committee assesses both the adequacy of the management process used to control interest rate risk and the quantitative level of exposure, ensuring that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at appropriate levels. Evaluating the quantitative level of interest rate risk exposure requires assessment of existing and potential effects of changes in interest rates on the bank's financial condition, including capital adequacy, earnings, liquidity and asset quality.
The bank uses an asset/liability model to support its balance sheet strategies. The bank uses gap analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The table below illustrates the maturities or repricing of the bank's assets and liabilities at December 31, 2000, based upon the contractual maturity or contractual repricing dates of loans and the contractual maturities of time deposits. Prepayment assumptions have not been applied to fixed-rate mortgage loans. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Allocation of deposits other than time deposits to the various maturity and repricing periods is based upon management's best estimate.
MATURING OR REPRICING PERIODS
----------------------------------------------------------------------------
WITHIN 3 4-12 1-5 OVER 5
(Dollars in thousands) MONTHS MONTHS YEARS YEARS TOTAL
------- -------- ------- -------- --------
INTEREST-EARNING ASSETS:
Interest-bearing deposits in other
institutions ......................... $ 2,223 $ 26 $ -- $ -- $ 2,249
Investment securities .................. 2,485 6,635 18,714 2,753 30,587
Commercial and industrial loans (1) .... 5,572 7,598 4,617 3,721 21,508
Real estate construction loans (1) ..... 366 1,476 353 373 2,568
Real estate mortgage loans (1) ......... 16,946 21,822 53,231 14,214 106,213
Consumer installment loans (1) ......... 715 1,370 1,866 1,064 5,015
------- -------- ------- -------- --------
Total interest-earning assets .... $28,307 $ 38,927 $78,781 $ 22,125 $168,140
------- -------- ------- -------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ................ $ 917 $ 612 $ 1,223 $ 3,364 $ 6,116
Money market ........................... 3,665 945 533 3,985 9,128
Savings ................................ 4,839 3,226 6,452 17,744 32,261
Time ................................... 12,474 36,767 27,264 -- 76,505
Short-term borrowings .................. 543 -- -- -- 543
Other borrowings ....................... 69 2,207 7,104 482 9,862
------- -------- ------- -------- --------
Total interest-bearing
liabilities ...................... $22,507 $ 43,757 $42,576 $ 25,575 $134,415
------- -------- ------- -------- --------
Interest sensitivity gap .................. $ 5,800 $ (4,830) $36,205 $ (3,450) $ 33,725
======= ======== ======= ======== ========
Cumulative interest sensitivity gap ....... $ 5,800 $ 970 $37,175 $ 33,725
Cumulative interest sensitivity gap
as a percent of total assets ........... 3.29% 0.55% 21.06% 19.11%
|
(1) For purposes of the gap analysis, loans are not reduced by the allowance for loan losses and nonperforming loans.
The bank's policy is that the one-year cumulative interest rate sensitivity gap should generally be within a range of negative 20% to positive 20%. As the table above shows, the one-year gap was within this range as of December 31, 2000, with a positive one-year gap of 0.55%. The cumulative gap at December 31, 2000 is due principally to fixed-rate securities and loans in the "over one year to five years" and "over five years" categories to maximize yield on assets.
One way to minimize interest rate risk is to maintain a balanced or matched interest-rate sensitivity position. However, profits are not always maximized by matched funding. To increase net interest income, the bank selectively mismatches asset and liability repricing to take advantage of short-term interest rate movements. The magnitude of the mismatch depends on a careful assessment of the risks presented by forecasted interest rate movements. The risk inherent in such a mismatch, or gap, is that interest rates may not move as anticipated.
Interest rate risk exposure is reviewed in quarterly meetings of the Asset/Liability Committee. At each meeting, guidelines are established for the following quarter and longer term exposure. Risk is mitigated by matching maturities or repricing more closely. The bank does not use derivative financial instruments to manage interest rate risk.
Limitations are inherent in any method of measuring interest rate risk. Actual results can differ significantly from simulated results if, for example, market conditions and management strategies vary from the assumptions used in the analysis. The static "gap" analysis is based on assumptions concerning such matters as when assets and liabilities will reprice in a changing interest rate environment. Because these assumptions are no more than estimates, certain assets and liabilities indicated as maturing or repricing within a stated period might actually mature or reprice at different times and at different volumes from those estimated. The actual prepayments and withdrawals experienced by the bank after a change in interest rates could deviate significantly from those assumed in calculating the data shown in the table. Adjustable-rate loans, for example, commonly have provisions that limit changes in interest rates each time the interest rate changes and on a cumulative basis over the life of the
loan. Also, the renewal or repricing of some assets and liabilities can be discretionary and subject to competitive and other pressures. The ability of many borrowers to service their debt could diminish after an interest rate increase. Therefore, the gap table above does not and cannot necessarily indicate the actual future impact of general interest movements on net interest income.
Middlefield's use of a simulation model to better measure the impact of interest rate changes on net interest income is incorporated into the risk management process to effectively identify, measure, and monitor Middlefield's risk exposure. Interest rate simulations using a variety of assumptions are employed by Middlefield to evaluate its interest rate risk exposure. A shock analysis at December 31, 2000 indicated that a 200 basis point movement in interest rates in either direction would have had a minor impact on Middlefield's anticipated net interest income and the market value of assets and liabilities over the next 12 months, well within Middlefield's ability to manage effectively.
RECENT DEVELOPMENTS
SELECTED FINANCIAL DATA FOR THE FIRST QUARTER. The following table
shows selected unaudited financial information as of or for the first quarter of
2001 and 2000. In the opinion of management, the data to follow include all
normal recurring adjustments necessary to state fairly the quarterly information
presented.
AS OF OR FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
(In thousands, except per share data) 2001 2000
---------- ----------
INCOME STATEMENT:
Interest income ................................... $ 3,299 $ 3,050
Interest expense .................................. 1,655 1,357
---------- ----------
Net interest income ............................... 1,644 1,693
Provision for loan losses ......................... 39 75
---------- ----------
Net interest income after provision for loan
losses .......................................... 1,605 1,618
Noninterest income ................................ 259 220
Noninterest expense ............................... 1,090 1,045
---------- ----------
Income before income taxes ........................ 774 793
---------- ----------
Net income ........................................ $ 537 $ 557
========== ==========
BALANCE SHEET:
Investment securities ............................. $ 30,793 $ 31,527
Loans, net ........................................ $ 134,796 $ 121,724
Total deposits .................................... $ 151,771 $ 138,224
Borrowed funds .................................... $ 10,218 $ 10,071
Total stockholders' equity ........................ $ 18,728 $ 16,788
Total assets ...................................... $ 181,375 $ 165,540
PER COMMON SHARE:
Basic net income (1) .............................. $ 0.49 $ 0.50
Diluted net income (1) ............................ $ 0.49 $ 0.50
Book value ........................................ $ 16.98 $ 15.32
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic ............................................. 1,102,954 1,117,069
Diluted ........................................... 1,104,304 1,117,069
SELECTED RATIOS:
Return on average total stockholders' equity ...... 11.63% 12.92%
Return on average total assets .................... 1.20% 1.35%
Efficiency ratio .................................. 57.31% 54.65%
|
(1) Per share amounts are adjusted for a 2-for-1 stock split in 2000
RESULTS OF OPERATIONS. Net income for the three months ended March 31, 2001 remained relatively unchanged as compared to the same period in 2000. The $49,000 decrease in net interest income for the three months ended March 31, 2001 was primarily due to an increase in interest expense of $298,000 that was partially offset by an increase of $249,000 in interest income. This fluctuation was primarily driven by increases in average balances during the period. Basic and diluted earnings per share declined slightly from $.50 per share in 2000 to $.49 per share in 2001.
Noninterest income increased $39,000 to $259,000 for the three months ended March 31, 2001 as compared to $220,000 for the same period ended 2000. An increase in fee income from deposit accounts of $33,000 was related to the increase in the number of deposit accounts and the volume of activity associated with the accounts.
Noninterest expense increased $45,000 to $1,090,000 for the three months ended March 31, 2001 from $1,045,000 for the comparable period in 2000. The increase in noninterest expense was primarily due to a $29,000 increase in compensation and employee benefits from normal merit increases.
The provision for income taxes fluctuated during these periods in direct correlation to the changing level of pre-taxable income.
FINANCIAL CONDITION -- Total assets increased $4.9 million to $181.4 million at March 31, 2001 from $176.5 million at December 31, 2000. Federal funds sold and net loans receivable increased $3.6 million and $1.5 million, respectively, and were funded by a $4.6 million increase in deposits. Management opted to invest funds temporarily in federal funds while reviewing other investment opportunities. Deposit growth was primarily concentrated in time deposits and resulted from continual marketing efforts by management.
Total stockholders' equity increased $485,000 to $18.7 million at March 31, 2001. Net income of $537,000 and increases in unrealized gains on investment securities available for sale of $102,000, were offset somewhat by a dividend payment of $154,000. Management continues to monitor regulatory capital ratios and at March 31, 2001, there have been no significant fluctuations as compared to December 31, 2000.
PROPERTIES
The bank's offices are: LOCATION COUNTY OWNED/LEASED OTHER INFORMATION -------- ------ ------------ ----------------- MAIN OFFICE: 15985 East High Street Geauga owned Middlefield, Ohio 44062-1666 BRANCHES: West Branch Geauga owned 15545 West High Street Middlefield, Ohio Garrettsville Branch Portage owned 8058 State Street Garrettsville, Ohio Mantua Branch Portage leased three-year lease expiring November 16, 10519 South Main Street 2001, with option to renew for eight Mantua, Ohio consecutive three-year terms Chardon Branch Geauga owned under construction, expected to open by the 348 Center Street end of 2001, total anticipated cost of Chardon, Ohio approximately $676,000 |
At December 31, 2000 the net book value of the bank's investment in premises and equipment totaled $5.4 million.
The bank's electronic data processing functions are performed under contract with an electronic data processing services firm that performs services for financial institutions throughout the Midwest.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below shows the beneficial ownership of Middlefield common stock as of April 11, 2001 by
o each director of Middlefield and each executive officer identified in the Summary Compensation Table below, and
o all directors and executive officers of Middlefield as a group.
To the best of Middlefield's knowledge, no person owns beneficially more than 5% of Middlefield's outstanding common stock. For purposes of this table, a person is considered to beneficially own any shares over which he or she exercises sole or shared voting or investment power or of which he or she has the right to acquire beneficial ownership within 60 days. Unless otherwise indicated, voting power and investment power are exercised solely by the person named in the table or shared with members of his or her household. Shares deemed to be outstanding for purposes of computing "Percent of Common Stock" are calculated on the basis of 1,102,954 shares issued and outstanding, plus the number of shares a person or group has the right to acquire within 60 days.
SHARES
ACQUIRABLE
SHARES WITHIN 60 DAYS
BENEFICIALLY BY EXERCISE OF PERCENT OF
DIRECTORS AND NAMED EXECUTIVE OFFICERS OWNED OPTIONS (1) COMMON STOCK
------------ -------------- ------------
Thomas G. Caldwell, Director, President and Chief Executive Officer..... 8,800 (2) 1,000 (9)
Richard T. Coyne, Director.............................................. 1,138 (3) 1,000 (9)
Frances H. Frank, Director.............................................. 5,596 (4) 1,000 (9)
Thomas C. Halstead, Director............................................ 9,134 (5) 1,000 (9)
George F. Hasman, Director.............................................. 3,860 1,000 (9)
James R. Heslop, II, Executive Vice President........................... 520 (6) 500 (9)
Donald D. Hunter, Director and Chairman of the Board.................... 14,896 (7) 1,000 1.4%
Martin S. Paul, Director................................................ 20 1,000 (9)
Donald E. Villers, Director............................................. 7,130 (8) 1,000 (9)
------ ----- ----
All Middlefield directors and executive officers as a group (15 persons) 52,634 9,300 5.6%
====== ===== ====
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(1) Options granted under Middlefield's 1999 Stock Option and Incentive Plan. Options granted under the Plan have a term of ten years, vesting and becoming exercisable one year after the date of grant.
(2) Includes 100 shares held by Mr. Caldwell as custodian for his minor children.
(3) Includes 80 shares held by Mr. Coyne as custodian for his grandchildren.
(4) Includes 3,786 shares held by Mrs. Frank's spouse. Mrs. Frank disclaims beneficial ownership of shares held by her spouse.
(5) Includes 2,722 shares held by Mr. Halstead's spouse and her trust and 908 shares held by Mr. Halstead's child. Mr. Halstead disclaims beneficial ownership of the shares held by his child.
(6) Includes 120 shares held by Mr. Heslop as custodian for his minor children.
(7) Includes 7,210 shares held in trust by Mr. Hunter's spouse and 462 shares held by First United Methodist Church, for which Mr. Hunter acts as Trustee. Mr. Hunter disclaims beneficial ownership of shares held in trust by his spouse.
(8) Includes 4,906 shares held jointly by Mr. Villers with his spouse and children and 614 shares held by Mr. Viller's spouse.
(9) Does not exceed 1%.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS. Under Article III, Section 2 of Middlefield's Regulations, the board may consist of no fewer than five and no more than 25 directors. The precise number of directors may be fixed from time to time within that range by the board, or by a majority vote of stockholders acting at an annual meeting. The number of directors is currently fixed at 8, divided into two classes of four directors serving staggered two-year terms. All eight Middlefield directors are currently serving as directors of the bank also. However, bank directors are elected annually and do not serve staggered terms.
Except as may be noted, there are no family relationships among any of Middlefield's directors or executive officers. No director was selected or serves under any arrangement or understanding with any other person. Except as may be disclosed, none of Middlefield's directors and executive officers serves as a director of (1) any company that has a class of securities registered under or that is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, or (2) any investment company registered under the Investment Company Act of 1940. None of Middlefield's directors or executive officers have been involved in any legal proceedings concerning bankruptcy, either individually or in respect of any businesses with which they have been involved. None of them have been convicted of any crime, excluding traffic violations and similar minor offenses.
CURRENT
DIRECTOR TERM
DIRECTORS AGE SINCE EXPIRES PRINCIPAL OCCUPATION IN THE LAST 5 YEARS
----------------------- --- -------- ------- ----------------------------------------
Thomas G. Caldwell..... 43 1997 2001 Mr. Caldwell is President and Chief Executive Officer of
President and CEO Middlefield and the bank. Mr. Caldwell served as Vice
President of Middlefield until October 2000, when he
became its President and CEO as well
Richard T. Coyne....... 65 1997 2001 Mr. Coyne is the General Manager of Jaco Products, a
production plastics component manufacturer located in
Middlefield, Ohio. He is also President and a Trustee
of the Geauga Park District Foundation, Geauga County,
Ohio
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CURRENT
DIRECTOR TERM
DIRECTORS AGE SINCE EXPIRES PRINCIPAL OCCUPATION IN THE LAST 5 YEARS
------------------------ --- -------- ------- ----------------------------------------
Donald D. Hunter........ 72 1977 2001 Mr. Hunter serves as Chairman of the Board of each of
Chairman of the Board Middlefield and the bank. He is co-owner of H&H
Hardware, Inc. in Middlefield, Ohio
Martin S. Paul.......... 57 1998 2002 * Mr. Paul is Vice President of Paul's Lumber in
Garrettsville, Ohio. He is also a Trustee of Ohio
Northern University in Ada, Ohio, a Trustee of Robinson
Memorial Hospital Foundation in Ravenna, Ohio and
President and Trustee of Hiram Community Trust in Hiram,
Ohio
George F. Hasman........ 75 1989 2002 * Mr. Hasman was President of Middlefield until October
2000 , but he did not serve on a full-time basis. He
previously served as Chairman and President of The
Twinsburg Banking Company, which was sold to FirstMerit
Corporation in 1982
Donald E. Villers....... 67 1987 2000 * Mr. Villers is retired, having previously served as a
superintendent with Copperweld Steel, from which he
retired after 31 years of service. Mr. Villers has been
a Township Trustee of Parkman Township in Geauga County,
Ohio since 1988
Frances H. Frank........ 53 1995 2000 * Mrs. Frank is the Secretary and Treasurer of The Frank
Agency, Inc., a general insurance agency located in
Middlefield, Ohio
Thomas C. Halstead...... 69 1988 2000 * Mr. Halstead is co-owner of Settlers Farm, a retail
shopping area located in Middlefield, Ohio. He
previously was owner of Settlers Collections, a retail
gift outlet
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* Recent Board Reconstitution. Until the 2000 annual meeting held in May 2000 and a special meeting of stockholders held in June 2000, Middlefield's eight directors were divided into three classes serving three-year terms. Under Ohio law, a board having fewer than nine directors cannot be classified in this manner. Since adoption of new Articles of Incorporation at the 2000 annual meeting and new Regulations at the June 2000 special meeting, the board has been divided into two classes serving two-year terms.
Directors Paul and Hasman were last elected by stockholders at the 1999 annual meeting. At that meeting, they were elected to serve until 2002 or until their successors are elected and qualified. Directors Frank, Halstead and Villers were last elected by stockholders at the 1997 annual meeting, for three-year terms ending at the 2000 annual meeting or upon election and qualification of their successors. Successors were not elected and qualified at the 2000 annual meeting. Directors Frank, Halstead and Villers have therefore continued to serve as Middlefield directors.
The previous governing documents of Middlefield replaced by stockholder vote at the 2000 annual meeting and the June 2000 special meeting seriously complicated Middlefield's corporate governance, and on the subject of board size and composition and director terms they were unworkable, in Middlefield's opinion. Middlefield's effort to obtain stockholder approval at the 2000 annual meeting for reconstitution of its board -- at the same time Middlefield separately proposed new Articles of Incorporation and new Regulations -- was not successful. Instead, stockholders approved new Articles of Incorporation only, which required approval of at least 75% of Middlefield's outstanding shares. By contrast, the separate board-reconstitution proposal and the separate proposal to adopt new Regulations required approval of at least 80% of Middlefield's outstanding shares, but slightly less than 80% voted in favor. Directors nominated for election as part of the board-reconstitution proposal therefore were not elected at the 2000 annual meeting, and the new Regulations proposed for adoption at the 2000 annual meeting were not approved.
But the new Articles of Incorporation that stockholders did approve changed the approval requirement for new or amended Regulations from 80% to a majority (provided the board first approves the new or amended regulations; otherwise, two-thirds approval would be necessary). Therefore, Middlefield again submitted new Regulations for stockholder approval at the June 2000 special meeting, and the new Regulations were adopted by majority vote of stockholders at that later meeting. With new governing documents that more readily accommodate changes in board composition, Middlefield expects to complete at its May 9, 2001 annual meeting the transition begun last summer from a three-class board to a two-class board by proposing that all directors be nominated for new or changed terms at the 2001 annual meeting. At the 2001 annual meeting, Directors Caldwell, Coyne, Hunter and Paul will stand for election to the class whose term expires at the 2003 annual meeting. Directors Frank,
Halstead, Hasman and Villers will stand for election at the 2001 annual meeting to the class whose term expires at the 2002 annual meeting initially, and thereafter every second year.
Board Committees and Meeting Attendance. The only committee of Middlefield's board is the Compensation Committee. The members of the Compensation Committee of Middlefield and the bank's compensation committee are Directors Villers (who acts as chairman of the committee), Frank, Halstead, and Paul. The Compensation Committee establishes the compensation of the senior executive officers of Middlefield and the bank. The Compensation Committee held two meetings in 2000. Neither Middlefield nor the bank has a board nominating committee. The full board acts as a nominating committee, selecting nominees for election as director.
Middlefield's board held 14 meetings in 2000, and the bank's board held 40 meetings. The individuals who served in 2000 as directors of the bank and Middlefield attended at least 75% of (1) the total number of meetings of the board of each of Middlefield and the bank and (2) the total number of meetings held by all committees on which he or she served.
The Audit Committee is a committee of the bank's board. Members of the Audit Committee are Directors Hasman (who acts as chairman of the committee), Halstead and Coyne. The Audit Committee is charged with examining or superintending the examination or audit of assets, liabilities and results of operations on at least an annual basis, reporting the results thereof to the board. The Audit Committee held four meetings in 2000.
The Audit Committee does not have a written charter. Middlefield and the bank believe that none of the directors who serve on the Audit Committee have a relationship with Middlefield or the bank that would interfere with the exercise of independent judgment in carrying out their responsibilities as director. None of them is or has for the past three years been an employee of Middlefield or the bank, and no immediate family members of any of them is or has for the past three years been an executive officer of Middlefield or the bank. Although certain of the directors and their affiliates are indebted to the bank for credit extended in the ordinary course of business, payments made by them to Middlefield or the bank in the past three years have not in any of those years exceeded the greater of 5% of the affiliates' revenues or $200,000. In the opinion of Middlefield's board and the bank's board the directors who serve on the Audit Committee are "independent directors," as that term is defined in Rule 4200(a)(14) of the rules of the National Association of Securities Dealers, Inc.
Director Compensation. In 2000, each bank director received monthly compensation of $1,050, less $100 for each board meeting not attended. The Chairman of the Board received additional annual compensation of $2,400 paid by Middlefield. Middlefield directors receive compensation of $200 for each meeting attended. Directors who serve on the bank's Compensation, Audit and Asset/Liability Committees earned additional compensation of $200 for each committee meeting attended. Under Middlefield's 1999 Stock Option Plan, options to acquire 1,000 shares of Middlefield common stock were granted effective June 14, 1999 to each Middlefield director who was not also a full-time officer or employee of Middlefield or the bank. The exercise price of those options is $31.75 per share. The 1999 Stock Option Plan provides for an automatic grant of options on similar terms to any other nonemployee director elected or appointed after the May 12, 1999 adoption of the 1999 Stock Option Plan but during the term of the plan. In December 2000 each of Middlefield's seven non-employee directors received an additional grant of options to acquire 390 shares, exercisable at $24 per share.
Directors are also entitled to life insurance benefits under the bank's group term life insurance program, paying benefits of $30,000 (or $15,000 in the case of Directors Hasman and Hunter) to the director's beneficiaries if the director dies while in service to the bank.
EXECUTIVE OFFICERS. The executive officers of Middlefield and the bank who do not also serve as Middlefield directors are:
NAME AGE PRINCIPAL OCCUPATION IN THE LAST 5 YEARS
---- --- ----------------------------------------
Jay P. Giles................... 51 Mr. Giles is Senior Vice President-- Senior Commercial Lender. He
joined the bank in September 1998, having previously served as Vice
President and Senior Commercial Lender at Huntington National Bank in
Burton, Ohio since 1985
James R. Heslop, II............ 47 Executive Vice President of The Middlefield Banking Company since 1996,
Mr. Heslop became Executive Vice President and Chief Operating Officer
of Middlefield on October 30,2000. He became a director of the bank in
July 1999. From July 1993 until joining the bank in April 1996, Mr.
Heslop was a director, President and Chief Executive Officer of First
County Bank in Chardon, Ohio, an institution with over $40 million
total assets. First County Bank is an affiliate of FNB Corporation of
Hermitage, Pennsylvania
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NAME AGE PRINCIPAL OCCUPATION IN THE LAST 5 YEARS
---- --- ----------------------------------------
Teresa M. Hetrick.............. 37 Ms. Hetrick is Senior Vice President-- Operations/Administration. Ms.
Hetrick served as Vice President and Secretary of First County Bank in
Chardon, Ohio before joining the bank in December 1996
Jack L. Lester................. 55 Mr. Lester is Vice President-- Compliance and Security Officer. He
joined the bank in August 1990 as a loan officer and has served in his
current position since 1991
Nancy C. Snow.................. 66 Ms. Snow is Vice President, Secretary and Branch Manager. She has been
with the bank since 1979, and has served in her current capacities
since the mid-1980s
Donald L. Stacy................ 47 Mr. Stacy joined the bank in August 1999 and serves as its Chief
Financial Officer. On October 30, 2000 he was appointed as the
Treasurer and Chief Financial Officer of Middlefield. He previously
served for twenty years with Security Dollar Bank and Security
Financial Corp. in Niles, Ohio, where he was Senior Vice President and
Treasurer
Alfred F. Thompson, Jr......... 41 Mr. Thompson is Vice President-- Senior Retail Lender. Mr. Thompson
has been with the bank since March 1996. He was promoted from loan
officer to Assistant Vice President in 1997, and promoted again to his
current position in July 1998. Before joining the bank, Mr. Thompson
served as Loan Officer in the Small Banking Group of National City
Bank, Northeast
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EXECUTIVE COMPENSATION
The following table shows compensation for services in all capacities for the fiscal years ended December 31, 2000, 1999, and 1998 for the President and Chief Executive Officer and for any other executive officer whose compensation exceeded $100,000 during 2000, including salary and bonus.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ ------------------------- -------
(#)
($) ($) SECURITIES ($) ($)
NAME AND ($) ($) OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS (2) COMPENSATION (3) STOCK AWARDS OPTIONS PAYOUTS COMPENSATION(4)
------------------ ---- ---------- --------- ---------------- ------------ ---------- ------- ---------------
Thomas G. Caldwell 2000 $118,300 $ 0 (3) -- 2,500 -- $9,823
President and Chief 1999 $110,456 $19,977 (3) -- 1,000 -- $9,733
Executive Officer 1998 $101,626 $ 7,902 (3) -- -- -- $9,342
James R. Heslop, II 2000 $102,750 $ 0 (3) -- 2,500 -- $1,354
Executive Vice 1999 $ 87,784 $19,658 (3) -- 500 -- $1,086
President 1998 $ 74,077 $ 6,686 (3) -- -- -- $ 741
-----------------------------------------------------------------------------------------------------------------------------------
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(1) Includes amounts deferred at the election of the named executive officers pursuant to the 401(k) plan. Also includes fees for service as a director of Middlefield or the bank.
(2) Represents profit sharing distributions and, in 1999 only, a $17,691 cash bonus paid to each of Messrs. Caldwell and Heslop.
(3) Perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of total salary and bonus.
(4) Represents matching contributions under the bank's 401(k) plan and, for Mr. Caldwell, the $6,700 dollar value of insurance premiums paid in each of 1998, 1999 and 2000. Mr. Caldwell's 401(k) plan matching contribution in 2000 was $3,123, and Mr. Heslop's was $1,354.
Director George F. Hasman held the title of President until October 2000, but he did not serve as a full-time officer or employee. Mr. Hasman did not receive compensation in his capacity as President. Instead, his compensation was limited solely to the compensation he received as a director. In his capacity as a director, Mr. Hasman was granted in 1999 an option to acquire 1,000 shares of Middlefield common stock. The option is currently exercisable in full, at the exercise price of $31.75 per share. In December 2000 he received an option to acquire an additional 390 shares of Middlefield common stock, exercisable at $24 per share.
Life Insurance. Mr. Caldwell is the owner of a life insurance policy for which The Middlefield Banking Company pays an annual premium of $6,700. Issued in October 1995, the policy provides for an initial death benefit of $250,000, increasing over time. Under a separate collateral assignment agreement, Mr. Caldwell has assigned his interest in the policy to the bank as security for the bank's interest in the policy death benefits. At Mr. Caldwell's death, the bank will be reimbursed for premiums paid. Mr. Caldwell's beneficiaries will receive the remainder of the policy death benefits.
Bank officers have life insurance benefits under a group term life insurance program, paying benefits to the officer's beneficiaries if the officer dies while employed by the bank, up to the lesser of (1) twice the officer's annual salary at the time of death or (2) $240,000.
Stock Option Plan. Middlefield's 1999 Stock Option Plan provides for the grant of options to acquire a maximum of 114,866 shares of common stock. Options granted under the plan can be either incentive stock options or non-qualified stock options. Options to acquire 20,980 shares of Middlefield common stock were issued and outstanding as of April 11, 2001. The 1999 Stock Option Plan also allows for the grant of stock appreciation rights, restricted stock and performance unit awards, but the only grants made under the plan so far are stock option grants.
Under the stock option plan, qualified stock options -- also commonly known as incentive stock options or ISOs -- may be granted to Middlefield's or the bank's officers and employees, and non-qualified stock options may be granted to directors, officers and employees. No one individual may be granted options to acquire more than 20% of the total shares acquirable by exercise of options that may be granted under the plan. Similarly, all non-employee directors as a group may be granted options to acquire no more than 20% of the total shares acquirable by exercise of options that may be granted under the plan. The stock option plan has a ten-year term, and it provides that options to acquire no more than 10% of the total shares acquirable under the plan may be granted in any one year. The plan is administered by a committee of at least 2 directors.
A qualified stock option, or incentive stock option, is an option that satisfies the terms of Section 422 of the Internal Revenue Code of 1986. All other options granted under the stock option plan are non-qualified options. All options granted to officers and employees under the plan to date are incentive stock options, and all options granted to non-employee directors are non-qualified options. The exercise price of incentive stock options must be no less than the fair market value of the shares on the date of grant (or 110% of fair market value in the case of any incentive stock option grant to a holder of more than 10% of Middlefield's common stock), and the exercise price of non-qualified stock options must be no less than book value at the end of the most recent fiscal year.
The committee administering the stock option plan determines the vesting schedule of stock options. All stock options granted to date become fully exercisable one year after the date of grant. Options granted under the plan are not transferable except by will or the laws of descent and distribution, and are exercisable during the option grantee's lifetime by the option grantee only. Exercisable options not exercised within three months after termination of the option holder's service expire, except in the case of the option holder's death, in which case they expire after one year. If the option holder's service is terminated for cause, all of his options expire immediately. However, unexercisable options become fully exercisable if a tender offer for Middlefield common stock occurs or if Middlefield's stockholders approve an agreement whereby Middlefield ceases to be an independent, publicly owned company or whereby Middlefield agrees to sale of substantially all of its assets.
The following table shows stock option grants in 2000 to the individual(s) named in the Summary Compensation Table.
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS GRANTED EMPLOYEES IN PRICE PER
NAME IN 2000 2000 SHARE EXPIRATION DATE
----------------------- --------------- ------------ --------- ---------------
Thomas G. Caldwell..... 2,500 28.6% $24.00 December 11, 2010
James R. Heslop, II.... 2,500 28.6% $24.00 December 11, 2010
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The following table shows the number of shares of Middlefield common stock acquired during 2000 or acquirable upon exercise of options by the individuals named in the Summary Compensation Table. The table also indicates the extent to which the options were exercisable at December 31, 2000, as well as the approximate value of the options based on the estimated fair market value of Middlefield common stock on December 31, 2000.
SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL VALUE OF IN-THE-MONEY OPTIONS AT
SHARES YEAR END FISCAL YEAR END (1)
ACQUIRED ON ------------------------------ --------------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------ ----------- -------------- ----------- ------------- ----------- -------------
Thomas G. Caldwell...... 0 -- 1,000 2,500 $0 $0
James R. Heslop, II..... 0 -- 500 2,500 $0 $0
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(1) None of the stock options held by Mr. Caldwell or Mr. Heslop was "in-the-money" at year end, and the value of their stock options is therefore shown as zero. In general, a stock option is "in-the-money" when the stock's market value exceeds the option exercise price. Value of unexercised options equals the estimated fair market value of a share acquirable upon exercise of an option at December 31, 2000, less the exercise price per share, multiplied by the number of shares acquirable
upon exercise of the options. The stock options granted to Mr. Caldwell and Mr. Heslop in 1999 are exercisable at the price of $31 per share, and the options granted to them in 2000 have an exercise price of $24 per share. Middlefield common stock is not actively traded and is not authorized for quotation or trading on any exchange or on Nasdaq. Solely for purposes of the table and for no other purpose, Middlefield estimated the per share market value of Middlefield common stock on December 31, 2000 as $24. This is an estimate only and does not necessarily reflect actual transactions in Middlefield common stock. The estimate does not necessarily reflect the price stockholders could obtain upon sale of their stock or the price at which shares of Middlefield common stock may be acquired. The estimate should not be taken to represent management or the board's estimate of the intrinsic value or appropriate market value of the common stock.
Retirement Plan. The bank maintains a section 401(k) employee savings and investment plan for substantially all employees and officers of the bank who have more than one year of service. The bank's contribution to the plan is based on 50% matching of voluntary contributions, up to 6% of compensation. An eligible employee may contribute up to 15% of his or her salary. Employee contributions are vested at all times. Bank contributions are fully vested after 6 years, vesting in 20% annual increments beginning with the second year.
Employment and Severance Agreements. Neither the bank nor Middlefield has written employment agreements with officers. But on October 8, 1996 Middlefield and the bank entered into severance agreements with Thomas G. Caldwell and James R. Heslop, II. Although the severance agreements terminate when the executives reach age 65, the initial term of the agreement is three years, renewing each year for an additional one-year term unless the board determines that the executive has not met the requirements and standards of the board and that the term therefore will not be extended.
The severance agreements provide that the executive will be entitled to severance compensation if two conditions are satisfied:
1) a change in control occurs during the agreement's term, and
2) the executive is involuntarily terminated within one year after the change in control or the executive voluntarily terminates employment for "good reason" within one year after the change in control.
The severance compensation will be paid in a lump sum in cash within 90 days after termination of the executive's employment. The amount of the severance compensation will equal 24 times the average monthly salary paid to the executive over the preceding five years. For this purpose, salary includes the executive's base salary, board fees and any other cash compensation required to be reported in the Summary Compensation Table. Middlefield and the bank have also agreed to pay legal fees incurred by the executives associated with the interpretation, enforcement, or defense of their rights under the severance agreements if Middlefield or the bank initiates the legal proceeding but the executive prevails.
The term "change in control" can be defined in a variety of ways from one corporation to the next and from one benefit plan to the next. Under the severance agreements, a change in control means any of the following events occur --
o Merger: Middlefield merges into or consolidates with another corporation, or merges another corporation into Middlefield, with the result in either case that less than 50% of the total voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were Middlefield stockholders immediately before the merger or consolidation,
o Acquisition of Significant Share Ownership: a person or group of persons acting in concert acquires the power to vote 25% or more of Middlefield's common stock,
o Acquisition of Control of Middlefield: Middlefield's board determines (a) that a person has acquired the power to direct Middlefield's management or policies and (b) that this constitutes an acquisition of control for purposes of the Bank Holding Company Act or the Change in Bank Control Act and regulations thereunder. Under the Bank Holding Company Act and the Change in Bank Control Act, control is conclusively presumed to exist when an acquiror has 25% ownership of a bank holding company, and control may be rebuttably presumed to exist when the acquiror has 10% ownership. Control determinations under the Bank Holding Company Act and the Change in Bank Control Act are highly dependent on the facts of each case and are not necessarily based on stock ownership alone,
o Change in Board Composition: during any period of two consecutive years, individuals who constituted Middlefield's or the bank's board at the beginning of the two-year period (including directors later elected by the board, or later nominated by the board for election by stockholders,
by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the period) cease for any reason to constitute at least a majority, or
o Sale of Assets: Middlefield sells to a third party substantially all of its assets.
If Mr. Caldwell or Mr. Heslop terminates employment for "good reason" within one year after a change in control, he will be entitled to severance benefits just as if he were terminated involuntarily and without cause. Under the severance agreements, "good reason" includes occurrence of any of the following events without the executive's written consent--
o Change in Office or Position: a change in the executive's status, title, position or responsibilities that, in the executive's judgment, does not represent a promotion, or assignment to him of responsibilities that are, in his judgment, inconsistent with his status, title, position or responsibilities,
o Salary Reduction: a reduction in the executive's base salary,
o Reduction of Benefits. The executive's benefits under employee benefit plans are materially reduced, or
o Relocation of the Executive: the executive's principal place of employment is relocated outside of Middlefield, Ohio.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The bank has deposit and lending relationships with directors and officers of Middlefield, as well as with their affiliates. All loans to directors, officers and their affiliates were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal credit risk or present other unfavorable features.
LEGAL PROCEEDINGS
From time to time the bank is involved in various legal proceedings that are incidental to its business. In the opinion of management, no current legal proceedings are material to the financial condition of Middlefield or the bank, either individually or in the aggregate.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
COMMON STOCK. Middlefield had approximately 540 stockholders of record as of April 11, 2001. Middlefield common stock is traded very infrequently. Although there is no established market for the common stock, bid prices are quoted from time to time on the National Quotation Bureau's "pink sheets" under the symbol "MBCN." Middlefield common stock closed at $27.50 per share on April 10, 2001. The following table shows the high and low bid prices of and cash dividends paid on Middlefield common stock in 1999, 2000, and the first quarter of 2001, adjusted for stock splits and stock dividends. This does not reflect retail mark-up, mark-down or commissions and does not necessarily represent actual transactions.
CASH
DIVIDENDS
HIGH BID LOW BID PER SHARE
-------- ------- ---------
1999:
First Quarter............ $31.750 $30.125 $0.100
Second Quarter........... $31.000 $30.813 $0.100
Third Quarter............ $31.000 $30.000 $0.100
Fourth Quarter........... $31.000 $30.000 $0.200
2000:
First Quarter............ $31.000 $30.000 $0.100
Second Quarter........... $32.500 $31.000 $0.110
Third Quarter............ $31.000 $19.625 $0.115
Fourth Quarter........... $25.000 $24.000 $0.215
2001:
First Quarter............ $28.500 $24.000 $0.140
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DIVIDENDS. Middlefield's current policy is to maintain a cash dividend payout ratio of 25% to 35% of net earnings, adjusted for nonrecurring items. Because Middlefield is dependent on its bank subsidiary for earnings and funds necessary to pay dividends, the ability of Middlefield to pay dividends to its stockholders is subject to bank regulatory restrictions. See, "BUSINESS -- SUPERVISION AND REGULATION - Limits on Dividends and Other Payments."
RESALES UNDER RULE 144 -- General Application of Rule 144. A person who resells securities acquired directly or indirectly from an issuer or its affiliate in a transaction or chain of transactions not involving a public offering could be deemed to be an underwriter of those securities. Securities acquired in this fashion from an issuer or an affiliate are defined in Rule 144 under the Securities Act of 1933 as "restricted securities." Registration of that person's offer and sale of restricted securities under the Securities Act of 1933 could be necessary, unless an exemption is available or unless the person is able to rely on the safe harbor from treatment as an underwriter provided by the Securities and Exchange Commission's Rule 144. Since Middlefield became the holding company for The Middlefield Banking Company in 1988, Middlefield has never undertaken a public offering of its securities.
Resale of Restricted Securities. Rule 144 imposes a one-year holding period on restricted securities before they may be resold in reliance on the safe-harbor exemption of Rule 144. And if restricted securities are held for two years or more, the shares may be freely resold in reliance on Rule 144 without compliance with the terms of Rule 144 (summarized below), other than the provision of Rule 144 requiring that the shares be sold in unsolicited brokers' transactions. But this dispensation from the requirements of Rule 144 does not apply to resale of shares by affiliates or to resale of shares by persons who were affiliates at any time within three months before the resale.
Resale of Shares by Affiliates. Offers and sales of shares by
Middlefield affiliates are subject to registration under the Securities Act of
1933, unless an exemption is available, including the exemption provided by Rule
144. Defined in Rule 144(a), the term "affiliate" generally includes directors
and executive officers of a company. An owner of more than 10% of a company's
shares can be considered an affiliate too. In summary terms, compliance with
Rule 144 requires satisfaction of the following conditions, in addition to a
holding period for restricted securities:
o CURRENT IN REPORTING OBLIGATION: under Rule 144(c), the issuer must have securities registered under Section 12 of the Securities Exchange Act of 1934, the issuer must have been subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934 for at least 90 days immediately before the sale, and the issuer must have been in compliance with its reporting requirements under the Securities Exchange Act of 1934 for the 12 months preceding the proposed sale (or the period that the issuer has been required to file reports under Section 13, if less than 12 months),
o VOLUME LIMITATION: the number of shares that may be sold in any 3-month period is limited to the greater of (1) 1% of the issuer's shares outstanding or (2) the average weekly trading volume during the four calendar weeks preceding the sale, and
o MANNER OF SALE: the shares must be sold by a broker in a routine open market transaction that does not involve the solicitation of orders for purchase.
When this Form 10 becomes effective, which Middlefield expects to occur in June 2001, Middlefield will have equity securities registered under Section 12 of the Securities Exchange Act of 1934, and Middlefield will thereafter be required to file reports under Section 13 of that act. Middlefield has not agreed to register the offer or sale of shares by any person. Although each stockholder is responsible to determine his or her own holding period for Middlefield common stock, Middlefield believes that most of its stockholders have held Middlefield common
stock for the minimum one-year holding period of Rule 144(d). Stockholders who desire to sell their shares should consult their own counsel concerning any restrictions on sale that might apply under federal securities law. Stockholders who desire to sell their shares before Middlefield's securities have been registered under the Securities Exchange Act of 1934 for 90 days should consult their own counsel about whether information concerning Middlefield available under Rule 15c2-11 satisfies the public information requirement of Rule 144(c).
DESCRIPTION OF SECURITIES
The rights of Middlefield stockholders are governed by Middlefield's Second Amended and Restated Articles of Incorporation, its Regulations, and by the Ohio General Corporation Law. The following discussion of important stockholder rights is merely a summary. It does not necessarily contain all of the information that is important to you. You should read the Second Amended and Restated Articles of Incorporation and Regulations of Middlefield, which are included as exhibits to this registration statement. See, "WHERE TO FIND MORE INFORMATION."
COMMON STOCK 5,000,000 shares of common stock authorized
Authorized shares generally may be issued and sold without
further stockholder action, provided that the issuance and
sale is made in compliance with the corporate governance
documents of Middlefield and the Ohio General Corporation
Law. Stockholder approval may be required in certain cases
under the Ohio General Corporation Law, for example if 16.7%
or more of a corporation's shares are issued in a merger
PAR VALUE No par value shares
PREEMPTIVE RIGHTS No preemptive rights
CUMULATIVE VOTING No cumulative voting rights
DIRECTORS Article III, Section 2(a) of the regulations provides for at
least 5 but no more than 25 directors. The precise number of
directors is fixed from time to time by the board, or by
stockholders acting at an annual meeting
CLASSIFIED BOARD Under Article III, Section 2(b) of the
regulations, directors will be (a) elected annually
and not divided into classes if there are fewer
than 6 directors, (b) divided into two classes
serving two-year terms if there are six or more --
but fewer than 9 -- directors, and (c) divided into
three classes serving three-year terms if there are
9 or more directors
DIRECTOR REMOVAL Although Ohio General Corporation Law Section 1701.58(D)
provides that stockholders may remove any or all of the
directors with or without cause by the vote of the holders
of a majority of the voting power entitled to elect
directors, Article III, Section 5 of the regulations
provides that directors may be removed solely for good cause
VOTING RIGHTS Holders of common stock are entitled to one vote per share
on any matter submitted to a vote of stockholders
DIVIDENDS The holders of common stock are entitled to receive
ratably dividends, if any, as may be declared from
time to time by the board out of funds legally
available therefor. Under Ohio General Corporation
Law Section 1701.33(C), a corporation may not pay a
dividend when the corporation is insolvent or if
there are reasonable grounds to believe that it
will become insolvent as a result of the dividend
Dividends and distributions are also subject to bank
regulatory restrictions. See, "BUSINESS -- SUPERVISION AND
REGULATION -- Limits on Dividends and Other Payments."
SHARE REPURCHASES As authorized by the board, except that
a corporation may not repurchase its shares (a) if
immediately thereafter the corporation's assets
would be less than its liabilities and stated
capital, or (b) if the corporation is insolvent or
if there are reasonable grounds to believe that it
will become insolvent as a result of the share
repurchase
AMENDMENT OF Amendment of Middlefield's articles of incorporation
GOVERNING generally requires the approval of a majority of shares
DOCUMENTS issued and outstanding and entitled to vote, but approval
of two thirds is necessary if the amendment has to do with
the Business Combination provisions of Article Sixth.
See "--Changes in Control," below.
According to Article Seventh of Middlefield's articles of
incorporation, amendment of Middlefield's regulations
generally requires the approval of a majority of shares
issued and outstanding and entitled to vote, or two thirds
of the voting shares if the board has not first approved the
proposed amendment
INDEMNIFICATION Article VIII of the regulations provides that directors,
AND LIMITATIONS officers and employees shall be indemnified to the full
ON LIABILITY extent permitted by law
Middlefield also may purchase insurance covering actions of
directors, officers and employees
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SPECIAL MEETINGS Special meetings may be called by the Chairman of the
OF STOCKHOLDERS Board or the President, by the Board acting at a meeting,
by a majority of directors acting without a meeting or by
stockholders who together hold at least 25% of the shares
outstanding and entitled to vote
STOCKHOLDER Regulations Article III, Section 4 provides that stockholder
NOMINATIONS AND nominations for director, and regulations Article I,
STOCKHOLDER Section 8 provides that stockholder proposals for business
PROPOSALS to be acted on at an annual meeting, must be made in
writing within a range of 60 to 120 days before the
corporation mails its proxy statement for the annual
meeting, based on the date of mailing in the preceding year
ANTITAKEOVER Provisions of Middlefield's governing documents that could
PROVISIONS have an antitakeover effect include the following:
o the board's ability to issue authorized but
unissued shares of common stock without further
stockholder action
o the restrictions in the regulations on stockholder
proposals and stockholder nominations for director
o classified board of directors; no cumulative
voting
o the articles of incorporation and regulations may
be amended by majority vote, but a higher voting
threshold (2/3) applies if the board does not
first approve the amendment
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o directors may be removed solely for good cause
o the Business Combination provisions in Article Sixth of the articles of incorporation, discussed in "-- Changes in Control" below
CHANGES IN CONTROL. Middlefield's articles of incorporation and regulations contain a number of provisions that could have the effect of delaying or making more difficult or costly an attempt to acquire control of Middlefield.
Authorized but Unissued Shares. Authorized but unissued shares of Middlefield common stock may be issued by the board without further stockholder approval. When in the judgment of the board the action is in the best interest of stockholders and Middlefield, the authorized but unissued common stock could be used by the board for the purpose or with the effect of creating impediments to or frustrating the attempts of persons seeking to gain control of Middlefield. As a means to oppose a hostile takeover bid, unissued shares of common stock could be privately placed by Middlefield with purchasers selected by the board. The issuance of new shares could be used by Middlefield to dilute the stock ownership of a person or entity seeking to obtain control, if the board considers the change in control to be not in the best interests of stockholders and Middlefield. Authorized but unissued capital stock could discourage unsolicited takeover attempts, and could be used to delay or prevent a change in control. This could frustrate stockholders' desire to receive the premium for stock that is commonly paid in changes in control.
Director Nominations and Other Business Proposed for Stockholders' Consideration. Article I, Section 8 of Middlefield's regulations require that notice in writing of proposed stockholder nominations for the election of directors and proposals for stockholder action be timely given before an annual meeting. To be timely, the stockholder's notice must be received by Middlefield's Secretary at least 60 days -- but no more than 120 days -- before the date corresponding to the date on which Middlefield's proxy statement was mailed to stockholders for the preceding year's annual meeting. The stockholder's notice must contain information about the non-incumbent nominee or stockholder proposal, including the nominee's name, age, business and residence addresses, principal occupation, the number of shares beneficially owned by the nominee and any other information of the kind required to be included in a proxy statement soliciting proxies for election of the nominee. If the officer presiding at a meeting determines that a person was not nominated or a proposal was not presented in accordance with the foregoing procedures, the nominee would not be eligible for election as a director and the proposal would not be presented for stockholder action. You should refer to Article I, Section 8(d) for a description of the information you must provide with a notice for proposed stockholder action, and Article III, Section 4 for a description of the information you must provide with a director nomination. The regulations also provide in Article III, Section 2 that directors may be elected by stockholders at annual meetings only.
The purpose of these director nomination and stockholder proposal procedures is to preserve the board's opportunity to investigate -- and the stockholders' opportunity to assess -- the competence, experience, integrity and qualifications of a proposed nominee and the factors that are relevant to consideration of a stockholder proposal. The board believes stockholder meetings should be conducted in an orderly manner, and sufficient time should be allowed for consideration of matters so that stockholders have ample time and information to vote on an informed basis.
But these provisions could deter a stockholder from gaining control of Middlefield by nominating his own director slate, by proposing stockholder action from the floor of a meeting, or by instituting a proxy contest so close in time to the date of a stockholders' meeting that inadequate information is available to stockholders. And the nomination by stockholders of a person otherwise qualified to serve as director might not be considered if the nomination does not strictly comply with the procedures outlined in the regulations. Also, this provision could
make it easier for incumbent directors to solicit proxies to resist a dissident slate of directors, and thereby retain their status as directors, even if the dissident's nominations are in the best interests of Middlefield and stockholders. In this sense, the provisions can be considered advantageous to incumbent directors and executive officers, and could discourage takeover attempts.
Classified Board. Middlefield's regulations provide for a classified board, serving staggered terms of two years if there are fewer than nine directors and three years if there are nine or more directors. Because one and only one class of directors is elected at each annual meeting, a stockholder seeking to change the composition of the board could be delayed in his efforts to replace existing directors with his own nominees.
Amendment of Governing Documents. Middlefield's articles of incorporation and regulations generally may be amended by a vote of a majority of the voting power, except that (a) any amendment of the regulations would require approval of two thirds of the voting power if the board does not first approve the amendment, and (b) the Business Combination provisions in Article Sixth of the articles of incorporation may not be amended unless holders of at least two thirds of the shares vote in favor of amendment (along with a majority of shares not held by the interested stockholder, unless the board also first approves the amendment by a two-thirds vote).
Removal of Directors. Article III, Section 5 of Middlefield's regulations provides that directors may be removed solely for good cause, and removal of a director by stockholders requires the affirmative vote of the holders of a majority of the voting power.
Business Combination Provisions of Article Sixth of the Articles of Incorporation. Similar to the Merger Moratorium Act discussed below, Article Sixth applies to two-step acquisition transactions. For example, an acquiror could gain a significant toehold ownership interest in a company in a first step at one price, and thereafter use the leverage of that ownership position in a second-step acquisition of the remainder of the company at a lower price. Sophisticated investors and arbitragers could profit by selling out to the acquiror in the first step of the transaction, leaving the great bulk of long-term stockholders and their individually small ownership stakes at the mercy of the acquiror in the second step and without a disinterested Board to protect minority stockholders' interests. All of the complexity and elaborate definitions and voting requirements of Article Sixth's business combination provisions exist to advance one simple goal: to prevent a person who has accumulated a significant percentage interest in Middlefield (10% or more) from using that ownership interest to his own advantage at the expense of other stockholders. Oppression of long-term, smaller stockholders in the second step of a two-step acquisition transaction is the outcome Article Sixth is intended to avoid.
In summary, the business combination provisions of Article Sixth apply to a transaction that constitutes a "Business Combination" and that involves an "Interested Party." Defined in paragraph (e) of Article Sixth, the term "Business Combination" includes mergers, a sale of assets and a variety of other kinds of transactions involving an Interested Party, including reclassifications and issuances of securities. The term "Interested Party" means any corporation, person or entity that, together with its affiliates, beneficially owns 10% or more of Middlefield's common stock.
If the party proposing to enter into a merger or similar transaction with Middlefield is an Interested Party, Article Sixth could require approval of two thirds of all shares of common stock issued and outstanding, plus a majority of shares not held by the Interested Party. But there are two exceptions:
1) if the transaction is approved by the board before or at the same time as the Interested Party becomes the owner of 10% or more of Middlefield's common stock; and
2) if the board approves the transaction by a vote of two thirds of its members and a majority of the so-called "Continuing Directors," and if the per share price to be paid in the transaction by the Interested Party is an amount, in cash, equal to or greater than the highest price ever paid by the Interested Party for his shares. Paragraph (f) of Article Sixth defines the term "Continuing Director" to include any person who was a director before the Interested Party owned 4% of Middlefield's shares. A person recommended by a majority of Continuing Directors to succeed a Continuing Director would himself also be considered a Continuing Director.
If either of the two exceptions to the provisions of Article Sixth applies, it is conceivable that no approval of Middlefield's stockholders would be required at all. This is because the Ohio General Corporation Law does not require stockholder approval for some of the transactions to which the business combination provisions of Article Sixth apply.
Article Sixth creates incentive for an acquiror to negotiate the terms of an acquisition directly with the board before the acquiror becomes a significant stockholder. In contrast, bypassing approval of the board can have adverse consequences, such as a higher stockholder approval threshold, a requirement to pay a higher price than the acquiror might otherwise be willing to pay, potential resistance by the board, greater potential for delays and potentially higher transaction costs.
Article Sixth does not require a supermajority vote for a merger or similar transaction with a party that is not a so-called "Interested Party." Instead, the only stockholder vote required for a merger or similar transaction with someone other than an Interested Party will be the stockholder vote -- if any -- required by the Ohio General Corporation Law to be obtained. In many cases, that required vote is two thirds of all issued and outstanding shares. In some cases, approval of a majority of shares not held by the party to the transaction will also be required, if the Ohio Control Share Acquisition Act discussed below applies. And in other cases, no stockholder vote will be required under the Ohio General Corporation Law. For example, the Ohio General Corporation Law generally would not require a vote by stockholders of a corporation for issuance of a small percentage of shares (5%, for example) or for a merger in which the corporation is the surviving entity (provided the surviving corporation does not issue or transfer to the other party in the merger shares representing one-sixth or more of the voting power in the election of the surviving corporation's directors).
Consideration of Constituencies Other than Stockholders. Section 1701.59 of the Ohio General Corporation Law permits the board to consider constituencies other than stockholders in the board's deliberations over a potential change in control. The board may consider the social, legal and economic consequences of a change in control on employees and customers and on the communities served by Middlefield and its subsidiaries, in addition to considering the long-term and short-term interests of stockholders.
Ohio Control Share Acquisition Act. Contained in Section 1701.831 of the Ohio General Corporation Law, the Control Share Acquisition Act requires stockholder approval for transfers of corporate control. The Control Share Acquisition Act provides generally that acquisitions of voting securities resulting in the acquiring stockholder owning 20%, 33 1/3%, or 50% of the outstanding voting securities of an issuing public corporation must be approved in advance by the holders of a majority of the outstanding voting shares, and by a majority of the portion of the outstanding voting shares that excludes so-called "interested shares," a term defined below. The Control Share Acquisition Act was intended to protect stockholders of Ohio corporations from coercive tender offers. In general, an issuing public corporation is any Ohio corporation that has 50 or more shareholders, provided the corporation has its principal place of business, its principal offices, assets with substantial value or a substantial percentage of its assets in Ohio. Middlefield is an issuing public corporation.
The term "interested shares" means shares of the issuing public corporation held by the acquiring stockholder, by officers of the issuing public corporation, or by any employee of the issuing public corporation who is also a director of the issuing public corporation. The term "interested shares" also includes shares acquired by any person after the first date of public disclosure of the acquisition and before the record date for the meeting at which the acquisition will be voted upon, provided (a) the person paid over $250,000 for the shares, or (b) the shares represent more than 0.5% of the outstanding shares of the issuing public corporation.
A corporation's articles of incorporation or regulations may opt out of the protection provided by the Control Share Acquisition Act, and in such a case the Control Share Acquisition Act would not apply to acquisitions of that corporation's shares. Middlefield's articles of incorporation and regulations do not opt out of coverage under the Control Share Acquisition Act.
Ohio Merger Moratorium Act. Chapter 1704 of the Ohio Revised Code, known as the Merger Moratorium Act, prevents an issuing public corporation from entering into a business combination transaction with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder. Mergers and a wide variety of other kinds of transactions involving an interested stockholder would be considered business combinations for purposes of the Merger Moratorium Act. If the business combination or the interested stockholder's share acquisition is approved by the directors, the three-year moratorium does not apply. In general, an interested stockholder is one who can vote or direct the voting of 10% or more of the issuing public corporation's stock in the election of directors.
The Merger Moratorium Act generally does not apply to issuing public corporations that --
o do not have a class of voting securities traded on a national securities exchange,
o do not have a class of voting securities registered under
Section 12(g) of the Securities Exchange Act of 1934, or
o are not required to file periodic reports and information pursuant to Section 15(d) of the Securities Exchange Act of 1934.
Middlefield's common stock will be registered under Section 12(g) of the Securities Exchange Act of 1934 when this Form 10 registration statement becomes effective. Business combination transactions involving Middlefield and an interested stockholder therefore could be subject to compliance with the Ohio Merger Moratorium Act.
Like the Control Share Acquisition Act, the Merger Moratorium Act provides that a corporation's articles of incorporation may opt out of the protection provided by the statute, and in such a case the Merger Moratorium Act would not apply to business combination transactions involving an interested stockholder. Middlefield's articles of incorporation do not opt out of coverage under the Merger Moratorium Act.
Ohio "Anti-Greenmail" Statute. Under Ohio Revised Code Section 1707.043, a public corporation formed in Ohio may recover profits that a stockholder makes from a sale of the corporation's securities occurring within 18 after making a proposal to acquire control or publicly disclosing the possibility of a proposal to acquire control. The corporation may not, however, recover from a person who proves either --
o that his sole purpose in making the proposal was to succeed in acquiring control of the corporation and there were reasonable grounds to believe that he would acquire control of the corporation, or
o that his purpose was not to increase any profit or decrease any loss in the stock.
Also, the corporation may not obtain any recovery unless the aggregate amount of the profit realized by such person exceeds $250,000. Any stockholder may bring an action on behalf of the corporation if the corporation refuses to bring an action to recover these profits. The party bringing an action may recover his attorneys' fees if the court having jurisdiction over the action orders recovery of profits. An Ohio corporation may elect not to be covered by the "anti-greenmail" statute with an appropriate amendment of its articles of incorporation or regulations. Middlefield has taken no action to opt out of the "anti-greenmail" statute's coverage.
Regulatory Approval of Acquisitions. A company seeking to acquire control of an Ohio bank or bank holding company must obtain approval of the Federal Reserve Board and the Ohio Division of Financial Institutions.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VIII of Middlefield's regulations provides for indemnification of directors, officers, employees and agents. The indemnification rights set forth in the regulations and the Ohio General Corporation Law are not exclusive of any other indemnification rights to which a director or officer may be entitled under an indemnification agreement or board resolution. Middlefield may purchase and maintain insurance on behalf of any director or officer against any liability asserted against and incurred by him or her in any such capacity, regardless of whether Middlefield would have had the power to indemnify against that liability. Middlefield has purchased and maintains directors' and officers' liability insurance. At the May 9, 2001 annual meeting of stockholders, Middlefield is seeking stockholder approval to enter into indemnification agreements with directors.
Permitted Indemnification in General. Under Section 1701.13(E) of the Ohio General Corporation Law, Ohio corporations may indemnify directors, officers and agents within prescribed limits, and must indemnify them in some circumstances.
Required Advancement of Directors' Expenses. The Ohio General Corporation Law does not expressly authorize indemnification for settlements, fines or judgments in the context of derivative suits (shareholders' lawsuits brought on behalf of a corporation). However, Ohio corporations must advance expenses, including attorneys' fees, incurred by directors -- but not officers -- in defending an action, including a derivative action, if the director agrees to cooperate with the corporation in the derivative action and agrees to repay the amount advanced. The director would have to repay the amount advanced to him if it is proved by clear and convincing evidence that his act or failure to act was done (a) with deliberate intent to cause injury to the corporation or (b) with reckless disregard for the corporation's best interests. But advancement of expenses is not required if the corporation's articles of incorporation or regulations explicitly state that it is not required -- Middlefield's governing documents do not do so.
No Indemnification in a Derivative Suit If the Director or Officer Acted Negligently. The Ohio General Corporation Law does not authorize indemnification of a director or officer in a derivative suit if his actions were negligent or constituted misconduct. Indemnification in that case may be ordered by a court, however.
Indemnification Is Required If the Director or Officer Is Successful on the Merits. An Ohio corporation must indemnify a director, officer, employee or agent who succeeds on the merits in a derivative suit or in a non-derivative suit.
Indemnification Is Allowed If the Director or Officer Satisfied the Ohio General Corporation Law Standard of Conduct, Even If He Is Not Successful on the Merits. In all other cases, if a director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the company, indemnification is discretionary -- except as otherwise provided by a corporation's articles of incorporation, code of regulations or by contract (and advancement of directors' expenses is also not discretionary).
Standard for Personal Liability of Directors for Monetary Damages. According to Ohio General Corporation Law Section 1701.59(D), a director will not be liable for monetary damages unless it is proved by clear and convincing evidence that his action or failure to act was undertaken with deliberate intent to cause injury to the corporation or with reckless disregard for the best interest of the corporation. There is no comparable provision limiting the liability of officers, employees or other agents of a corporation.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Middlefield or to an affiliate of Middlefield under its articles of incorporation, regulations or otherwise, Middlefield has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
WHERE TO FIND MORE INFORMATION
Middlefield provides to its stockholders an annual report containing consolidated financial statements audited by its independent auditors.
Middlefield has filed with the Securities and Exchange Commission a registration statement on Form 10 under the Securities Exchange Act of 1934. When the Form 10 becomes effective, Middlefield common stock will be registered under Section 12(g) of the Securities Exchange Act of 1934. Middlefield will be subject to the reporting and informational requirements of the Securities Exchange Act of 1934. Middlefield will be required to file reports, proxy statements and other information with the Securities and Exchange Commission.
The Form 10 registration statement and the exhibits thereto, as well as the annual and quarterly reports, proxy statements and other information filed hereafter with the Securities and Exchange Commission by Middlefield under the Securities Exchange Act of 1934 may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.
Washington, D.C. 20549
and at the regional offices of the Securities and Exchange Commission located at
Citicorp Center 7 World Trade Center 500 West Madison Street, Suite 1400 13th Floor Chicago, Illinois 60661 New York, New York 10048 |
Copies of this material may also be obtained at prescribed rates from the Public Reference Room of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet web site containing reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The address of that site is http://www.sec.gov. This Form 10 registration statement, including all exhibits and amendments, is available on the SEC's web site.
FORWARD-LOOKING STATEMENTS
This Form 10 registration statement contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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. Factors that may cause actual results to differ materially from those contemplated by forward-looking statements include, among others, the risks outlined in "RISK FACTORS" and the following possibilities --
1) competitive pressures in the banking industry increase significantly,
2) actual collection of amounts on liquidation of collateral or enforcement of guaranties is less than expected,
3) changes in prevailing interest rates reduce margins,
4) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in a deterioration in credit quality, among other things,
5) legislation or regulatory requirements or changes adversely affect the businesses in which Middlefield is engaged,
6) changes in business conditions and inflation, and
7) changes in the securities markets.
If one or more of these risks of uncertainties occurs or if the underlying assumptions prove incorrect, actual results in 2001 and beyond could differ materially from those expressed in or implied by the forward-looking statements.
Forward-looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic and competitive uncertainties, all of which are difficult to predict and many of which are beyond Middlefield's control. Although Middlefield believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information in this Form 10 registration statement 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.
The independent public accountants of Middlefield have not examined any of the forward-looking statements included in this Form 10 registration statement, nor have the accountants applied any auditing procedures to those statements. Therefore, the accountants do not express an opinion or any other form of assurance on them.
The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with generally accepted accounting principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollar amounts or estimated fair value, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Middlefield's operations. Unlike industrial companies, nearly all of the assets and liabilities of Middlefield and the bank are monetary in nature. As a result, changes in prevailing interest rates have a greater impact than inflation on their performance. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
RECENT SALES OF UNREGISTERED SECURITIES
The following summarizes Middlefield's offers and sales of common stock in the past three years. None of the offers or sales were registered under the Securities Act of 1933.
Stock Options. Middlefield granted stock options in 1999 and 2000 to directors, officers and employees under its 1999 Stock Option Plan. No stock options had been exercised by April 11, 2001. The following table shows all stock option grants made by Middlefield since the stock option plan was adopted in 1999:
EXERCISE
OPTION NUMBER OF SHARES ACQUIRABLE BY PRICE PER
OPTION GRANT DATE GRANTED TO TYPE EXERCISE OF OPTION GRANTED SHARE
-------------------------------------------------------------------------------------------------------------------
Director Coyne NQSO 1,000 $31.75
Director Frank NQSO 1,000 $31.75
Director Halstead NQSO 1,000 $31.75
June 14, 1999......... Director Hasman NQSO 1,000 $31.75
Director Hunter NQSO 1,000 $31.75
Director Paul NQSO 1,000 $31.75
Director Villers NQSO 1,000 $31.75
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Thomas G. Caldwell, President and ISO 1,000 $31.00
CEO
November 23, 1999..... James R. Heslop, II, Executive V.P. ISO 500 $31.00
7 other officers ISO 1,400 total, of which 400 have $31.00
since been forfeited
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Director Coyne NQSO 390 $24.00
Director Frank NQSO 390 $24.00
Director Hasltead NQSO 390 $24.00
Director Hasman NQSO 390 $24.00
December 11, 2000..... Director Hunter NQSO 390 $24.00
Director Paul NQSO 390 $24.00
Director Villers NQSO 390 $24.00
Thomas G. Caldwell, President and ISO 2,500 $24.00
CEO
James R. Heslop, II, Executive ISO 2,500 $24.00
V.P.
9 other officers ISO 3,750 total $24.00
-----------------------------------------------------------------------------------------------------------------
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For these offers and sales, Middlefield claims the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933, relating to sales by an issuer not involving any public offering, Section 3(b) of the Securities Act of 1933, relating to public offerings that are limited in amount, Regulation D and the rules thereunder, relating to offers and sales to limited numbers of people and accredited investors, and Rule 701 under the Securities Act of 1933, covering offers and sales to directors, officers, employees, and others.
Treasury Shares. From time to time Middlefield acquires shares of its stock and holds the shares in its treasury. The following table summarizes Middlefield's purchases and sales of treasury stock in 1999 and 2000. There were no treasury stock purchases or sales in 1998, and there have been none in 2001.
PURCHASE OR NUMBER OF PRICE PER
DATE SALE SHARES SHARE SELLER OR PURCHASER(S)
---- ----------- --------- --------- ----------------------
March 9, 1999 purchase 3,552 $31.00 regional broker/dealer
October 19, 1999 purchase 2,240 $31.00 regional broker/dealer
October 21, 1999 purchase 264 $31.00 regional broker/dealer
December 1, 1999 purchase 600 $31.00 individual stockholder
December 10, 1999 sale 230 $31.00 two local investors, one of whom is an
executive officer of The Middlefield Banking
Company
December 23, 1999 purchase 2,506 $31.00 individual stockholder
December 24, 1999 sale 2,876 $31.00 five local investors, one of whom is a minor
and grandson of a director of Middlefield
and the bank, another of whom is a minor
child of a branch manager of the bank, and
two of whom were already Middlefield
stockholders
December 31, 1999 purchase 726 $30.50 regional broker/dealer
February 4, 2000 purchase 40,340 $32.50 a trust stockholder
June 19, 2000 sale 1,000 $32.50 local investor who has been a Middlefield
stockholder for many years
December 6, 2000 sale 400 $30.00 regional broker/dealer
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The sales of treasury stock were isolated transactions involving small
quantities of stock issued to a limited number of persons. Middlefield and the
bank did not solicit any purchases or offers to buy and did not engage any
person or firm to solicit purchases or offers on Middlefield's behalf. The
transactions were initiated by the purchasers. No underwriters or agents were
engaged for these issuances of securities, and no commissions or discounts were
paid or given by Middlefield or the bank. The transactions were engaged in by
Middlefield as an accommodation to persons who made known to Middlefield their
desire to buy its common stock, rather than for the purpose of raising capital
or as part of a plan of financing. None of the transactions involved a public
offering or distribution. And all of the investors whose identities are known to
Middlefield are permanent residents of the State of Ohio. Accordingly,
Middlefield claims reliance on the exemptions for offers and sales of securities
provided under Section 3 and Section 4 of the Securities Act of 1933, including
Section 3(a)(11), Section 3(b) and Section 4(2) thereof, and the rules and
regulations of the Securities and Exchange Commission thereunder, including
Regulation D and Rules 147 and 701.
MIDDLEFIELD BANC CORP.
MIDDLEFIELD, OHIO
AUDIT REPORT
DECEMBER 31, 2000
MIDDLEFIELD BANC CORP.
CONSOLIDATED AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Page
Number
--------
Report of Independent Auditors 1
Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 24
|
Board of Directors and Stockholders
Middlefield Banc Corp.
We have audited the accompanying consolidated balance sheet of Middlefield Banc Corp. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Middlefield Banc Corp. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the three years in the period ending December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ S.R. Snodgrass, A.C. Wexford, PA February 16, 2001 |
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
December 31,
2000 1999
------------- -------------
ASSETS
Cash and due from banks ................................................. $ 3,574,875 $ 3,210,556
Federal funds sold ...................................................... 1,265,000 0
------------- -------------
Cash and cash equivalents ............................................... 4,839,875 3,210,556
Interest-bearing deposits in other institutions ......................... 984,441 3,345,522
Investment securities available for sale ................................ 12,781,237 10,582,688
Investment securities held to maturity (estimated market value
of $17,942,255 and $21,719,267) .................................... 17,942,310 22,011,951
Loans ................................................................... 135,304,215 121,227,878
Less allowance for loan losses .......................................... 2,037,322 1,756,137
------------- -------------
Net loans ........................................................... 133,266,893 119,471,741
Premises and equipment ....................................................... 5,432,472 5,619,269
Accrued interest and other assets ............................................ 1,241,585 1,270,726
------------- -------------
TOTAL ASSETS ........................................................ $ 176,488,813 $ 165,512,453
============= =============
LIABILITIES
Deposits:
Noninterest bearing demand .............................................. $ 23,155,904 $ 22,880,016
Interest-bearing demand ................................................. 6,116,094 4,362,509
Money market ............................................................ 9,127,760 12,490,025
Savings ................................................................. 32,260,775 30,474,288
Time .................................................................... 76,505,513 64,887,621
------------- -------------
Total deposits ...................................................... 147,166,046 135,094,459
Short-term borrowings ................................................... 543,222 2,507,670
Other borrowings ........................................................ 9,861,596 9,602,496
Accrued interest and other liabilities .................................. 674,587 618,773
------------- -------------
TOTAL LIABILITIES ................................................... 158,245,451 147,823,398
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized; 1,148,676 shares
issued ............................................................. 6,287,011 6,287,011
Retained earnings ....................................................... 13,343,980 11,702,564
Accumulated other comprehensive income (loss) ........................... 88,811 (90,631)
Treasury stock, at cost (45,722 and 6,782 shares) ....................... (1,476,440) (209,889)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY .......................................... 18,243,362 17,689,055
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 176,488,813 $ 165,512,453
============= =============
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31,
2000 1999 1998
------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans ....................... $ 10,853,292 $ 9,408,603 $ 8,591,369
Interest-bearing deposits in other institutions... 97,037 81,211 147,326
Federal funds sold ............................... 99,320 90,676 143,160
Investment securities:
Taxable interest ............................. 1,195,504 1,281,341 1,404,541
Tax-exempt interest .......................... 525,017 586,788 615,049
------------ ------------ ------------
Total interest income ............... 12,770,170 11,448,619 10,901,445
------------ ------------ ------------
INTEREST EXPENSE
Deposits ......................................... 5,311,657 4,539,351 4,695,850
Short-term borrowings ............................ 64,031 8,425 3,038
Other borrowings ................................. 534,196 500,500 385,727
------------ ------------ ------------
Total interest expense .............. 5,909,884 5,048,276 5,084,615
------------ ------------ ------------
NET INTEREST INCOME ................................... 6,860,286 6,400,343 5,816,830
Provision for loan losses ............................. 275,000 296,000 270,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES .......................... 6,585,286 6,104,343 5,546,830
------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts .............. 823,888 667,220 480,582
Investment securities losses ..................... 0 (606) 0
Other income ..................................... 158,775 137,744 118,189
------------ ------------ ------------
Total noninterest income ............ 982,663 804,358 598,771
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits ................... 2,240,522 2,258,779 2,073,567
Occupancy expense ................................ 320,539 334,199 260,733
Equipment expense ................................ 283,174 235,703 356,419
Data processing costs ............................ 240,658 208,525 103,227
Ohio state franchise tax ......................... 208,457 222,240 230,630
Other expense .................................... 1,115,267 994,928 800,243
------------ ------------ ------------
Total noninterest expense ........... 4,408,617 4,254,374 3,824,819
------------ ------------ ------------
Income before income taxes ............................ 3,159,332 2,654,327 2,320,782
Income taxes .......................................... 922,661 735,318 630,337
------------ ------------ ------------
NET INCOME ............................................ $ 2,236,671 $ 1,919,909 $ 1,690,445
============ ============ ============
EARNINGS PER COMMON SHARE
Basic ........................................ $ 2.02 $ 1.68 $ 1.47
Diluted ...................................... 2.02 1.68 N/A
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------ RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) STOCK EQUITY INCOME
----------- ----------- ------------ ---------- ----------- ------------ -----------
Balance, December 31, 1997 ...... 1,044,506 $ 3,656,718 $ 11,794,961 $ 13,576 0 $ 15,465,255
Net income ...................... 1,690,445 1,690,445 $ 1,690,445
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $161................. 312 312 312
-----------
Comprehensive income............. $ 1,690,757
===========
Cash dividends ($.44 per
share)........................ (499,215) (499,215)
Stock dividend................... 104,170 2,630,293 (2,630,293) 0 0
----------- ----------- ------------ ---------- ----------- ------------
Balance, December 31, 1998 ...... 1,148,676 6,287,011 10,355,898 13,888 0 16,656,797
Net income....................... 1,919,009 1,919,009 1,919,009
Other comprehensive income:
Unrealized loss on available
for sale securities net of
tax benefit of $53,843 ....... (104,519) (104,519) (104,519)
-----------
Comprehensive income............. $ 1,814,490
===========
Cash dividends ($.50 per share) . (572,343) (572,343)
Purchase of treasury stock ...... (306,175) (306,175)
Sale of treasury stock........... 96,286 96,286
----------- ----------- ------------ ---------- ----------- ------------
Balance, December 31, 1999 ...... 1,148,676 6,287,011 11,702,564 (90,631) (209,889) 17,689,055
Net income....................... 2,236,671 2,236,671 2,236,671
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $92,440.............. 179,442 179,442 179,442
-----------
Comprehensive income............. $ 2,416,113
===========
Cash dividends ($.54 per share) . (595,255) (595,255)
Purchase of treasury stock ...... (1,311,050) (1,311,050)
Sale of treasury stock........... 44,499 44,499
----------- ----------- ------------ ---------- ----------- ------------
Balance, December 31, 2000 ...... 1,148,676 $ 6,287,011 $ 13,343,980 $ 88,811 $(1,476,440) $ 18,243,362
=========== =========== ============ ========== =========== ============
|
2000 1999 1998
--------- ---------- --------
Components of comprehensive income:
Change in net unrealized gain (loss) on investments
available for sale.................................................... $ 179,442 $ (104,919) $ 312
Realized losses included in net income, net of tax benefit of $206 ..... 0 400 0
--------- ----------- --------
Total................................................................... $ 179,442 $ (104,519) $ 312
========= ========== ========
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Net income ......................................................... $ 2,236,671 $ 1,919,009 $ 1,690,445
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ..................................... 275,000 296,000 270,000
Depreciation and amortization ................................. 352,613 287,641 319,617
Amortization of premium and discount on investment securities.. 75,563 93,664 104,552
Amortization of net deferred loan costs (fees) ................ 35,489 (112,126) (74,624)
Deferred income taxes ......................................... (87,521) (58,739) (63,599)
Decrease (increase) in accrued interest receivable ............ (59,663) 85,288 99,537
Increase in accrued interest payable .......................... 84,301 18,700 30,757
Other, net .................................................... 39,943 (19,320) 29,579
------------ ------------ ------------
Net cash provided by operating activities ................. 2,952,396 2,510,117 2,406,264
------------ ------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in
other institutions, net .................................. 2,361,081 (1,107,918) (842,604)
Investment securities available for sale:
Proceeds from repayments and maturities ................... 766,880 4,931,129 6,060,071
Purchases ................................................. (2,697,459) (9,970,951) (897,569)
Proceeds from sales........................................ 0 149,885 0
Investment securities held to maturity:
Proceeds from repayments and maturities ................... 3,997,990 8,280,098 3,930,017
Purchases ................................................. 0 0 (8,028,573)
Proceeds from sales ....................................... 0 1,054,648 0
Increase in loans, net ......................................... (14,105,641) (16,927,161) (14,603,783)
Purchase of premises and equipment.............................. (150,361) (520,313) (986,186)
------------ ------------ ------------
Net cash used for investing activities .................... (9,827,510) (14,110,583) (15,368,627)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposits ...................................... 12,071,587 6,266,570 7,345,851
Increase (decrease) in short-term borrowings, net ............. (1,964,448) 2,507,670 0
Proceeds from other borrowings ................................ 2,000,000 1,000,000 6,000,000
Repayment of other borrowings ................................. (1,740,900) (973,706) (1,272,931)
Purchase of treasury stock .................................... (1,311,050) (306,175) 0
Sale of treasury stock ........................................ 44,499 96,286 0
Cash dividends ................................................ (595,255) (572,343) (499,215)
------------ ------------ ------------
Net cash provided by financing activities ................. 8,504,433 8,018,302 11,573,705
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents .......... 1,629,319 (3,582,164) (1,388,658)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................... 3,210,556 6,792,720 8,181,378
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................... $ 4,839,875 $ 3,210,556 $ 6,792,720
============ ============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings ....................... $ 5,825,583 $ 5,029,576 $ 5,053,858
Income taxes .............................................. 1,097,000 735,756 675,175
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:
Middlefield Banc Corp. (the "Company") is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (the "Bank"). The Bank is a state-chartered bank located in Ohio. The Company and its subsidiary derive substantially all of their income from banking and bank-related services which include interest earnings on residential real estate, commercial mortgage, commercial, and consumer financings as well as interest earning on investment securities and deposit services to its customers through four locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions.
The consolidated financial statements of the Company include its wholly-owned subsidiary, the Bank. Significant intercompany items have been eliminated in preparing the consolidated financial statements.
The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statement, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates.
Investment securities are classified at the time of purchase, based on management's intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount which are computed using the interest method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of stockholders' equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank ("FHLB") represents ownership in an institution which is wholly-owned by other financial institutions. This equity security is accounted for at cost and classified as equity securities available for sale.
Loans are reported at their principal amount net of the allowance for loan losses. Interest income is recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower's financial condition is such that collection of interest is doubtful. Interest received on nonaccrual loans is recorded as income against principal according to management's judgment as to the collectibility of such principal.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield. Management is amortizing these amounts over the contractual life of the related loans.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for loan losses represents the amount which management estimates is adequate to provide for potential loan losses in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based on management's periodic evaluation of the adequacy of the allowance for loan losses which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining 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.
A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan in which case the portion of the payment related to interest is recognized as income.
Premises and equipment are stated at cost net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.
The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company maintains a stock option plan for key officers, employees and non-employee directors. When the exercise price of the Company's stock options is greater than or equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company's financial statements. Pro forma net income and earnings per share are presented to reflect the impact of the stock option plan assuming compensation expense had been recognized based on the fair value of the stock options granted under the plan.
On August 14, 2000, the Board of Directors approved a two-for-one stock split. Average shares outstanding and all per share amounts included in the consolidated financial statements are based on the increased number of shares giving retroactive effect to the stock split.
During 1998, retroactive recognition was given for the elimination of the par value of the Company's common stock. This caused surplus to be reduced to zero, with the balance of $2,612,212 being reclassified to common stock. There was no effect on total stockholders' equity.
The Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and due from banks and Federal funds sold.
Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), as amended by Financial Accounting Standards Board Statement No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities-Deferral of the Effective Date of Statement No. 133" (Statement No. 138), is effective in 2001, and requires measuring and recording the change in fair value of derivative instruments. Statement No. 133 is not expected to materially affect the Company's financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement replaces Statement No. 125 and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings based on a control-oriented "financial-components" approach. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
extinguished. The provisions of Statement No. 140 are effective for transactions occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of the provisions of Statement No. 140 is not expected to have a material impact on the Company's financial position or results of operations.
Certain items previously reported have been reclassified to conform with the current year's format. Such reclassifications did not affect net income or stockholders' equity.
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
2000 1999 1998
---------- ---------- ----------
Weighted-average common shares outstanding .................... 1,148,676 1,148,676 1,148,676
Average treasury stock shares ................................. (42,704) (3,426) N/A
--------- --------- ---------
Weighted-average common shares and common stock
equivalents used to calculate basic earnings per share ........ 1,105,972 1,145,250 1,148,676
Additional common stock equivalents (stock options) used
to calculate diluted earnings per share ....................... -- -- N/A
--------- --------- ---------
Weighted-average common shares and common stock
equivalents used to calculate diluted earnings per share ...... 1,105,972 1,145,250 N/A
========= ========= =========
|
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of Investment securities available for sale are as follows:
2000
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
-------------- -------------- ------------- -------------
U.S. Government agency securities........................ $ 3,990,419 $ 70,843 $ (1,419) $4,059,843
Obligations of states and political subdivisions:
Taxable......................................... 1,458,400 11,744 (2,645) 1,467,499
Tax-exempt...................................... 3,685,472 42,258 (16,746) 3,710,984
Corporate securities..................................... 701,306 3,400 (2,800) 701,906
Mortgage-backed securities............................... 1,898,177 29,928 -- 1,928,105
----------- -------- --------- -----------
Total debt securities........................... 11,733,774 158,173 (23,610) 11,868,337
Equity securities........................................ 912,900 -- -- 912,900
----------- -------- --------- -----------
Total.................................. $12,646,674 $158,173 $(23,610) $12,781,237
=========== ======== ========= ===========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
3. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
1999
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
-------------- -------------- ------------- -------------
U.S. Treasury securities................................. $ 499,750 $ 250 $ -- $ 500,000
U.S. Government agency securities........................ 3,984,640 -- 3,939,440
Obligations of states and political subdivisions:
Taxable......................................... 956,782 6,074 (14,109) 948,747
Tax-exempt...................................... 3,550,001 5,019 (71,350) 3,483,670
Corporate securities..................................... 952,034 -- (18,003) 934,031
----------- ------- ---------- -----------
Total debt securities........................... 9,943,207 11,343 (148,662) 9,805,888
Equity securities........................................ 776,800 -- -- 776,800
----------- ------- ---------- -----------
Total.................................. $10,720,007 $11,343 $(148,662) $10,582,688
=========== ======= ========== ===========
|
The amortized cost and estimated market value of debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ form contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
2000
--------------------------------------
Estimated Market
Amortized Cost Value
---------------- ------------------
Due in one year or less................... 3,197,181 3,202,645
Due after one year through five years..... 6,726,243 6,804,532
Due after five through ten years.......... 810,912 845,303
Due after ten years....................... 999,438 1,015,857
----------- -----------
Total............................ $11,733,774 $11,868,337
=========== ===========
|
Investment securities with a carrying value of $6,633,661 and $4,342,453 at December 31, 2000 and 1999, respectively, were pledged to secure deposits and other purposes as required by law.
The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities available for sale for the year ended December 31, 1999. The Company had no sales in 2000 and 1998.
1999
------------
Proceeds from sales .......... $149,885
Gross gains .................. --
Gross losses ................. 116
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
4. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market value of investment securities held to maturity are as follows:
2000
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- ------------- -------------
U.S. Government agency securities........................ $ 1,899,752 $ -- $ (8,565) $ 1,891,187
Obligations of states and political subdivisions:
Taxable......................................... 3,723,251 18,354 (19,685) 3,721,920
Tax-exempt...................................... 7,480,801 26,182 (7,420) 7,499,563
Corporate securities..................................... 4,525,466 7,829 (18,683) 4,514,612
Mortgage-backed securities............................... 313,040 1,933 -- 314,973
----------- ------- --------- -----------
Total........................................... $17,942,310 $54,298 $(54,353) $17,942,255
=========== ======= ========= ===========
|
1999
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- ------------- -------------
U.S. Government agency securities........................ $ 3,030,857 $ -- $ (72,008) $ 2,958,849
Obligations of states and political subdivisions:
Taxable......................................... 3,993,634 2,860 (89,625) 3,906,869
Tax-exempt...................................... 9,275,319 17,984 (58,468) 9,234,835
Corporate securities..................................... 5,712,141 858 (94,285) 5,618,714
----------- ------- ---------- -----------
Total........................................... $22,011,951 $21,702 $(314,386) $21,719,267
=========== ======= ========== ===========
|
The amortized cost and estimated market value of debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
ESTIMATED
AMORTIZED COST MARKET VALUE
---------------- ---------------
Due in one year or less................... 6,045,612 6,047,035
Due after one year through five years..... 11,342,616 11,336,036
Due after five through ten years.......... 141,042 143,591
Due after ten years....................... 413,040 415,593
----------- -----------
Total............................ $17,942,310 $17,942,255
=========== ===========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
4. INVESTMENT SECURITIES HELD TO MATURITY (continued)
Investment securities held to maturity with carrying values of $7,741,881 and $4,531,106 and estimated market values of $7,743,199 and $4,412,866 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and other purposes required by law.
The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities held to maturity for the year ended December 31, 1999. These sales occurred within 90 days of maturity of the security. The Company had no sales in 2000 or 1998.
1999
-----------
Proceeds from sales............................... $1,054,648
Gross gains....................................... --
Gross losses...................................... 490
5. LOANS
|
Major classifications of loans are summarized as follows:
2000 1999
------------ ------------
Commercial and industrial ...... $ 21,508,391 $ 18,587,254
Real estate - construction ..... 2,568,095 2,258,917
Real estate - mortgage:
Residential ........... 101,403,937 89,262,855
Commercial ............ 4,809,088 6,919,271
Consumer installment ........... 5,014,704 4,199,581
------------ ------------
135,304,215 121,227,878
Less allowance for loan losses.. 2,037,322 1,756,137
------------ ------------
Net loans ............. $133,266,893 $119,471,741
============ ============
|
The Company's primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at December 31, 2000 and 1999, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, are as follows:
2000 1999 1998
---------- ---------- ----------
Balance, January 1 ...................... $1,756,137 $1,538,726 $1,334,800
Add:
Provisions charged to operations.... 275,000 296,000 270,000
Recoveries ......................... 61,002 39,822 72,573
Less loans charged-off .................. 54,817 118,411 138,647
---------- ---------- ----------
Balance, December 31 .................... $2,037,322 $1,756,137 $1,538,726
========== ========== ==========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2000 1999
---------- ----------
Land and land improvements .......... $1,094,685 $1,094,685
Building and leasehold improvements . 5,203,258 5,187,773
Furniture, fixtures and equipment ... 1,977,013 1,926,925
Construction in-progress ............ 84,788 --
---------- ----------
8,359,744 8,209,383
Less accumulated depreciation ....... 2,927,272 2,590,114
---------- ----------
Total ...................... $5,432,472 $5,619,269
========== ==========
|
Construction in-progress represents the costs incurred to date for a new branch office of the Bank with an anticipated completion date in 2001. Depreciation charged to operations was $337,158 in 2000, $287,641 in 1999, and $319,617 in 1998.
8. OTHER ASSETS
The components of other assets are as follows:
2000 1999
---------- ----------
Accrued interest on investment securities $ 397,582 $ 440,131
Accrued interest on loans ............... 495,629 393,417
Deferred tax asset, net ................. 268,385 273,304
Other ................................... 79,989 163,874
---------- ----------
Total .......................... $1,241,585 $1,270,726
========== ==========
|
9. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated $11,529,786 and $9,874,865 at December 31, 2000 and 1999, respectively.
Maturities on time deposits of $100,000 or more at December 31, 2000 are as follows:
Within three months ................ $ 2,047,325
Beyond three but within six months.. 815,448
Beyond six but within twelve months. 4,501,893
Beyond one year .................... 4,165,120
-----------
Total ..................... $11,529,786
===========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
10. SHORT-TERM BORROWINGS
The outstanding balances and related information of short-term borrowings which includes securities sold under agreements to repurchase and federal funds purchased are summarized as follows:
2000 1999
------------ ------------
Balance at year-end..................... $ 543,222 $2,507,670
Average balance outstanding............. 1,059,042 143,438
Maximum month-end balance............... 3,581,491 2,507,670
Weighted-average rate at year-end....... 5.43% 4.75%
Weighted-average rate during the year... 6.05% 5.87%
|
Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.
In 1998, the Company entered into a $4,000,000 line of credit at an adjustable rate, currently 9.00 percent, from The State Bank and Trust Company. At December 31, 2000 and 1999, there were no outstanding balances on this line.
11. OTHER BORROWINGS
Other borrowings consist of fixed rate advances from the FHLB as follows:
Interest
Maturity Rate 2000 1999
---------------------------------- --------- ------------ -------------
June 23, 2000..................... 6.25% $ -- $1,000,000
July 1, 2007...................... 6.40% 1,861,596 2,602,496
September 4, 2008................. 5.36% 4,000,000 4,000,000
October 2, 2008................... 4.53% 2,000,000 --
July 28, 2010..................... 6.45% 2,000,000 2,000,000
---------- ----------
Total.................... $9,861,596 $9,602,496
========== ==========
|
Advances from FHLB maturing July 1, 2007 require monthly principal and interest payments and a 20 percent paydown of outstanding principal every July 1. Monthly principal and interest payments are adjusted after each 20 percent paydown. Under terms of a blanket agreement, collateral for the FHLB borrowings are secured by certain qualifying assets of the Bank which consist principally of first mortgage loans.
12. OTHER LIABILITIES
The components of other liabilities are as follows:
2000 1999
-------- --------
Accrued interest on deposits.. $568,277 $483,976
Other ........................ 106,310 134,797
-------- --------
Total ........................ $674,587 $618,773
======== ========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
13. INCOME TAXES
The provision for federal income taxes consists of:
2000 1999 1998
-------------- -------------- --------------
Current payable............................................ $1,010,182 $794,057 $693,936
Deferred................................................... (87,521) (58,739) (63,599)
---------- -------- --------
Total provision............................................ $ 922,661 $735,318 $630,337
========== ======== ========
|
The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
2000 1999
----------- ------------
Deferred tax assets:
Allowance for loan losses................................... $621,654 $528,154
Net unrealized loss on securities........................... -- 46,689
-------- --------
Gross deferred tax assets.......................... 621,654 574,843
-------- --------
Deferred tax liabilities:
Deferred origination fees, net.............................. 141,232 138,043
Premises and equipment...................................... 96,982 114,000
Net unrealized gain on securities........................... 45,751 --
Other....................................................... 69,304 49,496
-------- --------
Gross deferred tax liabilities..................... 353,269 301,539
-------- --------
Net deferred tax assets............................ $268,385 $273,304
======== ========
|
No valuation allowance was established at December 31, 2000 and 1999 in view of the Company's ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company's earnings potential.
The reconciliation between the federal statutory rate and the Company's effective consolidated income tax rate is as follows:
2000 1999 1998
----------------------------- ------------------------------ ---------------------------
% of Pre- % of Pre- % of Pre-
Amount tax income Amount tax income Amount tax income
------------- ------------ -------------- ------------ ----------- ------------
Provision at statutory rate...... $1,074,173 34.0% $ 902,471 34.0% $ 789,066 34.0%
Tax-free income.................. (178,520) (5.7) (200,165) (7.5) (211,818) (9.1)
Nondeductible interest expense... 19,966 0.6 24,813 0.9 31,808 1.4
Other............................ 7,042 0.3 8,199 0.3 21,281 0.9
---------- ------ --------- ----- --------- ------
Actual tax expense and effective
rate.......................... $ 922,661 29.2% $ 735,318 27.7% $ 630,337 27.2%
========== ====== ========= ===== ========= ======
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
14. EMPLOYEE BENEFITS
The Bank maintains a section 401(k) employee savings and investment plan for substantially all employees and officers of the Bank with more than one year of service. The Bank's contribution to the plan is based on 50 percent matching of voluntary contributions up to 6 percent of compensation. An eligible employee can contribute up to 15 percent of salary. Employee contributions are vested at all times, and the Bank contributions are fully vested after 6 years beginning at the second year in 20 percent increments. Contributions for 2000, 1999, and 1998 to this plan amounted to $44,411, $42,149, and $40,559, respectively.
At the annual meeting in May 1999, the Board of Directors approved and stockholders ratified the formation of the 1999 Stock Option Plan (the "Plan"). The Plan will provide for granting incentive stock options and non-qualified stock options for key officers, employees and non-employee directors of the Company. A total of 57,433 shares of authorized and unissued or issued common stock are reserved for issuance under the Plan, which expires ten years from the date of shareholder ratification. The per share exercise price of an option granted will not be less than the fair value of a share of common stock on the date the option is granted. No option shall become exercisable earlier than one year from the date the Plan was approved by the stockholders.
The following table presents share data related to the outstanding options:
Weighted- Weighted-
average average
2000 Exercise Price 1999 Exercise Price
------- -------------- ------- --------------
Outstanding, January 1....... 9,900 $ 31.53 -- $ --
Granted...................... 11,480 24.00 9,900 31.53
Exercised.................... -- -- -- --
Forfeited.................... (400) 31.00 -- --
------- -------
Outstanding, December 31..... 20,980 $ 27.42 9,900 $ 31.53
======= =======
Exercisable at year-end...... 9,500 31.55 -- --
======= =======
|
The following table summarizes the characteristics of stock options at December 31, 2000:
Outstanding Exercisable
----------------------------------------- --------------------------
Contractual Average Average
Exercise Average Exercise Exercise
Grant Date Price Shares Life Price Shares Price
-------------------- ----------- ----------- ------------- ---------- ---------- ------------
June 14, 1999 $31.75 7,000 8.45 $31.75 7,000 $31.75
November 23, 1999 31.00 2,500 8.89 31.00 2,500 31.00
December 11, 2000 24.00 11,480 9.95 24.00 -- --
----------- ----------
20,980 27.42 9,500 $31.55
=========== ==========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
14. EMPLOYEE BENEFITS (CONTINUED)
The Company accounts for the Plan under provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under this Opinion, no compensation expense has been recognized with respect to the Plan because the exercise price fo the Company's employee stock options equals the market price of the underlying stock on the grant date.
For purposes of computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option pricing model. The model requires the use of subjective assumptions which can materially affect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 1999: (1) expected dividend yield was two percent; (2) risk-free interest rate of 5.34 percent; (3) expected volatility of 5.00 percent; and (4) expected lives of options of ten years.
2000
------------
Net income applicable to common stock:
As reported..................................................... $2,236,671
Pro forma....................................................... 2,195,370
Basic net income per common share:
As reported..................................................... $ 2.02
Pro forma....................................................... 1.97
Diluted net income per common share:
As reported..................................................... $ 2.02
Pro forma....................................................... 1.97
|
15. COMMITMENTS
In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent financial instruments with off-balance sheet risk. The contract or notional amounts of those instruments reflect the extent of involvement in particular types of financial instruments which were comprised of the following:
2000 1999
------------ ------------
Commitments to extend credit............. $10,103,358 $12,148,878
Standby letters of credit................ 100,692 45,000
----------- -----------
Total.................................... $10,204,050 $12,193,878
=========== ===========
|
The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Generally, collateral is not required to support financial instruments with credit risk. The terms are typically for a one-year period with an annual renewal option subject to prior approval by management.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
15. COMMITMENTS (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of available commercial and personal lines of credit. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.
The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future funding requirements.
16. REGULATORY RESTRICTIONS
Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount of ten percent of the Bank's common stock and capital surplus.
The Bank is subject to a dividend restriction which generally limits the amount of dividends that can be paid by an Ohio state-chartered bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net profits for the two preceding years less any required transfers to surplus. Under this formula, the amount available for payment of dividends in 2001 is $2,120,415 plus 2001 profits retained up to the date of the dividend declaration.
17. REGULATORY CAPITAL
Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") established five capital categories ranging from "well capitalized" to "critically undercapitalized." Should any institution fail to meet the requirements to be considered "adequately capitalized," it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2000 and 1999, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at least ten percent, six percent, and five percent, respectively.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
17. REGULATORY CAPITAL (CONTINUED)
The Company's actual capital ratios are presented in the following table which shows the Company met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the Company's.
2000 1999
-------------------------------- --------------------------------
Amount Ratio Amount Ratio
-------------- -------------- -------------- --------------
Total Capital
(to Risk-weighted Assets)
-----------------------
Actual......................................... $19,534,601 17.75% $19,068,411 18.39%
For Capital Adequacy........................... 8,802,236 8.00 8,294,511 8.00
To Be Well Capitalized......................... 11,002,795 10.00 10,368,138 10.00
Tier I Capital
(to Risk-weighted Assets)
-----------------------
Actual......................................... $18,154,551 16.50% $17,779,686 17.15%
For Capital Adequacy........................... 4,401,118 4.00 4,147,255 4.00
To Be Well Capitalized......................... 6,601,677 6.00 6,220,883 6.00
Tier I Capital
(to Average Assets)
-----------------
Actual......................................... $18,154,551 10.32% $17,779,686 10.93%
For Capital Adequacy........................... 7,037,304 4.00 6,507,565 4.00
To Be Well Capitalized......................... 8,796,631 5.00 8,134,456 5.00
|
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December 31, are as follows:
2000 1999
--------------------------------- --------------------------------
Carrying Carrying
Value Fair Value Value Fair Value
-------------- --------------- -------------- --------------
Financial assets:
Cash and due from banks................... $ 3,574,875 $ 3,574,875 $ 3,210,556 $ 3,210,556
Interest-bearing deposits in other banks.. 984,441 984,441 3,345,522 3,345,522
Federal funds sold........................ 1,265,000 1,265,000 -- --
Investment securities:
Available for sale................... 12,781,237 12,781,237 10,582,688 10,582,688
Held to maturity..................... 17,942,310 17,942,255 22,011,951 21,719,267
Net loans................................. 133,266,893 135,415,893 119,471,741 120,747,146
Accrued interest receivable............... 893,211 893,211 833,548 833,548
------------ ------------ ------------ ------------
Total.......................... $170,707,967 $172,856,912 $159,456,006 $160,438,727
============ ============ ============ ============
Financial liabilities:
Deposits.................................. $147,166,046 $147,424,151 $135,094,459 $134,595,875
Short-term borrowings..................... 543,222 543,222 2,507,670 2,507,670
Other borrowings.......................... 9,861,596 9,907,000 9,602,496 9,013,319
Accrued interest payable.................. 568,277 568,277 483,976 483,976
------------ ------------ ------------ ------------
Total.......................... $158,139,141 $158,442,650 $147,688,601 $146,600,840
============ ============ ============ ============
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon management's judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:
The fair value is equal to the current carrying value.
The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.
The fair value of loans, certificates of deposit, and other borrowings is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, noninterest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 15.
19. PARENT COMPANY
Following are condensed financial statements for the Company.
CONDENSED BALANCE SHEET
December 31,
-----------------------------------
2000 1999
------------- -------------
ASSETS
Cash and due from banks................................................ $ 502,849 $ 119,125
Interest-bearing deposits in other institutions........................ 26,441 1,028,618
Investment in subsidiary bank.......................................... 17,681,862 16,541,279
Other assets........................................................... 32,210 33
----------- -----------
TOTAL ASSETS................................................................ $18,243,362 $17,689,055
=========== ===========
STOCKHOLDERS' EQUITY........................................................ $18,243,362 $17,689,055
=========== ===========
|
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
INCOME
Dividends from subsidiary bank ............................ $1,335,994 $ 765,617 $1,566,957
Interest income ........................................... 25,600 49,823 8,802
---------- ---------- ----------
Total income .......................................... 1,361,594 815,440 1,575,759
---------- ---------- ----------
EXPENSES ....................................................... 86,065 55,704 7,614
---------- ---------- ----------
Income before equity in undistributed net income of subsidiary.. 1,275,529 759,736 1,568,145
Equity in undistributed net income of subsidiary ............... 961,142 1,159,273 122,300
---------- ---------- ----------
NET INCOME ..................................................... $2,236,671 $1,919,009 $1,690,445
========== ========== ==========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
19. PARENT COMPANY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income .............................................................. $ 2,236,671 $ 1,919,009 $ 1,690,445
Adjustments to reconcile net income to cash provided by operating
activities:
Equity in undistributed net income of subsidiary ................... (961,142) (1,159,273) (122,300)
Other .............................................................. (32,176) (898) 612
----------- ----------- -----------
Net cash provided by operating activities ....................... 1,243,353 758,838 1,568,757
----------- ----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in other institutions... 1,002,177 (389,814) (563,804)
Investment securities available for sale:
Proceeds from repayments and maturities ............................ -- 1,500,000 --
Purchases .......................................................... -- (1,500,000) --
Investment securities held to maturity:
Proceeds from repayments and maturities ............................ -- 500,000 --
Purchases .......................................................... -- -- (505,597)
----------- ----------- -----------
Net cash provided by (used for) investing activities ............ 1,002,177 110,186 (1,069,401)
----------- ----------- -----------
FINANCING ACTIVITIES
Purchase of treasury stock .............................................. (1,311,050) (306,175) --
Sale of treasury stock .................................................. 44,499 96,286 --
Cash dividends .......................................................... (595,255) (572,343) (499,215)
----------- ----------- -----------
Net cash used for financing activities .......................... (1,861,806) (782,232) (499,215)
----------- ----------- -----------
Increase in cash ................................................ 383,724 86,792 141
CASH AT BEGINNING OF YEAR .................................................... 119,125 32,333 32,192
----------- ----------- -----------
CASH AT END OF YEAR .......................................................... $ 502,849 $ 119,125 $ 32,333
=========== =========== ===========
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
-----------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
---------- ---------- ---------- ----------
Total interest income ............................... $3,050,487 $3,141,341 $3,268,702 $3,309,640
Total interest expense .............................. 1,357,310 1,409,416 1,542,773 1,600,385
---------- ---------- ---------- ----------
Net interest income ................................. 1,693,177 1,731,925 1,725,929 1,709,255
Provision for loan losses ........................... 75,000 75,000 75,000 50,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses . 1,618,177 1,656,925 1,650,929 1,659,255
Total noninterest income ............................ 219,897 224,333 247,238 291,195
Total noninterest expense ........................... 1,045,414 1,097,167 1,072,384 1,193,652
---------- ---------- ---------- ----------
Income before income taxes .......................... 792,660 784,091 825,783 756,798
Income taxes ........................................ 235,370 232,000 254,000 201,291
---------- ---------- ---------- ----------
Net income .......................................... $ 557,290 $ 552,091 $ 571,783 $ 555,507
========== ========== ========== ==========
Per share data:
Net income
Basic .......................................... $ 0.50 $ 0.50 $ 0.52 $ 0.50
Diluted ........................................ 0.50 0.50 0.52 0.50
Average shares outstanding
Basic .......................................... 1,117,069 1,101,675 1,101,554 1,101,663
Diluted ........................................ 1,117,069 1,101,675 1,101,554 1,101,663
|
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
----------- ----------- ----------- -----------
Total interest income ............................... $ 2,715,174 $ 2,838,296 $ 2,941,186 $ 2,953,963
Total interest expense .............................. 1,249,587 1,253,208 1,266,810 1,278,671
----------- ----------- ----------- -----------
Net interest income ................................. 1,465,587 1,585,088 1,674,376 1,675,292
Provision for loan losses ........................... 108,000 108,000 78,000 2,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses . 1,357,587 1,477,088 1,596,376 1,673,292
Investment securities losses ........................ -- -- -- (606)
Total noninterest income ............................ 147,828 191,778 210,531 254,827
Total noninterest expense ........................... 1,083,977 1,040,348 1,031,520 1,098,529
----------- ----------- ----------- -----------
Income before income taxes .......................... 421,828 628,518 775,387 828,984
Income taxes ........................................ 97,556 160,000 216,000 261,762
----------- ----------- ----------- -----------
Net income .......................................... $ 323,882 $ 468,518 $ 559,387 $ 567,222
----------- ----------- ----------- -----------
Per share data:
Net income
Basic .......................................... $ 0.28 $ 0.41 $ 0.49 $ 0.50
Diluted ........................................ 0.28 0.41 0.49 0.50
Average shares outstanding
Basic .......................................... 1,147,808 1,145,124 1,145,124 1,142,993
Diluted ........................................ 1,147,808 1,145,124 1,145,124 1,142,993
|
INDEX TO EXHIBITS
3.1 Second Amended and Restated Articles of Incorporation of
Middlefield Banc Corp.
3.2 Regulations of Middlefield Banc Corp.
4 Specimen common stock certificate
10.1 1999 Stock Option Plan of Middlefield Banc Corp.
10.2 Severance Agreement of President and Chief Executive Officer
10.3 Severance Agreement of Executive Vice President
10.4 Federal Home Loan Bank of Cincinnati Agreement for Advances and
Security Agreement dated September 14, 2000
21 Subsidiaries of Middlefield Banc Corp.
|
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
MIDDLEFIELD BANC CORP.
(Registrant)
April 17, 2001
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ --------------
3.1 Second Amended and Restated Articles of Incorporation of
Middlefield Banc Corp.
3.2 Regulations of Middlefield Banc Corp.
4 Specimen common stock certificate
10.1 1999 Stock Option Plan of Middlefield Banc Corp.
10.2 Severance Agreement of President and Chief Executive Officer
10.3 Severance Agreement of Executive Vice President
10.4 Federal Home Loan Bank of Cincinnati Blanket Agreement for
Advances and Security Agreement dated September 14, 2000
21 Subsidiaries of Middlefield Banc Corp.
|
EXHIBIT 3.1
Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp.
FIRST: The name of the Corporation shall be Middlefield Banc Corp.
SECOND: The place in Ohio where its principal office is to be located is the Village of Middlefield in Geauga County, but the Corporation may establish and maintain its principal office, or other offices, at other places in the United States of America, as its Board of Directors may, from time to time, determine.
THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be formed under Chapter 1701 of the Ohio Revised Code.
FOURTH: The maximum number of shares the Corporation shall have authority to issue and to have outstanding at any time shall be Five Million (5,000,000) shares of Common Stock, without par value. Each share of Common Stock shall be equal to every other share of Common Stock. The holders thereof shall have such rights as are provided by law and, except as otherwise provided herein or as required by law, shall be entitled to one vote for each whole share held by them upon all matters presented to shareholders. The shares of Common Stock may be issued in whole or fractional shares.
FIFTH: The authority of this Corporation, its shareholders and directors, is subject to the following:
(a) No holder of shares of this Corporation, regardless of class, shall be entitled as a matter of right to exercise any preemptive rights, to subscribe for or to purchase shares of any class, now or hereafter authorized, or to purchase or subscribe for securities that are convertible into or exchangeable for shares of the Corporation, regardless of class, or to which shall be attached or appertain any warrants or rights entitling the holder thereof to subscribe for or purchase shares of the Corporation, regardless of class, except such rights to subscribe for or purchase, at such prices and according to such terms and conditions as the Board of Directors may, from time to time, approve and authorize in its sole discretion.
(b) The Corporation may from time to time purchase or otherwise acquire its shares, regardless of class, upon such terms and conditions as the Board of Directors shall determine, without action by the shareholders; provided, however, that the Corporation shall not purchase any of its shares if, after such purchase, the Corporation's assets would be less than the sum of its liabilities and stated capital.
(c) No shareholder shall have the right to vote cumulatively in the election or removal of directors or otherwise.
SIXTH:
(a) Except as otherwise expressly provided in this Article
SIXTH, any Business Combination (as hereinafter defined) with an
Interested Party (as hereinafter defined) or any Affiliate, as defined
in Rule 12b-2 of the General Rules and Regulations of the Securities
and Exchange Commission promulgated under the Securities Exchange Act
of 1934, of an Interested Party shall require the affirmative vote of
(i) at least two-thirds (2/3) of the outstanding shares of each class
of capital stock of the Corporation issued and outstanding and entitled
to vote as a class and (ii) a majority of each class of those shares of
capital stock of the Corporation issued and outstanding and entitled to
vote as a class other than those shares beneficially owned by an
Interested Party and any Affiliate thereof. For purposes of this
Article SIXTH, an "Interested Party" is defined as a corporation,
person or entity that, together with all Affiliates thereof, is the
beneficial owner, directly or indirectly, of ten percent (10%) or more
of the shares of any class of capital stock of the Corporation issued
and outstanding and entitled to vote.
(b) The provisions of this Article SIXTH set forth in paragraph (a) hereof shall not apply to any Business Combination:
(1) with an Interested Party if the Board of Directors of the Corporation shall have approved by resolution a memorandum of understanding or agreement with the Interested Party for a transaction substantially consistent with such Business Combination, provided that such Board approval occurs before or at the time the Interested Party (together with its Affiliates) became the beneficial owner, directly or indirectly, of ten percent (10%) or more of any class of the outstanding shares of capital stock of the Corporation; or
(2) (i) that has been approved at any time before consummation thereof by a two-thirds (2/3) vote of the total membership of the Board of Directors of the Corporation and a majority of the Continuing Directors (as hereinafter defined) of the Corporation at the time of said vote; and
(ii) that provides for a price to be paid in cash for the shares of capital stock of the Corporation in an amount not less than the highest price, including commissions, previously paid by the Interested Party for any of the shares of the Corporation's capital stock of that class.
(c) For purposes of this Article SIXTH, an Interested Party shall be deemed to be the beneficial owner of any shares of capital stock of the Corporation if such Interested Party would be deemed the beneficial owner of such shares under the General Rules and Regulations of the Securities and Exchange Commission promulgated under Section 13(d) of the Securities Exchange Act of 1934.
(d) For purposes of this Article SIXTH, a majority of the Continuing Directors shall, on the basis of information then known to it, determine (i) whether any Interested Party beneficially owns, together with its Affiliates, directly or indirectly, ten percent (10%) or more of a class of the outstanding shares of capital stock of the Corporation entitled to vote as a class, (ii) whether any sale, lease, exchange or other disposition of part of the assets of the Corporation involves substantially all of the assets of the Corporation, (iii) whether the memorandum of understanding or agreement referred to above is substantially consistent with the transaction to which it relates, and (iv) if an Interested Party purchases capital stock for consideration other than cash, the "price" paid by the Interested Party for such capital stock. A majority of the Continuing Directors may determine that a corporation, person or other entity purchasing shares of capital stock of any class directly from the Corporation shall not be deemed to be an Interested Person because of such purchase, provided that such determination is made before or at the same time as the purchase of such shares. That determination by the Continuing Directors shall be conclusive and binding for all purposes of this Article SIXTH.
(e) A Business Combination, for the purposes of this Article SIXTH, shall mean:
(1) any merger or consolidation of the Corporation, or a subsidiary of the Corporation, into or with any other person, corporation or entity; or
(2) any sale, lease, mortgage, pledge, transfer or other disposition of all or substantially all of the assets of the Corporation to or with any other corporation, person or entity; or
(3) any reclassification of securities (including a reverse stock split) or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any subsidiaries or any other transaction which has the effect of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any subsidiary which is directly or indirectly owned by any corporation, person or other entity; or
(4) the issuance or transfer by the Corporation or any subsidiary (in one transaction or a series of transactions) of a number or amount of securities equal to five percent (5%) or more of the then outstanding number or amount of any class of the Corporation's securities to a corporation, person or other entity; or
(5) the adoption of any plan for liquidation or dissolution of the Corporation proposed by or on behalf of any corporation, person or entity.
(f) For purposes of this Article SIXTH, the term Continuing Directors shall mean those members of the Board of Directors of the Corporation elected by the shareholders, or otherwise appointed, before an Interested Party and any Affiliate beneficially owned four percent (4%) of the shares of a class of the capital stock of the Corporation issued and outstanding and entitled to vote, and any person recommended to succeed a Continuing Director by a majority of the Continuing Directors.
(g) Although Article SEVENTH may provide for a lesser vote for amendment of these Articles of Incorporation, this Article SIXTH may not be amended except by the affirmative vote of the holders of at least two-thirds (2/3) of the shares of each class of capital stock of the Corporation issued and outstanding and entitled to vote as a class, and by the affirmative vote of a majority of shares of each class of capital stock of the Corporation issued and outstanding and entitled to vote as a class other than those shares beneficially owned by an Interested Party and any Affiliate thereof; provided, however, that the only vote
required for amendment shall be the affirmative vote of the holders of two-thirds (2/3) of the issued and outstanding shares if the Board of Directors of the Corporation proposes the amendment by resolution approved by two-thirds (2/3) of the total membership of the Board of Directors and, if applicable, by a majority of the Continuing Directors.
SEVENTH: Notwithstanding any provision of any statute of the State of Ohio, now or hereafter in force, requiring for any purpose the vote of the holders of shares entitling them to exercise two-thirds or any other proportion of the voting power of the Corporation, these Articles of Incorporation may be amended by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the Corporation, except as otherwise expressly required by these Articles of Incorporation, including Article SIXTH.
Anything in the regulations of the Corporation to the contrary notwithstanding, the regulations of the Corporation may be amended by the affirmative vote of the holders of shares entitling them to exercise two thirds (2/3) of the voting power of the Corporation; provided, however, that the regulations may be amended by the affirmative vote of the holders of a majority of the voting power of the Corporation if the amendment is first approved by the Board of Directors and, if applicable, by a majority of the Continuing Directors.
EIGHTH: These Second Amended and Restated Articles of Incorporation shall supersede the existing amended and restated articles of incorporation and amendments thereto.
EXHIBIT 3.2
REGULATIONS
OF
MIDDLEFIELD BANC CORP.
ARTICLE I
SHAREHOLDERS
SECTION 1 - MEETINGS; ANNUAL MEETING. Meetings of the shareholders of the Corporation shall be held at the principal office of the Corporation, or at such other place as may be designated by the Board of Directors and specified in the notice of such meeting within or without the State of Ohio. The Annual Meeting of the shareholders of the Corporation shall be held on the second Wednesday following the first Monday in May of each year, or on the next business day if the second Wednesday is a legal holiday, at such hour as the Board of Directors may determine, or on such other date as the Board of Directors shall determine. The Annual Meeting shall be held for the purpose of electing directors and transacting such other business as may properly come before the meeting.
SECTION 2 - SPECIAL MEETINGS. (a) Special meetings of the shareholders of the Corporation may be held on any business day and may be called by the Chairman of the Board or the President, by the Board acting at a meeting, by a majority of the directors acting without a meeting or by persons who hold not less than twenty-five percent (25%) of all shares outstanding and entitled to vote at the special meeting.
(b) A request for a special meeting of shareholders shall be in writing and shall state the object(s) for which the meeting is to be called and the business to be considered and transacted at the meeting. The special meeting shall be confined to the objects stated in the request. The request for a special meeting of shareholders shall be delivered either in person or by registered mail to the President or the Secretary by any person(s) entitled to call a special meeting of shareholders. The President or the Secretary shall forthwith cause to be given to the shareholders notice of a meeting to be held on a date no fewer than ten (10) and no more than ninety (90) days after the receipt of such request, as the President or Secretary may fix. If the notice is not given within fifteen (15) days after the delivery or mailing of the request for a special meeting, the person(s) calling the special meeting may fix the time of the special meeting and give notice thereof in the manner provided by law or these Regulations, or cause such notice to be given by any designated representative.
SECTION 3 - NOTICE OF MEETINGS. No fewer than ten (10) days and no more than ninety (90) days before the date fixed for a meeting of shareholders, written notice stating the time, place and purpose(s) of such meeting shall be given by or at the direction of the President or the Secretary, or any other person or persons required or permitted by these Regulations to give notice. The notice shall be given by personal delivery or by mail to each shareholder of record as of the day preceding the day on which notice is given or, if a record date therefor is duly fixed, of record as of the record date. If mailed, the notice shall be addressed to the shareholders at their respective addresses as they appear on the records of the Corporation. Notice of the time, place and purpose(s) of any meeting of shareholders may be waived in writing by any shareholder either before or after the holding of such meeting, which writing shall be filed with or entered upon the records of the meeting. Attendance of any shareholder at a shareholders' meeting shall be deemed a waiver by him of notice of such meeting, unless the shareholder protests the lack of notice before or at commencement of the meeting.
SECTION 4 - QUORUM; ADJOURNMENT. Except as may be otherwise provided by law or by the Articles of Incorporation (as amended or restated or as the same may be amended or restated hereafter, the "Articles"), at any meeting of the shareholders the holders of the shares entitling them to exercise a majority of the voting power of the Corporation present in person or by proxy shall constitute a quorum for such meeting; provided, however, that no action required by law, the Articles or these Regulations to be authorized or taken by a designated proportion of the shares of the Corporation may be authorized or taken by a lesser proportion; and, provided further, that the holders of a majority of the voting shares represented at a meeting, regardless of whether a quorum is present, may adjourn the meeting from time to time. If any meeting is adjourned, notice of such adjournment need not be given if the time and place to which it is adjourned are fixed and announced at the meeting.
SECTION 5 - PROXIES. Any shareholder entitled to vote at a meeting of the shareholders may vote in person or may be represented and vote by proxy appointed by an instrument in writing, signed by the shareholder or by his duly authorized agent, or by proxy appointed by a verifiable communication that is authorized by the shareholder. For purposes of these Regulations, a verifiable communication is one that creates a record capable of authentication, including but not limited to a telegram, a cablegram or electronic mail, or an electronic, telephonic or other transmission appearing to have been transmitted by the shareholder. No appointment of a proxy shall be valid after the expiration of eleven months after it is made, unless the writing or verifiable communication specifies the date on which it is to expire or the length of time it is to continue in force. Unless the writing or verifiable communication appointing a proxy otherwise provides, each proxy shall have the power of substitution and,
where three or more proxies are appointed, a majority of them or of their substitutes may appoint one or more substitutes to act for all.
The presence at a meeting of the person appointing a proxy shall not revoke the appointment. Without affecting any vote previously taken, the person appointing a proxy may revoke the appointment by a later appointment received by the Corporation or by giving notice of the revocation to the Corporation in writing or in open meeting. A proxy shall not be revoked by the death or incompetence of the maker unless, before the vote is taken or the authority granted is otherwise exercised, written notice of the death or incompetence of the maker is given to the Corporation by the executor or administrator of the estate of the maker or by the fiduciary having control of the shares in respect of which the proxy was appointed.
SECTION 6 - APPROVAL AND RATIFICATION OF ACTS OF OFFICERS AND BOARD. Except as otherwise provided by the Articles or by law, any contract, act, or transaction, prospective or past, of the Corporation, or of the Board or of the officers may be approved or ratified by the affirmative vote at a meeting of the shareholders, or by written consent with or without a meeting, of the holders of shares entitling them to exercise a majority of the voting power of the Corporation, and such approval or ratification shall be as valid and binding as though affirmatively voted for or consented to by every shareholder of the Corporation.
SECTION 7 - VOTING. Except as otherwise expressly required by law, the Articles or these Regulations, at any meeting of shareholders at which a quorum is present a majority of the votes cast, whether in person or by proxy, on any matter properly brought before such meeting in accordance with these Regulations will be the act of the shareholders. An abstention shall not represent a vote cast. The vote upon any question brought before a meeting of the shareholders may be by voice vote, unless otherwise required by law, the Articles or these Regulations or unless the presiding officer otherwise determines.
SECTION 8 - ORDER OF BUSINESS. (a) The Chairman of the Board, or such other officer of the Corporation as provided in these Regulations or designated by Board of Directors, will call meetings of shareholders to order and will act as presiding officer thereof. Unless otherwise determined by the Board of Directors prior to the meeting, the presiding officer of the meeting of shareholders will also determine the order of business and have authority in his or her sole discretion to regulate the conduct of any such meeting, including without limitation authority to decide who (other than shareholders of the Corporation or their duly appointed proxies) may attend shareholders' meetings; authority to decide whether any shareholder or his proxy shall be excluded from a meeting of shareholders based upon the presiding officer's determination, in his sole discretion, that the shareholder or his proxy has unduly disrupted or is likely to disrupt the proceedings of the meeting; and authority to determine the circumstances in which any person may make a statement or ask questions at any meeting of shareholders.
(b) At an annual meeting of the shareholders, the only business that
will be conducted or considered is such business as is properly brought before
the meeting. To be properly brought before an annual meeting, business must be
(i) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the President or the Secretary in accordance with these
Regulations, (ii) otherwise properly brought before the meeting by the presiding
officer or by or at the direction of the Board, or (iii) otherwise properly
submitted by a shareholder of the Corporation for a vote at the meeting in
accordance with these Regulations.
(c) For business to be properly submitted by a shareholder for a vote
at an annual meeting, the shareholder must (i) be a shareholder of record as of
the record date for the meeting, (ii) be entitled to vote at the meeting, and
(iii) have given timely notice in writing of the proposal to be submitted by the
shareholder for a vote. The shareholder's notice must be delivered to the
Secretary at the Corporation's principal executive offices.
(d) To be timely, a shareholder's notice must be received by the Secretary at least 60 calendar days before the date corresponding to the date on which the Corporation's proxy materials were mailed to shareholders for the annual meeting in the preceding year, and no more than 120 calendar days before that date; provided, however, if the date of the annual meeting is changed by more than 30 calendar days from the date corresponding to the date of the preceding year's annual meeting, or if the Corporation did not hold an annual meeting in the preceding year, then the shareholder's notice will be considered timely if it is received by the Secretary a reasonable time before the Corporation mails its proxy materials for the annual meeting, but in any event at least 30 days before the Corporation mails its proxy materials for the annual meeting. A shareholder's notice to the Secretary must set forth as to each matter the shareholder proposes to bring before the annual meeting:
(A) a description in reasonable detail of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting,
(B) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal is
made,
(C) the class and number of shares of the Corporation that are owned beneficially and of record by the shareholder proposing such business and by the beneficial owner, if any, on whose behalf the proposal is made, and
(D) any material interest of such shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made in such business.
Nothing in these Regulations affects any right of shareholders to request inclusion of proposals in the Corporation's proxy statement in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, provided the Corporation has securities registered under Section 12 of the Securities Exchange Act of 1934, or the limitations and obligations imposed under Rule 14a-8 on any shareholder requesting inclusion of a proposal under that rule.
(e) At a special meeting of shareholders, the only business that will be conducted or considered is such business as is properly brought before the meeting. To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the President or the Secretary (or in case of their failure to give any required notice, the other persons entitled to give notice) in accordance with these Regulations or (ii) otherwise brought before the meeting by the presiding officer or by or at the direction of the Board.
(f) The determination of whether any business to be brought before an annual or special meeting of the shareholders is properly brought before that meeting will be made by the presiding officer of the meeting. If the presiding officer determines that any business is not properly brought before the meeting, he or she will so declare to the meeting and that business will not be conducted or considered.
SECTION 9 - RECORD DATE; CLOSING THE TRANSFER BOOKS. For any lawful purposes, including without limitation, the determination of the shareholders who are entitled to:
(a) receive notice of or to vote at a meeting of shareholders;
(b) receive payment of any dividend or distribution;
(c) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to contract rights with respect thereto; or
(d) participate in the execution of written consents, waivers or releases,
the Board may fix a record date, which shall not be a date earlier than the date
on which the record date is fixed and, in the cases provided for in clauses (a),
(b) and (c) above, shall not be more than ninety (90) days before the date of
the meeting of shareholders or the date fixed for the payment of any dividend or
distribution, or the date fixed for the receipt or the exercise of rights, as
the case may be. The record date for the purpose of the determination of the
shareholders who are entitled to receive notice of or to vote at a meeting of
shareholders shall continue to be the record date for all adjournments of the
meeting, unless the Board or the persons who shall have fixed the original
record date shall, subject to the limitations set forth in this Article, fix
another date. In case a new record date is so fixed, notice of the new record
date and of the date to which the meeting shall have been adjourned shall be
given to shareholders of record as of the new record date in accordance with the
same requirements as those applying to a meeting newly called. The Board may
close the share transfer books against transfers of shares during the whole or
any part of the period provided for herein, including the date of the meeting of
shareholders and the period ending with the date, if any, to which adjourned.
ARTICLE II
SHARES
SECTION 1 - FORM OF CERTIFICATES AND SIGNATURES. Certificates for shares may be issued to each shareholder in such form as shall be approved by the Board of Directors. Certificates for shares shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer of the Corporation. Certificates for shares shall certify the number and class of shares held in the Corporation, but no certificate for shares shall be executed or delivered until those shares are fully paid. When a certificate is countersigned by an incorporated transfer agent or registrar, the signature of any of said officers of the Corporation may be facsimile, engraved, stamped or printed. Although any officer of the Corporation whose manual or facsimile signature is affixed to a certificate so countersigned ceases to be an officer before the certificate is delivered, the certificate nevertheless shall be effective in all respects when delivered. The directors may provide by resolution that some or all of any or all classes and series of shares shall be uncertificated shares, as provided in the Ohio General Corporation Law Section 1701.24.
SECTION 2 - TRANSFER OF SHARES. Shares of the Corporation shall be transferable upon the books of the Corporation by the holders thereof in person, or by a duly authorized attorney, upon surrender and cancellation of certificates (in the case of certificated shares) for a like number of shares of the same class or series, with duly executed assignment and power of transfer endorsed thereon or attached thereto, and with such proof of the
authenticity of the signatures to the assignment and power of transfer as the Corporation or its agents may reasonably require.
SECTION 3 - LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate for shares in place of any certificate theretofore issued by it and alleged to have been lost, stolen or destroyed. However, the Board may, in its discretion, require the owner, or his legal representatives, to give the Corporation a written affidavit that the certificate has been lost, stolen or destroyed and a bond or indemnity satisfactory to the Board, which shall contain such terms as the Board may require to protect the Corporation or any person injured by the execution and delivery of a new certificate.
SECTION 4 - TRANSFER AGENTS AND REGISTRARS. The Board may appoint, or revoke the appointment of, transfer agents and registrars and may require all certificates for shares to bear the signatures of transfer agents and registrars, or any of them. The Board shall have authority to make all such rules and regulations as the Board may deem expedient concerning the issue, transfer and registration of certificated and uncertificated shares of the Corporation.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1 - AUTHORITY. Except where the law, the Articles or these Regulations require action to be authorized or taken by the shareholders, all of the authority of the Corporation shall be exercised by or under the direction of the Board of Directors.
SECTION 2 - NUMBER; ELECTION; QUALIFICATIONS; CLASSIFICATION. (a) The Board of Directors of the Corporation shall consist of no fewer than five (5) and no more than twenty-five (25) directors, the exact number of directors being fixed from time to time within that range (i) by the Board or (ii) at an annual meeting, by the affirmative vote of holders of a majority of the voting power of the Corporation represented at the meeting. No reduction in the number of directors constituting the Board of Directors may shorten the term of any incumbent director. Beginning with the election of directors at the annual meeting in the year 2001 and thereafter, directors may be elected by the shareholders at annual meetings of shareholders only. Directors shall be elected by plurality vote of all votes cast. Election of directors of the Corporation need not be by written ballot unless requested by the presiding officer or by the holders of a majority of the voting power of the Corporation. A director need not be a shareholder of the Corporation.
(b) At any time when the number of directors (including vacancies) of
the Corporation is less than six, as determined in accordance with Article III,
Section 2(a), the directors elected thereafter will hold office for a term of
one year, expiring at the annual meeting of shareholders at which their
successors are elected. At any time when the number of directors (including
vacancies) of the Corporation is six or more, as determined in accordance with
Article III, Section 2(a), the directors will be classified into at least two
classes, as nearly equal in number as possible and consisting of no fewer than
three directors in each class, designated Class I, Class II and, if there are
nine or more directors, Class III. The members of each class shall hold office
until their successors are elected. At each annual meeting of the shareholders
of the Corporation, the successors of the class of directors whose terms expire
at that meeting shall be elected by plurality vote of all votes cast at such
meeting to hold office for a term expiring (i) at the annual meeting of
shareholders held in the second year following the year of their election, if
there are two classes of directors, or (ii) at the annual meeting of
shareholders held in the third year following the year of their election, if
there are three classes of directors.
Unless directors are elected at a special meeting before the annual meeting in 2001 to different terms and unless there are nine or more directors divided among three classes, directors elected at the annual meeting in 2001 and at the annual meeting in 2002 shall be elected for full two-year terms or transitional one-year terms so that, at the annual meeting in 2002 and at annual meetings thereafter, one of the two classes of directors stands for election at that annual meeting to a two-year term. Likewise, if there are nine or more directors, directors shall be apportioned among three classes, and one or more classes may be elected to a transitional term of less than three years so that one of the three classes stands for election in each year.
SECTION 3 - NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Any vacancy (including newly created directorships resulting from an increase in the number of directors and vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other cause) may be filled by the affirmative vote of (i) a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, or (ii) the shareholders after a vote to increase the number of directors at a meeting called for that purpose. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor has been elected. When the number of directors is
increased, newly established directorships shall be apportioned among the classes so as to make all classes as nearly equal in number as possible.
SECTION 4 - NOMINATIONS. Nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote in the election of directors. However, a shareholder may nominate a director if and only if the shareholder gives timely written notice of his or her intent to make the nomination or nominations. The shareholder's notice shall be given either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation. To be timely, a shareholder's notice must be received by the Secretary within the time limits set forth in these Regulations for a shareholder's submission of business for a vote at an annual meeting.
The shareholder's notice of his or her intent to make a nomination must set forth the following:
(a) the name and address, as they appear on the Corporation's books, of the shareholder giving the notice and of the beneficial owner, if any, on whose behalf the nomination is made, as well as the name and address of each person(s) nominated by the shareholder;
(b) a representation that the shareholder giving the notice is a holder of record of stock of the Corporation entitled to vote at the annual meeting and that the shareholder intends to appear in person or by proxy at the annual meeting to nominate the person(s) specified in the notice;
(c) the class and number of shares of stock of the Corporation owned beneficially and of record by the shareholder giving the notice and by the beneficial owner, if any, on whose behalf the nomination is made;
(d) a description of all arrangements or understandings between or among any of (A) the shareholder giving the notice, (B) the beneficial owner on whose behalf the notice is given, (C) each nominee, and (D) any other person(s) (naming such person(s)) pursuant to which the nomination or nominations are to be made by the shareholder giving the notice;
(e) such other information regarding each nominee proposed by the shareholder giving the notice as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and
(f) the signed consent of each nominee to serve as a director of the Corporation if so elected.
If the presiding officer determines that a nomination was not made in accordance with these Regulations, the presiding officer of the annual meeting will so declare to the meeting, and the defective nomination will be disregarded. Notwithstanding the foregoing provision of these Regulations, a shareholder must also comply with all applicable requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder with respect to the matters set forth in these Regulations, provided the Corporation has securities registered under Section 12 of the Securities Exchange Act of 1934.
SECTION 5 - RESIGNATION; REMOVAL. No director may be removed during the term of office for which he or she was elected, by shareholders or otherwise, except for good cause, and if removed by shareholders for good cause, only by the holders of a majority of the voting power of the Corporation. Any director may resign at any time by oral statement to that effect made at a meeting of the Board or in writing to that effect delivered to the Secretary. The director's resignation shall take effect immediately or at such other time as the director may specify.
SECTION 6 - MEETINGS. For the purpose of electing officers and transacting any other business, a regular meeting of the Board of Directors may be held immediately after the annual meeting of the shareholders. Other regular meetings of the Board may be held at such other time and place either within or without the State of Ohio as may from time to time be determined by the Board; provided that, the Board of Directors shall meet no less frequently than once per calendar quarter. Notice of regular meetings of the Board of Directors need not be given.
Special meetings of the Board of Directors may be called by the Chairman, the President or any two (2) or more members of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given to each director. Every notice of a special meeting of directors shall state the time and place of the meeting, but it need not state the purpose(s) thereof. Notice may be given by mail, addressed to the director at his or her customary mailing address or usual place of business, at least two (2) days before the day on which the meeting is held. Notice may also be given personally or by telephone, telegram, cablegram, telex, facsimile, or other communication. Special meetings of the Board of Directors may be held at such time and place either within or without the State of Ohio as is determined by the Board or specified in the notice of any such meeting.
Written notice of meetings of the Board of Directors may be waived in writing by any director. The presence of a director at a meeting of the Board of Directors shall be deemed a waiver by him of notice of such meeting, unless he or she protests the lack of proper notice before or at commencement of the meeting.
SECTION 7 - QUORUM AND VOTE. A majority of the directors then in office shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which a quorum is present will be the act of the Board of Directors. If a quorum is not present at any meeting of the Board of Directors, the directors present may adjourn the meeting from time to time to another time or place, without notice other than announcement at the meeting, until a quorum is present.
SECTION 8 - COMMITTEES. The Board of Directors may from time to time create an executive committee and any other committee or committees of directors. Consistent with the Ohio General Corporation Law, the Articles and these Regulations, the Board may delegate to such committee or committees any of its authority other than that of filling vacancies among the Board of Directors or in any committee of the Board of Directors. The Board of Directors may appoint one or more directors as alternate members of any such committee to take the place of absent committee members at meetings of the committee. Unless otherwise ordered by the Board of Directors, a majority of the members of any committee appointed by the Board of Directors shall constitute a quorum at any meeting thereof, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee. Each committee shall prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board of Directors. Each committee will keep a written record of all action taken by it.
SECTION 9 - PARTICIPATION IN MEETINGS BY COMMUNICATIONS EQUIPMENT. Meetings of the Board of Directors or of any committee of the Board of Directors may be held through any means of communications equipment if all persons participating can hear each other. Such participation will constitute presence in person at the meeting.
SECTION 10 - CONTRACTS. Because it is in the best interest of the Corporation to attract as directors individuals with diverse business interests, some of whom are likely to be connected with other corporations with which, from time to time, the Corporation must have business dealings, no contract or other transaction between the Corporation, any other person, corporation or legal entity shall be affected by the fact that directors of the Corporation are partners in, officers or directors of, or otherwise interested in any such other person, corporation or legal entity, provided such contract or transaction shall be approved or ratified by the affirmative vote of a majority of the members of the Board of Directors not so interested.
SECTION 11 - BYLAWS. The Board may adopt bylaws for its own government, not inconsistent with the Articles or these Regulations.
SECTION 12 - COMPENSATION. The Board of Directors may establish the compensation and expense reimbursement policies for directors in exchange for their service on the Board of Directors and on committees of the Board of Directors, attendance at meetings of the Board of Directors or committees of the Board of Directors, and for other services by directors to the Corporation or any of its subsidiaries.
SECTION 13 - ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors. Any action required or permitted to be taken by a committee of the Board of Directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the committee.
ARTICLE IV
OFFICERS
SECTION 1 - CHAIRMAN OF THE BOARD. If the Board of Directors determines that one of its members should be Chairman of the Board and elects one of its members to that office, he shall preside at all meetings of the Board of Directors and perform such other duties as shall be assigned to him from time to time by the Board of Directors. If the Board shall have appointed a Chairman, he will call meetings of shareholders to order and will act as presiding officer thereof.
SECTION 2 - ELECTION AND DESIGNATION OF OFFICERS. The officers of the Corporation shall include a President, one or more Vice Presidents, a Secretary, and a Treasurer, all of whom shall be elected by the Board at its first regular meeting following the annual meeting of shareholders. There may also be one or more Assistant Secretaries and Assistant Treasurers, as may from time to time be elected by the Board. The President shall be a director, but none of the other officers need be a director. Any two (2) or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such
instrument is required to be executed, acknowledged or verified by two (2) or more officers. The Board may prescribe the duties of any officer.
SECTION 3 - TERM OF OFFICE; VACANCIES. The officers of the Corporation shall hold office at the pleasure of the Board of Directors and, unless sooner removed by the Board of Directors, until the first regular meeting of the Board of Directors following the annual meeting of shareholders or until their successors are elected. Without prejudice to the contract rights of such officer, the Board may remove any officer at any time, with or without cause. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors.
SECTION 4 - PRESIDENT; DUTIES. Unless the Board has designated a Chairman, or if the Chairman is absent or disabled, or if circumstances prevent the Chairman from acting, the President shall preside at meetings of shareholders and at all meetings of the Board. Subject to the direction and control and under the supervision of the Board of Directors and an executive committee of the Board, the President shall have general charge of the business affairs and property of the Corporation and control over its officers, agents and employees. He shall, in general, perform all duties and have all powers incident to the office of President and shall perform such other duties and have such other powers as from time to time may be assigned to him by these Regulations or by the Board of Directors or the executive committee of the Board.
SECTION 5 - VICE PRESIDENT; DUTIES. Each Vice President shall have the powers and duties incident to that office and shall have such other duties as may be prescribed from time to time by the Board of Directors or by the President. In case of the absence or disability of the President, or when circumstances prevent the President from acting, a Vice President designated by the Board shall perform all the duties and possess all the authority of the President. Each Vice President may sign and execute on behalf and in the name of the Corporation, bonds, contracts, instruments and documents authorized by the Board. Any one or more of the Vice Presidents may be designated as an "Executive Vice President."
SECTION 6 - SECRETARY; DUTIES. The Secretary shall attend all meetings of the shareholders and of the Board and act as Secretary thereof, and shall keep the minutes thereof in books of the Corporation provided for that purpose, which shall be attested by him, and, when required, he shall perform like duties for the standing committees, if any, elected or appointed by the Board; he shall see that proper notice, when required, is given of all meetings of the shareholders and of the Board; he may sign, with the President or any Vice President, on behalf and in the name of the Corporation, all contracts and other instruments authorized by the Board or the executive committee of the Board; he may sign or his facsimile signature, with that of the President or one of the Vice Presidents, may be used to sign certificates for shares of the capital stock of the Corporation; he shall keep in safe custody the seal of the Corporation and, whenever authorized by the Board or the executive committee of the Board, shall attest and affix the seal to any contract or other instrument requiring the same; he shall keep in safe custody all contracts and such books, records and other papers as the Board or the executive committee of the Board may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the Corporation during business hours; he shall produce on request at each meeting of shareholders for the election of directors a certified list of shareholders, arranged in alphabetical order; and he shall, in general, perform all the duties usually incident to the office of Secretary, subject to the control of the Board and the executive committee of the Board.
SECTION 7 - TREASURER; DUTIES. The Treasurer shall keep or cause to be kept in books belonging to the Corporation full and accurate accounts of all receipts, disbursements, assets, liabilities, gains, losses, stated capital, shares and business transactions of the Corporation. The Treasurer shall receive and have in charge all money, bills, notes, deeds, leases, mortgages and similar property belonging to the Corporation, and he shall do with the same as may from time to time be directed by the Board of Directors or the executive committee of the Board. The Treasurer shall have the care and custody of all funds and securities of the Corporation and deposit such funds in the name of the Corporation in such bank or banks as the Board or the executive committee of the Board may designate. The Treasurer is authorized to sign all checks, drafts, notes, bills of exchange, orders for the payment of money and any negotiable instruments of the Corporation, but no such instrument shall be signed in blank. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, the executive committee of the Board or the President. The Treasurer shall at all reasonable times exhibit the books and accounts to any director and, also, provided the Board or the executive committee of the Board or the President so orders, to any shareholder of the Corporation upon application at the offices of the Corporation by such shareholder during business hours; and he shall give such bonds for the faithful performance of his duties as the Board, the executive committee of the Board or the President may determine. The Treasurer shall perform such other duties as may be incident to his office and as may be assigned to him by the Board of Directors or the executive committee of the Board.
SECTION 8 - OTHER OFFICERS; DUTIES. The Assistant Secretaries and Assistant Treasurers, if any, in addition to such authority and duties as the Board may determine, shall have such authority and perform such duties as may be directed by their respective principal officers. The Board of Directors may, from time to time, authorize
any officer to appoint and remove assistant and subordinate officers, to prescribe their authority and duties, and to fix their compensation. In the absence of any officer of the Corporation, or for any other reason the Board of Directors may deem sufficient, the Board of Directors may delegate for the time being the powers or duties, or any of them, of an officer to any other officer, or to any director.
ARTICLE V
COMPENSATION
By the affirmative vote of a majority of the directors in office, and irrespective of any personal interest of any of them, the Board shall have authority to establish reasonable compensation for services to the Corporation by directors and officers, which may include pension, disability and death benefits and other benefits, or to delegate such authority to a committee of the Board or to one or more officers.
ARTICLE VI
EXECUTION OF CONTRACTS
VOUCHERS AND NEGOTIABLE INSTRUMENTS
The Board or the executive committee of the Board may authorize any of the officers of the Corporation or any other person or persons, either singly or with another such officer or person as said Board or Board committee may direct, to sign, on behalf of and in the name of the Corporation, contracts, indentures, deeds, conveyances, leases, declarations, communications and other instruments and documents, and the Board or the executive committee of the Board may authorize any of the officers of the Corporation or any other person or persons, either singly or with another such officer or person as said Board or executive committee may direct, to sign on behalf of and in the name of the Corporation, manually or by facsimile signature, checks, drafts, notes, bonds, debentures, bills of exchange and orders for the payment of money. In case any of the officers of the Corporation who shall have signed, or whose facsimile signature or signatures shall have been used, as aforesaid, upon any such document, instrument or security shall cease to be such officer of the Corporation before such document, instrument or security shall have been delivered or issued, such document, instrument or security, upon due delivery or issuance thereof, shall be valid and effective as though the person or persons who signed or whose facsimile signature or signatures were used upon such document, instrument or security had not ceased to be such officer of the Corporation.
ARTICLE VII
AUTHORITY TO TRANSFER AND VOTE SECURITIES
The President and each Vice President of the Corporation are each authorized to sign the name of the Corporation and to perform all acts necessary to effect a transfer of any shares, bonds, other evidences of indebtedness or obligations, subscription rights, warrants, and other securities of another corporation owned by the Corporation and to issue the necessary powers of attorney for the same; and each such officer is authorized, on behalf of the Corporation, to vote such securities, to appoint proxies with respect thereto, and to execute consents, waivers and releases with respect thereto, or to cause any such action to be taken.
ARTICLE VIII
INDEMNIFICATION AND INSURANCE
SECTION 1 - INDEMNIFICATION. The Corporation shall indemnify, to the full extent then permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (and including, without limitation, any action, suit or proceeding by or in the right of the Corporation or otherwise), by reason of the fact that he is or was a member of the Board of Directors or an officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall pay, to the full extent then required by law, expenses, including attorney's fees, incurred by a member of the Board of Directors in defending any such action, suit or proceeding as they are incurred, in advance of the final disposition thereof, and may pay, in the same manner and to the full extent then permitted by law, such expenses incurred by any other person. The indemnification and payment of expenses provided hereby shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under any law, the Articles, any agreement, vote of shareholders or disinterested members of the Board of Directors, or otherwise, both as to action in official capacities and as to action in another capacity while he or she is a member of the Board of Directors, or an officer, employee or agent of the Corporation, and shall continue as to a person who has ceased to be a member of the Board of Directors, trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.
SECTION 2 - INSURANCE. To the full extent then permitted by law and authorized by the Board of Directors, the Corporation may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any persons described in Section 1 of this
article against any liability asserted against and incurred by any such person in any such capacity, or arising out of his status as such, regardless of whether the Corporation would have the power to indemnify such person against such liability. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest.
SECTION 3 - AGREEMENTS. Upon approval by the Board of Directors, the Corporation may enter into agreements with any persons whom the Corporation may indemnify under these Regulations or under law and undertake thereby to indemnify such persons and to pay the expenses incurred by them in defending any action, suit or proceeding against them, regardless of whether the Corporation would have the power under law or these Regulations to indemnify any such person.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of December in each year, or on such other day as may be fixed from time to time by the Board of Directors.
Exhibit 4
MIDDLEFIELD BANC CORP.
MIDDLEFIELD, OH 44062
Incorporated under the laws of the State of Ohio
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THIS
CERTIFIES SEE REVERSE FOR
THAT CERTAIN DEFINITIONS
IS THE
OWNER OF
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CUSIP
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596304 20 4
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FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE MIDDLEFIELD BANC CORP. transferable only on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed in facsimile by its President and Secretary and a facsimile seal to be hereunto affixed.
[SEAL]
--------------------------------- ----------------------------
SECRETARY PRESIDENT
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SHAREHOLDER
-------------------------
-------------------------
CERTIFICATE NUMBER
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SHARES
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The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______________
TEN ENT - as tenants by the entireties (Cust)
JT TEN - as joint tenants with rights As Custodian for
OR of survivorship and not as _____________________________
JT TEN WROS - tenants in common (Minor)
under the _________________
(State)
Uniform Gifts to Minors Act
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Additional abbreviations may also be used though not in the above list.
For value received, _______________ hereby sell, assign and transfer unto
________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint __________________________________________
_____________________________________________________________________ Attorney
to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises.
Dated ___________________________ _______________________________________
(in the presence of) NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the certificate in every
particular, without alteration or
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__________________________________ enlargement or any change whatever.
EXHIBIT 10.1
MIDDLEFIELD BANC CORP.
1999 Stock Option Plan
1. Plan Purpose. The purpose of the Plan is to promote the long-term interests of the Corporation and its shareholders by providing a means for attracting and retaining directors, officers and employees of the Corporation and its Affiliates. It is intended that designated Options granted pursuant to the provisions of this Plan to persons employed by the Corporation or its Affiliates will qualify as Incentive Stock Options. Options granted to persons who are not employees will be Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary
corporation" of the Corporation, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
"Award" - means the grant of an Incentive Stock Option, a Non-Qualified Stock Option, a Stock Appreciation Right, Restricted Stock or other property or securities, or any combination thereof, as provided in the Plan.
"Award Agreement" - means the agreement evidencing the grant of an Award made under the Plan.
"Bank" - means The Middlefield Banking Co., and any successor entity.
"Cause" or "cause" - means, in connection with termination or cessation of service as a director, officer or employee of the Corporation or an Affiliate, personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties or gross negligence.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3 hereof.
"Continuous Service" - means the absence of any interruption or termination of service as a director, officer or employee of the Corporation or an Affiliate, except that when used with respect to persons granted an Incentive Option "Continuous Service" means the absence of any interruption or termination of service as an employee of the Corporation or an Affiliate. Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Corporation or in the case of transfers between payroll locations of the Corporation or between the Corporation, its parent, its subsidiaries or its successor.
"Corporation" - means Middlefield Banc Corp., an Ohio corporation.
"Employee" - means any person, including an officer or director, who is employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as amended.
"Exercise Price" - means (i) in the case of an Option, the price per Share at which the Shares subject to such Option may be purchased upon exercise of such Option and (ii) in the case of a Right, the price per Share which, upon grant, the Committee determines shall be used to calculate the aggregate value a Participant shall be entitled to receive pursuant to Sections 9 or 12 hereof upon exercise of such Right.
"Incentive Stock Option" - means an option to purchase Shares granted by the Committee pursuant to Section 6 hereof which is subject to the limitations and restrictions of Section 8 hereof and is intended to qualify under Section 422 of the Code. Unless otherwise set forth in the Award Agreement, any Option that does not qualify as an Incentive Stock Option for any reason shall be deemed a Non-Qualified Stock Option.
"Market Value" - means the average of the high and low quoted sales prices on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a Share on the Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such date the Shares are not quoted on the Composite Tape, on the New York Stock Exchange, or, if the Shares are not listed or admitted to trading on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which the Shares are listed or admitted to trading, or, if the Shares are not listed or admitted to trading on any such exchange, the mean between the closing high bid and low asked quotations with respect to a Share on such date on the National Association of Securities Dealers, Inc. Automated Quotations System or bulletin board, or any
similar system then in use, or, if no such quotations are available, the fair market value on such date of a Share as the Board of Directors shall determine.
"Non-Employee Director" - means a director who (a) is an outside director, as defined in Section 162(m) of the Code, and (b) is a Non-Employee Director, as defined in Rule 16b-3(b)(3) of the Securities and Exchange Commission or any successor rule thereto.
"Non-Qualified Stock Option" - means an option to purchase Shares granted by the Committee pursuant to Section 6 hereof which does not qualify, for any reason, as an Incentive Stock Option under Section 422(b) of the Code.
"Option" - means an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant" - means any director, officer or employee of the
Corporation or any Affiliate who is selected by the Committee to receive an
Award and any director of the Corporation who is granted an Award pursuant to
Section 19 hereof.
"Plan" - means the 1999 Stock Option Plan of the Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted in connection with, and to the extent exercisable, in whole or in part, in lieu of, an Option or another Right and (ii) in the case of an Option, an Option which is granted in connection with, and to the extent exercisable, in whole or in part, in lieu of, a Right or another Option.
"Restricted Stock" - means Shares awarded to a Participant by the Committee pursuant to Section 10(a) hereof.
"Right" - means a Stock Appreciation Right.
"Shares" - means the shares of Common Stock of the Corporation, without par value.
"Stock Appreciation Right" - means a stock appreciation right with respect to Shares granted by the Committee pursuant to the Plan.
3. Administration. The Plan shall be administered by a Committee consisting of two or more members, each of whom shall be a Non-Employee Director. The members of the Committee shall be appointed by the Board of Directors of the Corporation. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board of Directors of the Corporation, the Committee shall have sole and complete authority and discretion to (i) select Participants and grant Awards; (ii) determine the number of Shares to be subject to types of Awards generally, as well as to individual Awards granted under the Plan; (iii) determine the terms and conditions upon which Awards shall be granted under the Plan; (iv) prescribe the form and terms of instruments evidencing such grants; and (v) establish from time to time regulations for the administration of the Plan, interpret the Plan, and make all determinations deemed necessary or advisable for the administration of the Plan.
Without in any way limiting the authority of the Committee under the terms of the Plan, the Committee may provide in any Award Agreement that the recipient of the Award shall maintain in confidence the amount and terms of his or her award, except as disclosure thereof may be required under applicable law. An Award shall be subject to forfeiture at the Committee's discretion for violation of the confidentiality provisions of an Award Agreement, except insofar as such Award relates to Options or Rights that have been exercised or Shares that have become vested by lapse of any applicable restrictions.
A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be acts of the Committee.
4. Eligibility. The Committee may select from time to time Participants in the Plan from those directors, officers and employees of the Corporation or its Affiliates who, in the opinion of the Committee, are responsible for or contribute to the management, growth and profitability of the Corporation and its Affiliates. Subject to adjustment as set forth in Section 11, the maximum number of Shares with respect to which an Option or Options may be granted in any one taxable year of the Corporation is 5,743.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 11 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 57,433, plus any Shares surrendered to the Corporation
in payment of the exercise price of Options or Rights issued under the Plan. The
Shares with
respect to which Awards may be made under the Plan may be authorized and unissued shares or issued shares heretofore or hereafter reacquired and held as treasury shares. Shares that are subject to Related Rights and Related Options shall be counted only once in determining whether the maximum number of Shares with respect to which Awards may be granted under the Plan has been exceeded. An Award shall not be considered to have been made under the Plan with respect to any Option or Right that terminates. New Awards may be granted under the Plan with respect to the number of Shares as to which such termination has occurred.
6. General Terms and Conditions of Options and Rights. The Committee
shall have full and complete authority and discretion, except as expressly
limited by the Plan, to grant Options and/or Rights and to provide the terms and
conditions (which need not be identical among Participants) thereof. In
particular, the Committee shall prescribe the following terms and conditions:
(i) the Exercise Price of any Option or Right, which shall not be less than the
Market Value per Share at the date of grant of such Option or Right, (ii) the
number of Shares subject to, and the expiration date of, any Option or Right,
which expiration date shall not exceed ten years from the date of grant, (iii)
the manner, time and rate (cumulative or otherwise) of exercise of such Option
or Right, and (iv) the restrictions, if any, to be placed upon such Option or
Right or upon Shares which may be issued upon exercise of such Option or Right.
Notwithstanding the foregoing, no individual shall be granted Awards with
respect to more than 20% of the total shares subject to the Plan. All directors
who are neither officers or employees of the Corporation, in the aggregate, may
not be granted Awards with respect to more than 20% of the total Shares subject
to the Plan. No Awards shall vest and become exercisable earlier than one year
from the date the Plan is approved by shareholders of the Corporation.
Furthermore, at the time of any Award, the Participant shall enter into an agreement with the Corporation in a form specified by the Committee, agreeing to the terms and conditions of the Award and such other matters as the Committee, in its sole discretion, shall determine (the "Option Agreement").
7. Exercise of Options or Rights.
(a) Except as provided herein, an Option or Right granted under the Plan shall be exercisable during the lifetime of the Participant to whom such Option or Right was granted only by such Participant and, except as provided in paragraphs (c) and (d) of this Section 7, no such Option or Right may be exercised unless at the time such Participant exercises such Option or Right, such Participant has maintained Continuous Service since the date of grant of such Option or Right.
(b) To exercise an Option or Right under the Plan, the Participant to
whom such Option or Right was granted shall give written notice to the
Corporation in form satisfactory to the Committee (and, if partial exercises
have been permitted by the Committee, by specifying the number of Shares with
respect to which such Participant elects to exercise such Option or Right)
together with full payment of the Exercise Price, if any and to the extent
required. The date of exercise shall be the date on which such notice is
received by the Corporation. Payment, if any is required, shall be made either
(i) in cash (including check, bank draft or money order) or (ii) by delivering
(A) Shares already owned by the Participant and having a fair market value equal
to the applicable exercise price, such fair market value to be determined in
such appropriate manner as may be provided by the Committee or as may be
required in order to comply with or to conform to requirements of any applicable
laws or regulations, or (B) a combination of cash and such Shares.
(c) If a Participant to whom an Option or Right was granted shall cease to maintain Continuous Service for any reason (excluding death or disability and termination of employment by the Corporation or any Affiliate for cause), such Participant may, but only within the period of three months immediately succeeding such cessation of Continuous Service and in no event after the expiration date of such Option or Right, exercise such Option or Right to the extent that such Participant was entitled to exercise such Option or Right at the date of such cessation; provided, however, that such right of exercise after cessation of Continuous Service shall not be available to a Participant if the Committee otherwise determines and so provides in the applicable instrument or instruments evidencing the grant of such Option or Right. If a Participant to whom an Option or Right was granted shall cease to maintain Continuous Service by reason of death or disability then, unless the Committee shall have otherwise provided in the instrument evidencing the grant of an Option or Stock Appreciation Right, all Options and Rights granted and not fully exercisable shall become exercisable in full upon the happening of such event and shall remain so exercisable (i) in the event of death for the period described in paragraph (d) of this Section 7 and (ii) in the event of disability for a period of three months following such date. If the Continuous Service of a Participant to whom an Option or Right was granted by the Corporation is terminated for cause, all rights under any Option or Right of such Participant shall expire immediately upon the giving to the Participant of notice of such termination.
(d) In the event of the death of a Participant while in the Continuous Service of the Corporation or an Affiliate or within the three month period referred to in paragraph (c) of this Section 7, the person to whom any Option or Right held by the Participant at the time of his death is transferred by will or the laws of descent and distribution, or in the case of an Award other than an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title 1 of ERISA or the rules thereunder may, but only to the extent such Participant was entitled to exercise such Option or Right as set forth in paragraph (c) of this Section 7, exercise such Option or Right at any time within a period of one year succeeding the date of death of such Participant, but in no event later than ten years from the date of grant of such Option or Right. Following the death of any Participant to whom an Option was granted under the Plan, irrespective of whether any Related Right shall have been granted to the Participant or whether the person entitled to exercise such Related Right desires to do so, the Committee may, as an alternative means of settlement of such Option, elect to pay to the person to whom such Option is transferred by will or by the laws of descent and distribution, or in the case of an Option other than an Incentive Stock Option, pursuant to a qualified domestic relations order, as defined in the Code or Title I of ERISA or the rules there under, the amount by which the Market Value per Share on the date of exercise of such Option shall exceed the Exercise Price of such Option, multiplied by the number of Shares with respect to which such Option is properly exercised. Any such settlement of an Option shall be considered an exercise of such Option for all purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are Employees. Any provision of the Plan to the contrary notwithstanding, (i) no Incentive Stock Option shall be granted more than ten years from the date the Plan is adopted by the Board of Directors of the Corporation and no Incentive Stock Option shall be exercisable more than ten years from the date such Incentive Stock Option is granted, (ii) the Exercise Price of any Incentive Stock Option shall not be less than the Market Value per Share on the date such Incentive Stock Option is granted, (iii) any Incentive Stock Option shall not be transferable by the Participant to whom such Incentive Stock Option is granted other than by will or the laws of descent and distribution, and shall be exercisable during such Participant's lifetime only by such Participant, (iv) no Incentive Stock Option shall be granted to any individual who, at the time such Incentive Stock Option is granted, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation or any Affiliate unless the Exercise Price of such Incentive Stock Option is at least 110 percent of the Market Value per Share at the date of grant and such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted, and (v) the aggregate Market Value (determined as of the time any Incentive Stock Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant in any calendar year shall not exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its exercise, entitle the Participant to whom such Stock Appreciation Right was granted to receive a number of Shares or cash or combination thereof, as the Committee in its discretion shall determine, the aggregate value of which (i.e., the sum of the amount of cash and/or Market Value of such Shares on date of exercise) shall equal (as nearly as possible, it being understood that the Corporation shall not issue any fractional shares) the amount by which the Market Value per Share on the date of such exercise shall exceed the Exercise Price of such Stock Appreciation Right, multiplied by the number of Shares with respect of which such Stock Appreciation Right shall have been exercised. A Stock Appreciation Right may be Related to an Option or may be granted independently of any Option as the Committee shall from time to time in each case determine. At the time of grant of an Option the Committee shall determine whether and to what extent a Related Stock Appreciation Right shall be granted with respect thereto; provided, however, and notwithstanding any other provision of the Plan, that if the Related Option is an Incentive Stock Option, the Related Stock Appreciation Right shall satisfy all the restrictions and limitations of Section 8 hereof as if such Related Stock Appreciation Right were an Incentive Stock Option and as if other rights which are Related to Incentive Stock Options were Incentive Stock Options. In the case of a Related Option, such Related Option shall cease to be exercisable to the extent of the Shares with respect to which the Related Stock Appreciation Right was exercised. Upon the exercise or termination of a Related Option, any Related Stock Appreciation Right shall terminate to the extent of the Shares with respect to which the Related Option was exercised or terminated.
10. Restricted Stock and Performance Awards.
(a) Restricted Stock. The Committee is hereby authorized to grant Awards of Restricted Stock to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Corporation. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock.
(iii) Forfeiture; Delivery of Shares. Except as otherwise determined by the Committee, upon Termination of Service during the applicable restriction period, all Shares of Restricted Stock at such time subject to restriction shall be forfeited to the Corporation; provided, however, that the Committee may waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock. Shares representing Restricted Stock that is no longer subject to restrictions shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived.
(b) Performance Awards. The Committee is hereby authorized to grant performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance Award granted and the amount of any payment or transfer to be made pursuant to any performance Award shall be determined by the Committee.
11. Adjustments Upon Changes in Capitalization. In the event of any change in the outstanding Shares subsequent to the effective date of the Plan by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or Shares of the Corporation, the maximum aggregate number and class of shares as to which Awards may be granted under the Plan and the number, class and exercise price of shares with respect to which Awards have been granted under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Creation of a class of Serial Preferred Stock or issuance of such shares hereafter shall not be deemed to constitute a change requiring adjustment under this Section.
12. Effect of Merger and Change in Control.
(a) Merger. In the event of any merger, consolidation or combination of the Corporation (other than a merger, consolidation or combination in which the Corporation is the continuing entity and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof) pursuant to a plan or agreement the terms of which are binding upon all shareholders of the Corporation (except to the extent that dissenting shareholders may be entitled, under statutory provisions or provisions contained in the articles of incorporation, to receive the appraised or fair value of their holdings), any Participant to whom an Option or Right has been granted shall have the right (subject to the provisions of the Plan and any limitation or vesting period applicable to such Option or Right), thereafter and during the term of each such Option or Right, to receive upon exercise of any such Option or Right an amount equal to the excess of the fair market value on the date of such exercise of the securities, cash or other property, or combination thereof, receivable upon such merger, consolidation or combination in respect of a Share over the Exercise Price of such Right or Option, multiplied by the number of Shares with respect to which such Option or Right shall have been exercised. Such amount may be payable fully in cash, fully in one or more of the kind or kinds of property payable in such merger, consolidation or combination, or partly in cash and partly in one or more of such kind or kinds of property, all in the discretion of the Committee.
(b) Change in Control. Each of the events specified in the following clauses (i) through (iii) of this Section 12(b) shall be deemed a "change in control": (i) any third person, including a "group," as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial owner of shares of the Corporation with respect to which 25% or more of the total number of votes for the election of the Board of Directors of the Corporation may be cast (other than any person or group owning 25% or more of the Common Stock as of the date of adoption of the Plan, and other than any person who, together with members of his immediate family, owns 25% or more of the Common Stock as of the date of adoption of the Plan), (ii) as a result of, or in connection with, any cash tender offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Corporation shall cease to constitute a majority of the Board of Directors of the Corporation, or (iii) the shareholders of the Corporation shall approve an agreement providing either for a transaction in which the Corporation will cease to be an independent, publicly owned corporation or for a sale or other disposition of all or substantially all the assets of the Corporation. Upon a change in control, unless the Committee shall have otherwise provided in the Award Agreement, any restricted period with respect to Restricted Stock awarded to such Participant shall lapse and all Shares awarded as Restricted Stock shall become fully vested in the Participant to whom such Shares were awarded. If a tender offer or exchange offer for Shares (other than such an offer by the Corporation) is commenced, or if the event specified in clause (iii) above shall occur, unless the Committee shall have otherwise provided in the Award Agreement, all Options and Stock Appreciation Rights granted and not fully exercisable shall become exercisable in full upon the happening of such event; provided, however, that no Option or Stock Appreciation Right that has previously been exercised or otherwise terminated shall become exercisable.
13. Assignments and Transfers. No Award nor any right or interest of a Participant under the Plan in any instrument evidencing any Award under the Plan may be assigned, encumbered or transferred except, in the event of the death of a Participant, by will or the laws of descent and distribution or in the case of Awards other than Incentive Stock Options pursuant to a qualified domestic relations order, as defined in the Code or Title I of ERISA or the rules thereunder.
14. Employee Rights Under the Plan. No director, officer or employee shall have a right to be selected as a Participant nor, having been so selected, to be selected again as a Participant and no director, officer, employee or other person shall have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Corporation or any Affiliate. Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of the Corporation or any Affiliate.
15. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933 or any other Federal, state or local
securities legislation or regulation. It may be provided that any representation
requirement shall become inoperative upon a registration of the Shares or other
action eliminating the necessity of such representation under the Securities Act
of 1933 or other applicable securities law. The Corporation shall not be
required to deliver any Shares under the Plan prior to (i) the admission of such
shares to listing on any stock exchange on which Shares may then be listed, and
(ii) the completion of such registration or other qualification of such Shares
under any state or Federal law, rule or regulation, as the Committee shall
determine to be necessary or advisable.
16. Withholding Tax. Upon the termination of the restricted period with respect to any shares of Restricted Stock (or at any such earlier time, if any, that an election is made by the Participant under Section 83(b) of the Code, or any successor provision thereto, to include the value of such shares in taxable income), the Corporation shall have the right to require the Participant or other person receiving such shares to pay the Corporation the amount of any taxes which the Corporation is required to withhold with respect to such shares, or, in lieu thereof, to retain or sell without notice, a sufficient number of shares held by it to cover the amount required to be withheld. The Corporation shall have the right to deduct from all dividends paid with respect to shares of Restricted Stock the amount of any taxes which the Corporation is required to withhold with respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in cash with respect to the exercise of a Right under the Plan any taxes required by law to be withheld with respect to such cash payments. Where a Participant or other person is entitled to receive Shares pursuant to the exercise of an Option or Right pursuant to the Plan, the Corporation shall have the right to require the Participant or such other person to pay the Corporation the amount of any taxes which the Corporation is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld.
All withholding decisions pursuant to this Section 16 shall be at the sole discretion of the Committee or the Corporation.
17. Amendment or Termination. The Board of Directors of the Corporation may amend, suspend or terminate the Plan or any portion thereof at any time, but (except as provided in Section 11 hereof) no amendment shall be made without approval of the shareholders of the Corporation which shall (i) increase the aggregate number of Shares with respect to which Awards may be made under the Plan (except pursuant to Section 11), (ii) materially increase the benefits accruing to Participants, (iii) materially change the requirements as to eligibility for participation in the Plan or (iv) change the class of persons eligible to participate in the Plan; provided, that no such amendment, suspension or termination shall impair the rights of any Participant, without his consent, in any Award made pursuant to the Plan.
18. Effective Date and Term of Plan. The Plan shall become effective upon its adoption by shareholders of the Corporation. It shall continue in effect for a term of ten years unless sooner terminated under Section 17 hereof.
19. Initial Grant. Following adoption of this Plan by the shareholders of the Corporation at the Corporation's 1999 Annual Meeting of Shareholder of the Corporation, each member of the Board of Directors of the Corporation who is not an Employee (which term includes officers) shall be granted a ten-year, Non-Qualified Stock Option to purchase 500 shares at an Exercise Price per share equal to the Market Value per share of the Shares on the date of grant. Any director who is elected or appointed hereafter, but during the term of the Plan, who is not then an Employee shall be granted a ten-year, Non-Qualified Stock Option to purchase 500 shares at an Exercise Price per share equal to the Market Value per share of the Shares on the date of grant, the number of
Shares being subject to possible adjustment as provided in Section 11 in the event of intervening changes in capitalization; provided, however, that no director shall receive more than one Award pursuant to this Section 19.
Each Option issued under this Section 19 shall be evidenced by a Non-Qualified Stock Option Agreement in a form approved by the Board of Directors and shall be subject in all respects to the terms and conditions of this Plan, which are controlling. All Options granted pursuant to this section shall become exercisable on the first anniversary of the date of grant, subject to the Director maintaining Continuous Service with the Corporation or its Affiliates since the date of grant.
20. Successors. All obligations of the Corporation under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Corporation, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Corporation.
Exhibit 10.2
SEVERANCE AGREEMENT DUE TO CHANGE IN CONTROL
OF MIDDLEFIELD BANC CORP.
This AGREEMENT is made and entered into this 8th day of October, 1996 by and among Middlefield Banc Corp. (the "Corporation"), a corporation organized under the laws of the State of Ohio, with its main office in Middlefield, Ohio; The Middlefield Banking Company (the "Bank"), an Ohio-chartered, FDIC-insured nonmember bank with its main offices in Middlefield, Ohio; and Thomas G. Caldwell (the "Executive"). Any reference to "FDIC" herein shall mean the Federal Deposit Insurance Corporation. Any reference to "FRB" shall mean the Board of Governors of the Federal Reserve System and any reference to "Superintendent" herein shall mean the Superintendent of Banks, Ohio Division of Financial Institutions.
WHEREAS, the Executive has heretofore served in the position of President and CEO of the Bank:
NOW THEREFORE, in consideration of the performance of the responsibilities of the Executive and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows:
1. No Employment Contract
The parties hereto acknowledge and agree that this Agreement is not a management or employment agreement and that none of the terms and conditions contained herein shall be effective unless and until such time as there is a Change in Control as hereinafter defined in this Agreement. Prior to a Change in Control, the Executive agrees and acknowledges that he/she is an employee-at-will of the Bank.
2. Term of Agreement
The initial term of this Agreement shall be for a period of three (3) years commencing September 9, 1996 (hereafter referred to as the "Commencement Date"). Commencing on the first anniversary of the Commencement Date, and continuing at each anniversary of the Commencement Date thereafter, the Agreement shall automatically renew for one (1) additional year beyond the then effective expiration date unless the Board of Directors of either the Bank or the Corporation determine by resolution duly noted in its minutes the performance of the Executive has not met the requirements and standards of the Board and that such term shall not be extended (if the Board of Directors determines not to extend the term, it shall promptly so notify the Executive, with such election by the Board not to extend the term not to otherwise affect the then term of this Agreement). Reference herein to the term of this Agreement shall refer both to such initial term and such extended terms. Provided, however that in no event shall any benefits hereof extend beyond that date upon which the Executive attains the age of sixty-five (65).
3. Termination for Cause
(a) The Executive shall have no right to receive severance or other benefits under this Agreement for any period after the date of termination for Cause. For purposes of this Agreement, termination by the Corporation or the Bank for "Cause" shall mean only the following events:
(i) personal dishonesty;
(ii) incompetence;
(iii) material breach of any provision of this Agreement;
(iv) breach of a fiduciary duty involving personal gain or profit;
(v) intentional failure to perform stated duties;
(vi) a willful and material breach of the policies and procedures for the operation of the Bank provided to the Executive by formal action of its Board of Directors.
(vii) willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offense) or final cease-and-desist order; or
(viii) willful misconduct.
(b) (i) For purposes of Paragraph 3(a)(ii), "incompetence" shall mean the Executive's performance of his duties as measured against the then prevailing standard of the Ohio banking industry.
(ii) For purposes of Paragraph 3(a)(vii) and
3(a)(viii), no act, or failure to act, on the
Executive's part shall be considered "willful"
unless he has acted, or failed to act, with an
absence of good faith and without a reasonable
belief that his action or failure to act was
in the best interest of the Bank.
(iii) For purposes of Paragraph 3(a)(vii), a cease-and-desist order shall not become final until consent by the Corporation or the Bank, as the case may be, to such order, or the exhaustion or lapse of all (administrative and judicial) appeal rights in relation thereto.
4. Voluntary Termination of Agreement
This Agreement shall terminate automatically and without further action in the event the Executive shall resign or otherwise voluntarily terminate his/her employment with the Bank and/or Corporation.
5. Governmental Termination of Agreement
(a) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Bank's or the Corporation's affairs by an order issued under Section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e), or Section 1127.06 of the Ohio Revised Code, 11 O.R.C. Section 1127.06, all obligations of the Bank and the Corporation under this Agreement shall terminate, as of the effective date of the order.
(b) If the Bank is declared insolvent by the Superintendent
(defined with reference to Section 1103.04 of the Ohio Revised Code, O.R.C.
Section 1103.04), all obligations of the Bank or Corporation under this
Agreement shall terminate.
(c) All obligations under this Agreement may be terminated by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1823(c). Any rights of the parties that have already vested, however, shall not be affected by such action.
(d) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act 12 U.S.C. Section 1818(e)(3) or (g)(1), the Corporation's and the Bank's obligations under subparagraphs 6(a), (b) and (c) of this Agreement shall be suspended as the date of service, unless stayed by appropriate proceedings.
(e) If the charges in the notice referenced in subparagraph 5(d) are dismissed, the Board of Directors of the Bank or the Corporation may in its discretion:
(i) pay the Executive all or part of the severance benefits while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were suspended as required in subparagraph (d) above.
6. Change in Control
(a) If, during the term of this Agreement, there is a Change in Control of the Corporation and the Executive's employment by the Bank or the Corporation is involuntarily terminated in connection with or within one (1) year after the Change in Control other than for Cause or pursuant to Paragraphs 4 or 5, the Executive shall be entitled to the termination or severance payments hereinafter provided. Such payment(s) shall also be made in the case of the Executive's voluntary termination of employment for Good Reason (as defined in Paragraph 7) in connection with, or within one (1) year after, a Change in Control of the Corporation. Such voluntary termination of employment for Good Reason in connection with, or within one (1) year after, a Change in Control of the Corporation shall not constitute a termination for Cause or a voluntary termination subject to Paragraph 4 of this Agreement. The amount of this severance payment shall be the benefits specified in Paragraph 8 of this Agreement.
(b) For purposes of this Agreement, a "Change in Control of the Corporation" shall mean:
(i) The acquisition by a person or persons acting in concert of the power to vote twenty-five percent (25%) or more of a class of the Corporation's voting securities, or the acquisition by a person of the power to direct the Corporation's management or policies, if the Board of Directors or the FRB (or the FDIC in the case of an individual acquirer) has made a determination that such acquisition constitutes or will constitute an acquisition of control of the Corporation for the purposes of the Bank Holding Company Act or the Change in Bank Control Act and the regulations thereunder;
(ii) during any period of two (2) consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Bank or the Corporation cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors in office at the beginning of the period.
(iii) the Corporation shall have merged into or consolidated with another corporation, or merged another corporation into the Corporation, on a basis whereby less than fifty percent (50%) of the total voting power of the surviving corporation is represented by shares held by former shareholders of the Corporation prior to such merger or consolidation; or
(iv) the Corporation shall have sold substantially of its assets to another person. The term "person" refers to an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or other entity.
(c) Upon the Executive's termination of employment arising under this Paragraph 6 within one (1) year after the occurrence of a Change in Control of the Corporation, the Corporation will at its expense, provide health insurance coverage substantially identical to the coverage maintained by the Bank or the Corporation for Executive prior to his severance. Such coverage shall cease upon the earlier of Executive's employment by another employer or twelve (12) months from such termination.
7. Good Reason
For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in subparagraphs (a) through (e) hereof without the Executive's express written consent.
(a) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent the maintenance of or a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Executive from or failure to reappoint him to any of such positions, except in connection with the termination of his employment for (i) disability, (ii) Cause, (iii) pursuant to Paragraph 4 or 5, (iv) as a result of his death or (v) by the Executive other than for good Reason;
(b) A reduction by the Bank or the Corporation in the Executive's base salary as in effect on the date of a Change in Control of the Corporation;
(c) The relocation of his/her principal place of employment to a location other than Middlefield, Ohio, except for reasonably required travel on the Bank's or the Corporation's business which is not materially greater than such travel requirements prior to the Change in Control;
(d) The failure by the Bank or the Corporation to continue to provide the Executive with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank or the Corporation which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by him at the time of the Change in Control.
8. Termination Benefits
Upon the occurrence of a Change in Control, followed by the
voluntary or involuntary termination of Executive's employment with the Bank
other than for Cause or pursuant to Paragraph 4 or 5, the Bank or Corporation
shall within ninety (90) days of said termination pay Executive, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
twenty-four (24) times the average monthly salary paid to Executive by the Bank
and the Corporation during the sixty (60) months (or such lesser number of
months the Executive has been employed) immediately preceding Executive's
termination. The term salary shall refer to cash compensation for all services
rendered to the Bank, the Corporation or any subsidiary as is or would be
required to be reported pursuant to Section 402(a) of Regulation S-K, 17 C.F.R.
Section 229.402(a).
9. Payment of Legal Fees
Reasonable legal fees and expenses paid or incurred by the Executive pursuant to any dispute or question of interpretation relating to the Agreement shall be paid or reimbursed by the Corporation in accordance with the following. If the Executive, the Bank or the Corporation initiates a proceeding and the Executive prevails, all reasonable legal fees and expenses shall be paid by the Corporation. If the Executive initiates a proceeding and does not prevail on his/her claim, then the Corporation and the Executive shall each pay their own legal fees.
10. Successor Organization
The obligations of the Corporation and the Bank as set forth herein shall continue to be the obligation of any successor organization, any organization which purchases substantially all of the liabilities of the Corporation or the Bank, as well as any organization which assumes substantially all of the liabilities of the Corporation or the Bank whether by merger, consolidation, or other form of business combination. This Agreement is personal to the Executive and the Executive may not delegate his duties hereunder.
11. Notices
All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other addresses as either party may designate by like notice.
A. If to the Corporation, to:
Chairman Middlefield Banc Corp.
15985 East High Street
Middlefield, Ohio 44062
B. If to the Executive, to:
Thomas G. Caldwell 6651 Redbrush Road Ravenna, Ohio 44266
and to such other additional person or persons as either party shall have designated to the other party in writing by like notice.
12. Amendments
No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.
13. Paragraph Headings
The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.
14. Severability
The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
15. Governing Law
This Agreement shall, except to the extent that federal law (including any law, rule, or regulations of the FDIC) shall be deemed to apply, be governed by and construed and enforced in accordance with the laws of Ohio.
16. Arbitration
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction.
17. Safety and Soundness Limitations
Notwithstanding any other provisions of this Agreement, no severance benefits under Paragraph 8 shall be paid or payable in respect of any year in which the Bank (i) fails to meet any applicable capital requirements imposed by Part 325 of the FDIC's regulations (or successor regulations) after giving effect to the payment of severance benefits hereunder, (ii) receives or maintains a safety and soundness CAMEL rating of 4 or 5 from the FDIC or the Superintendent, or (iii) is subject to a proceeding to terminate deposit insurance. Severance benefits can be paid under clause (i) above to the extent that such payment would not cause the Bank to fail to meet any applicable capital requirements imposed by Part 325 by the FDIC's regulations.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written.
WITNESSES: MIDDLEFIELD BANC CORP.
/s/ BY: /s/ George F. Hasman
-------------------------------- ------------------------------
/s/ ITS: President
-------------------------------- -----------------------------
WITNESSES: MIDDLEFIELD BANKING COMPANY
/s/ BY: /s/ Donald Hunter
-------------------------------- ------------------------------
/s/ ITS: Chairman
-------------------------------- -----------------------------
WITNESSES:
/s/ /s/ Thomas G. Caldwell
-------------------------------- ----------------------------------
Thomas G. Caldwell
--------------------------------
|
Exhibit 10.3
SEVERANCE AGREEMENT DUE TO CHANGE IN CONTROL
OF MIDDLEFIELD BANC CORP.
This AGREEMENT is made and entered into this 8th day of October, 1996 by and among Middlefield Banc Corp. (the "Corporation"), a corporation organized under the laws of the State of Ohio, with its main office in Middlefield, Ohio; The Middlefield Banking Company (the "Bank"), an Ohio-chartered, FDIC-insured nonmember bank with its main offices in Middlefield, Ohio; and James R. Heslop II (the "Executive"). Any reference to "FDIC" herein shall mean the Federal Deposit Insurance Corporation. Any reference to "FRB" shall mean the Board of Governors of the Federal Reserve System and any reference to "Superintendent" herein shall mean the Superintendent of Banks, Ohio Division of Financial Institutions.
WHEREAS, the Executive has heretofore served in the position of Executive Vice President of the Bank:
NOW THEREFORE, in consideration of the performance of the responsibilities of the Executive and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows:
1. No Employment Contract
The parties hereto acknowledge and agree that this Agreement is not a management or employment agreement and that none of the terms and conditions contained herein shall be effective unless and until such time as there is a Change in Control as hereinafter defined in this Agreement. Prior to a Change in Control, the Executive agrees and acknowledges that he/she is an employee-at-will of the Bank.
2. Term of Agreement
The initial term of this Agreement shall be for a period of three (3) years commencing September 9, 1996 (hereafter referred to as the "Commencement Date"). Commencing on the first anniversary of the Commencement Date, and continuing at each anniversary of the Commencement Date thereafter, the Agreement shall automatically renew for one (1) additional year beyond the then effective expiration date unless the Board of Directors of either the Bank or the Corporation determine by resolution duly noted in its minutes the performance of the Executive has not met the requirements and standards of the Board and that such term shall not be extended (if the Board of Directors determines not to extend the term, it shall promptly so notify the Executive, with such election by the Board not to extend the term not to otherwise affect the then term of this Agreement). Reference herein to the term of this Agreement shall refer both to such initial term and such extended terms. Provided, however that in no event shall any benefits hereof extend beyond that date upon which the Executive attains the age of sixty-five (65).
3. Termination for Cause
(a) The Executive shall have no right to receive severance or other benefits under this Agreement for any period after the date of termination for Cause. For purposes of this Agreement, termination by the Corporation or the Bank for "Cause" shall mean only the following events:
(i) personal dishonesty;
(ii) incompetence;
(iii) material breach of any provision of this Agreement;
(iv) breach of a fiduciary duty involving personal gain or profit;
(v) intentional failure to perform stated duties;
(vi) a willful and material breach of the policies and procedures for the operation of the Bank provided to the Executive by formal action of its Board of Directors.
(vii) willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offense) or final cease-and-desist order; or
(viii) willful misconduct.
(b) (i) For purposes of Paragraph 3(a)(ii), "incompetence" shall mean the Executive's performance of his duties as measured against the then prevailing standard of the Ohio banking industry.
(ii) For purposes of Paragraph 3(a)(vii) and
3(a)(viii), no act, or failure to act, on the
Executive's part shall be considered "willful"
unless he has acted, or failed to act, with an
absence of good faith and without a reasonable
belief that his action or failure to act was
in the best interest of the Bank.
(iii) For purposes of Paragraph 3(a)(vii), a cease-and-desist order shall not become final until consent by the Corporation or the Bank, as the case may be, to such order, or the exhaustion or lapse of all (administrative and judicial) appeal rights in relation thereto.
4. Voluntary Termination of Agreement
This Agreement shall terminate automatically and without further action in the event the Executive shall resign or otherwise voluntarily terminate his/her employment with the Bank and/or Corporation.
5. Governmental Termination of Agreement
(a) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Bank's or the Corporation's affairs by an order issued under Section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e), or Section 1127.06 of the Ohio Revised Code, 11 O.R.C. Section 1127.06, all obligations of the Bank and the Corporation under this Agreement shall terminate, as of the effective date of the order.
(b) If the Bank is declared insolvent by the Superintendent
(defined with reference to Section 1103.04 of the Ohio Revised Code, O.R.C.
Section 1103.04), all obligations of the Bank or Corporation under this
Agreement shall terminate.
(c) All obligations under this Agreement may be terminated by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1823(c). Any rights of the parties that have already vested, however, shall not be affected by such action.
(d) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act 12 U.S.C. Section 1818(e)(3) or (g)(1), the Corporation's and the Bank's obligations under subparagraphs 6(a), (b) and (c) of this Agreement shall be suspended as the date of service, unless stayed by appropriate proceedings.
(e) If the charges in the notice referenced in subparagraph 5(d) are dismissed, the Board of Directors of the Bank or the Corporation may in its discretion:
(i) pay the Executive all or part of the severance benefits while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were suspended as required in subparagraph (d) above.
6. Change in Control
(a) If, during the term of this Agreement, there is a Change in Control of the Corporation and the Executive's employment by the Bank or the Corporation is involuntarily terminated in connection with or within one (1) year after the Change in Control other than for Cause or pursuant to Paragraphs 4 or 5, the Executive shall be entitled to the termination or severance payments hereinafter provided. Such payments shall also be made in the case of the Executive's voluntary termination of employment for Good Reason (as defined in Paragraph 7) in connection with, or within one (1) year after, a Change in Control of the Corporation. Such voluntary termination of employment for Good Reason in connection with, or within one (1) year after, a Change in Control of the Corporation shall not constitute a termination for Cause or a voluntary termination subject to Paragraph 4 of this Agreement. The amount of this severance payment shall be the benefits specified in Paragraph 8 of this Agreement.
(b) For purposes of this Agreement, a "Change in Control of the Corporation" shall mean:
(i) The acquisition by a person or persons acting in concert of the power to vote twenty-five percent (25%) or more of a class of the Corporation's voting securities, or the acquisition by a person of the power to direct the Corporation's management or policies, if the Board of Directors or the FRB (or the FDIC in the case of an individual acquirer) has made a determination that such acquisition constitutes or will constitute an acquisition of control of the Corporation for the purposes of the Bank Holding Company Act or the Change in Bank Control Act and the regulations thereunder;
(ii) during any period of two (2) consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Bank or the Corporation cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors in office at the beginning of the period.
(iii) the Corporation shall have merged into or consolidated with another corporation, or merged another corporation into the Corporation, on a basis whereby less than fifty percent (50%) of the total voting power of the surviving corporation is represented by shares held by former shareholders of the Corporation prior to such merger or consolidation; or
(iv) the Corporation shall have sold substantially of its assets to another person. The term "person" refers to an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or other entity.
(c) Upon the Executive's termination of employment arising under this Paragraph 6 within one (1) year after the occurrence of a Change in Control of the Corporation, the Corporation will at its expense, provide health insurance coverage substantially identical to the coverage maintained by the Bank or the Corporation for Executive prior to his severance. Such coverage shall cease upon the earlier of Executive's employment by another employer or twelve (12) months from such termination.
7. Good Reason
For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in subparagraphs (a) through (e) hereof without the Executive's express written consent.
(a) A change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent the maintenance of or a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Executive from or failure to reappoint him to any of such positions, except in connection with the termination of his employment for (i) disability, (ii) Cause, (iii) pursuant to Paragraph 4 or 5, (iv) as a result of his death or (v) by the Executive other than for good Reason;
(b) A reduction by the Bank or the Corporation in the Executive's base salary as in effect on the date of a Change in Control of the Corporation;
(c) The relocation of his/her principal place of employment to a location other than Middlefield, Ohio, except for reasonably required travel on the Bank's or the Corporation's business which is not materially greater than such travel requirements prior to the Change in Control;
(d) The failure by the Bank or the Corporation to continue to provide the Executive with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank or the Corporation which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by him at the time of the Change in Control.
8. Termination Benefits
Upon the occurrence of a Change in Control, followed by the
voluntary or involuntary termination of Executive's employment with the Bank
other than for Cause or pursuant to Paragraph 4 or 5, the Bank or Corporation
shall within ninety (90) days of said termination pay Executive, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
twenty-four (24) times the average monthly salary paid to Executive by the Bank
and the Corporation during the sixty (60) months (or such lesser number of
months the Executive has been employed) immediately preceding Executive's
termination. The term salary shall refer to cash compensation for all services
rendered to the Bank, the Corporation or any subsidiary as is or would be
required to be reported pursuant to Section 402(a) of Regulation S-K, 17 C.F.R.
Section 229.402(a).
9. Payment of Legal Fees
Reasonable legal fees and expenses paid or incurred by the Executive pursuant to any dispute or question of interpretation relating to the Agreement shall be paid or reimbursed by the Corporation in accordance with the following. If the Executive, the Bank or the Corporation initiates a proceeding and the Executive prevails, all reasonable legal fees and expenses shall be paid by the Corporation. If the Executive initiates a proceeding and does not prevail on his/her claim, then the Corporation and the Executive shall each pay their own legal fees.
10. Successor Organization
The obligations of the Corporation and the Bank as set forth herein shall continue to be the obligation of any successor organization, any organization which purchases substantially all of the liabilities of the Corporation or the Bank, as well as any organization which assumes substantially all of the liabilities of the Corporation or the Bank whether by merger, consolidation, or other form of business combination. This Agreement is personal to the Executive and the Executive may not delegate his duties hereunder.
11. Notices
All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other addresses as either party may designate by like notice.
A. If to the Corporation, to:
Chairman Middlefield Banc Corp.
15985 East High Street
Middlefield, Ohio 44062
B. If to the Executive, to:
James R. Heslop II 11731 Clarkwood Drive Chardon, Ohio 44024
and to such other additional person or persons as either party shall have designated to the other party in writing by like notice.
12. Amendments
No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.
13. Paragraph Headings
The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.
14. Severability
The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
15. Governing Law
This Agreement shall, except to the extent that federal law (including any law, rule, or regulations of the FDIC) shall be deemed to apply, be governed by and construed and enforced in accordance with the laws of Ohio.
16. Arbitration
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction.
17. Safety and Soundness Limitations
Notwithstanding any other provisions of this Agreement, no severance benefits under Paragraph 8 shall be paid or payable in respect of any year in which the Bank (i) fails to meet any applicable capital requirements imposed by Part 325 of the FDIC's regulations (or successor regulations) after giving effect to the payment of severance benefits hereunder, (ii) receives or maintains a safety and soundness CAMEL rating of 4 or 5 from the FDIC or the Superintendent, or (iii) is subject to a proceeding to terminate deposit insurance. Severance benefits can be paid under clause (i) above to the extent that such payment would not cause the Bank to fail to meet any applicable capital requirements imposed by Part 325 by the FDIC's regulations.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written.
WITNESSES: MIDDLEFIELD BANC CORP.
/s/ BY: /s/ George F. Hasman
--------------------------- ----------------------------------
/s/ ITS: President
--------------------------- ----------------------------------
WITNESSES: MIDDLEFIELD BANKING COMPANY
/s/ BY: /s/ Donald Hunter
--------------------------- ----------------------------------
/s/ ITS: Chairman
--------------------------- ----------------------------------
WITNESSES:
/s/ /s/ James R. Heslop II
--------------------------- ----------------------------------
James R. Heslop II
/s/
---------------------------
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Exhibit 10.4
FEDERAL HOME LOAN BANK OF CINCINNATI
Blanket Agreement for Advances
and
Security Agreement
Cincinnati, Ohio
September 14, 2000
1. APPLICATION AND AUTHORITY FOR ADVANCES; REPAYMENT; INTEREST AFTER MATURITY. Pursuant to the Federal Home Loan Bank Act of 1932, as amended, and all relevant rules and regulations in effect thereunder (hereinafter collectively the "Act"), the Bank makes available loans to its members and certain qualified non-member mortgagees (hereinafter referred to as "advances"), which advances shall be used by such members and their affiliates for the purposes specified in the Act. The procedures and the form of application for such advances shall be as specified within the "Advance Programs" in effect from time to time as adopted by the Board of Directors of the Bank as part of its "Credit Policy". The Borrower shall furnish to the Bank a certified copy of a resolution of the Borrower's Board of Directors (or other governing body) specifying certain of the Borrower's officers or other employees who are authorized to apply for, amend and renew such advances from the Bank. Generally, all applications for advances shall be made by such specified persons in writing, except that applications may be made by facsimile on the conditions set out in the Credit Policy only if applications for advances by facsimile are then permitted by the Credit Policy. However, unless the Bank shall be otherwise notified by the Borrower in writing, the Bank may honor any form of request, including an oral request, for disbursements of previously-approved applications for advances. The Bank's records of such advances to the Borrower shall be rebuttable evidence of such advance and of the Borrower's agreement to repay same in accord with the Advance Programs. Further, notwithstanding the particular repayment schedule or interest rates specified in the Advance Programs, or within the notice of approval from the Bank as to any such advance, interest shall be assessed against past-due principal and/or interest (whether past due because of maturity, acceleration or otherwise), or, at the Bank's option upon any event of default occurring and continuing hereunder, at a default rate as outlined in the Credit Policy.
2. SECURED PROPERTY LISTING AND DEFINITION. The following collateral shall be included in the Bank's security interest (as noted in the box by each category) and all of such items, together with all shares of the Bank owned by Borrower and such other collateral as may from time to time be specified in separate agreements between the Bank and the Borrower or between the Bank and any affiliate of the Borrower (each such separate agreement hereinafter sometimes called an "Addendum"), or which are otherwise pledged to the Bank or in which the Bank takes a security interest or collateral assignment, if any, shall hereinafter collectively be called the "secured property":
(a) [ ] Obligations of the United States of America, or obligations fully guaranteed by the United States of America, or other securities (whether certificated or uncertificated), investment property, financial assets, security entitlements, accounts or other equity or ownership interests in any corporation, partnership, limited liability company, trust or other entity, association or organization, including without limitation any affiliate which holds or may hold, directly or indirectly, transferred assets of the Borrower, which obligations or securities are approved by the Bank as eligible collateral security and delivered to the Bank's possession or (at the Bank's sole discretion) are otherwise in the Bank's control or subject to an acceptable negative pledge, which obligations or securities are to be treated as secured property (whether hereunder or pursuant to other agreements with the Bank), and all replacements therefor and proceeds thereof (hereinafter called "Securities Collateral").
(b) [ ] Specific one to four family residential mortgages and/or one to four family residential deeds of trust in favor of the Borrower or an affiliate of Borrower, as the case may be, as mortgagee, and the
notes or other instruments evidencing the indebtedness secured thereby, and complying with the requirements of the Act and all replacements therefor and proceeds thereof (hereinafter sometimes called "Specific Mortgage Collateral").
(c) [ XX ] 100% of the Borrower's one to four family mortgage portfolio i.e., each and every one to four family residential mortgage or one to four family residential deed of trust in favor of the Borrower or an affiliate of Borrower, as the case may be, as mortgagee, and the notes or other instruments evidencing indebtedness secured thereby, or any participation or residual interest therein, complying with the requirements of the Act and meeting the requirements of Section 5(b) and 5(e) below, whether now existing or hereafter acquired) and all replacements therefor and proceeds thereof (hereinafter sometimes called "Blanket One to Four Mortgage Collateral").
(d) [ XX ] 100% of the Borrower's multi-family mortgage portfolio (i.e., each and every five or more family residential mortgage or five or more family residential deed of trust in favor of the Borrower or an affiliate of Borrower, as the case may be, as mortgagee, and the notes or other instruments evidencing indebtedness secured thereby, or any participation or residual interest therein, complying with the requirements of the Act and meeting the requirements of Sections 5(b) and 5(e) below, whether now existing or hereafter acquired) and all replacements therefor and proceeds thereof (hereinafter the "Blanket Multi-Family Mortgage Collateral," and, along with the interests of the Bank specified in Section 2(c) above, collectively called "Blanket Mortgage Collateral").
3. EVIDENCE OF SECURED PROPERTY: MAINTENANCE OF COLLATERAL LEVEL. The Borrower agrees to deliver to the Bank such evidence of eligibility to borrow hereunder, its interest in the secured property and of availability of same for use as collateral pursuant hereto, in accordance with the Credit Policy and as the Bank may in good faith request. The Borrower agrees that all secured property shall be subject to audit and verification by or on behalf of the Bank at the sole expense of the Borrower. The Borrower will at all times maintain, as minimum secured property hereunder, secured property having an aggregate collateral value acceptable to the Bank, which shall make such determination in good faith and in conformity with the requirements of Section 5(b) below, and if the Borrower fails to do so (a) the Borrower will, within three (3) days of receipt of written notification from the Bank, reduce its unpaid advances or other Obligations as requested in writing by the Bank or (b) the Borrower, upon the written request of the Bank, will immediately deposit additional collateral and/or agree to additional security interests satisfactory to the Bank.
4. SECURITIES COLLATERAL. If item 2(a) above is included in the secured property, Securities Collateral shall be given to the Bank in aggregate principal amounts as required by the Bank and, if in certificated or other tangible form, such Securities Collateral (or custodial receipts for same acceptable to the Bank) shall be deposited with the Bank, together with indorsements acceptable to the Bank. In said connection, the Bank will be deemed to be an entitlements holder of and in sole control, within the meaning of Article 8 of the Uniform Commercial Code, of any Securities Collateral, with full power to hold and dispose of same as financial assets under Article 8 of the Uniform Commercial Code (including, without limitation, full power to exercise voting rights and to receive any income resulting from stock splits, stock dividends, cash dividends or otherwise), and the Borrower agrees to take and/or consent to such further actions as the Bank may deem appropriate to take and maintain control over any Securities Collateral, including obtaining the agreement of the issuer of any Securities Collateral to comply with instructions originated by the Bank without further consent by the Borrower and the agreement of any securities intermediary to comply with entitlement orders originated by the Bank without further consent by the Borrower. The Bank, upon the occurrence and during the continuation of an event of default (should the Bank have not already accelerated the Obligations), may retain any interest or principal payments, or dividends or other distributions, collected by it as to such Securities Collateral and apply same against interest or principal of the Obligations in its sole discretion.
5. MORTGAGE COLLATERAL. The Borrower acknowledges that the Bank is permitting it to retain in its possession all Specific and Blanket Mortgage Collateral (together or separately the "Mortgage Collateral") for purposes of servicing, collection and foreclosure, and the Borrower acknowledges that the Borrower will hold such Mortgage Collateral, and all proceeds and payments therefrom, in trust as the Bank's security and for the benefit and subject to the direction and control of the Bank, and upon the following additional terms and conditions:
(a) At the Bank's request and sole option, the Borrower shall immediately deliver to the Bank an Assignment of each item of Mortgage Collateral in the Bank's form for the same. Further, at the Bank's request and sole option, the Borrower will physically deliver to the Bank all documentation as to Specific Mortgage Collateral and/or Blanket Mortgage Collateral (including, without limitation, any participation certificates or other evidence thereof) and/or endorse in favor of the Bank all or any portion of same. Except as authorized by the Bank, the Borrower shall not withdraw any Specific Mortgage Collateral prior to is payment in full of all Obligations. The Borrower shall promptly notify the Bank in writing (i) whenever principal payments in excess of
ten percent (10%) of the remaining unpaid balance are made by Borrower's customers on any item of Specific Mortgage Collateral, (ii) whenever any item of Specific Mortgage Collateral is paid off in full by Borrower's customers or involved in any foreclosure action, and/or (iii) whenever any building on property serving as Specific Mortgage Collateral is damaged by casualty or otherwise in excess of twenty-five percent (25%) of its appraised value (if the Borrower does not reasonably believe that such building can be promptly repaired). Such written notices shall not initially be required where a Borrower's Blanket Mortgage Collateral provides collateral for the Obligations (i.e., if Sections 2(c) or 2(d) above has been utilized by the Borrower).
(b) The aggregate of the (i) market value of Securities Collateral and (ii) principal balances due under Mortgage Collateral shall be maintained at all times by the Borrower in an amount not less than that percentage of outstanding advances required by the Credit Policy.
(c) Upon written direction from the Bank, the Borrower will deposit all collections from Mortgage Collateral in a separate bank account designated as required by the Bank as a source of which to withdraw interest and principal payments on the Obligations.
(d) Unless and until otherwise directed in writing by the Bank after the occurrence of an event of default and only during the continuation of such event of default (should the Bank have not accelerated the maturity of the Obligation involved), the Borrower shall have the right to make and retain all collections from time to time coming due on Mortgage Collateral, to execute and deliver satisfactions of or releases of such Mortgage Collateral paid in full, and to take all necessary legal action to enforce collection of delinquent payments, including foreclosure, without disclosing this security arrangement and trust, and to use all collections so made by the Borrower in its ordinary course of business.
(e)(i) The Borrower shall keep and maintain all Mortgage Collateral at all times free and clear of pledges, liens, participation interests (unless taken or held by an affiliate of Borrower, of which the Borrower owns or controls, directly or indirectly, 100% of the voting stock of such affiliate), and encumbrances, unless the Bank approves, or is deemed to have approved, any such pledge, lien, participation interest or encumbrance, as provided in this Section 5(e)(i). Borrower shall promptly give the Bank specific and detailed written notice of any security interest or participation in Mortgage Collateral taken by third party lenders, affiliates or others. If at the time of such notice, no outstanding advances by Bank to Borrower are secured either wholly or partially by collateral pledged by Borrower or any affiliate of Borrower and if the Bank does not reply in writing to such notice by Borrower within thirty (30) days following receipt of it, such security interest or participation of a third party lender or affiliate shall be deemed approved.
(ii) Whenever it is commercially reasonable, the Borrower shall obtain the Bank's written approval prior to the actual sale or transfer of (or the granting of any participation in) such Mortgage Collateral. However, in case of pledge of Blanket Mortgage Collateral (i.e. notation by the Borrower of Sections 2(c) or 2(d) above), and if the Bank has not yet demanded or acquired physical possession of documentation related to such Mortgage Collateral, and when it is not commercially reasonable to obtain a release of such Mortgage Collateral prior to the sale or transfer of mortgages, then the Borrower is not required to comply with this subsection 5(e)(ii) of the Agreement provided the Borrower submits to the Bank within ten (10) business days after the contractual sale or transfer date, or any earlier sale or transfer date, a properly executed original Notice and Release Request in which the Borrower warrants to the Bank that an aggregate pledged mortgage portfolio equal in book value to at least that percentage of outstanding advances required by the Credit Policy still remains unsold and not participated in or encumbered by others.
(f) The buildings located on each mortgaged property constituting Mortgage Collateral shall be covered by all risk hazard insurance and by insurance against all other risks customary and generally required by mortgage lenders in the area in which the mortgaged property is located for the type of mortgage loan involved in an amount not less than the unpaid balance due the Borrower by its customer on each such item of Mortgage Collateral. The Borrower will cause such insurance policies to include the Borrower and its "successors and assigns" as loss payee under a standard mortgagee endorsement to evidence the Bank's mortgagee/assignee interest therein and, if the Bank so requires, to give the Bank ten (10) days prior notice of any policy cancellation. At the Bank's demand, the Borrower will physically deliver to the Bank any such insurance policies. The Bank may cause any secured property to be insured if the Borrower fails to do so, and any such expense shall be an additional Obligation hereunder.
6. WARRANTIES AND FURTHER COVENANTS.
(a) Borrower hereby represents and warrants that the Borrower and/or any pledging affiliate is the true and lawful owner of all the Securities Collateral and/or Mortgage Collateral free and clear of all claims, liens, encumbrances, rights of set-off, mortgages and security interests of any nature whatsoever (except this
security interest and as may be further specified below) and Borrower covenants that it shall defend the Securities Collateral and/or the Mortgage Collateral against the claims and demands of all persons.
(b) Borrower hereby represents and warrants that (i)
the existence of all necessary power to enter into and execute this Agreement,
(ii) this Agreement is not in violation of its Articles, Charter, Regulations or
By-Laws, or of any federal, state or local laws or administrative or judicial
rulings, (iii) no consent or approval of any securities exchange is necessary
for the valid pledge of the Securities Collateral under this Agreement, and (iv)
this Agreement is enforceable in accordance with its terms.
(c) Borrower hereby represents and warrants that it is either a member of the Bank or a qualified and eligible nonmember mortgagee with full powers to borrow hereunder.
(d) Borrower hereby agrees to execute and deliver financing statements under the Uniform Commercial Code, and statements or amendments thereof or supplements thereto, recordable Assignments of Mortgage Collateral, and such other instruments as the Bank may from time to time require in order to evidence, perfect, secure, preserve, protect and enforce the security interest hereby granted. The Bank is hereby irrevocably appointed as Attorney-In-Fact for the Borrower in all matters pertaining to all such perfection, preservation, protection and enforcement and evidencing same hereunder.
(e) Borrower hereby represents and warrants that to the best of its knowledge the secured property, including any property subject to the lien of any Mortgage Collateral, is free from any and all environmental hazards. Borrower shall indemnify Bank, hold Bank harmless, and, at the option of Bank, defend Bank with counsel satisfactory to Bank, from all liabilities, costs, damages, claims or expenses (including attorneys' fees and environmental consultant's fees), suffered, paid or incurred by Bank resulting from or arising out of any requirement under any applicable federal, state or local law, statute, regulation, order, judgment or decree requiring that any release of a hazardous material, solid waste, pollutant or contaminant at any of the secured property by remedied, cleaned up or lawfully disposed of.
(f) Except as permitted under Section 5(e) above, the Borrower hereby agrees that it shall not (i) sell, offer to sell or otherwise transfer the secured property, nor pledge, mortgage or create, or suffer to exist a security interest claim, lien, encumbrance, right of set-off or other security interest or collateral assignment of any kind whatsoever in the secured property or the proceeds or products thereof in favor of any person other than the Bank without prior written consent of the Bank, or (ii) transfer physical possession of notes and mortgages constituting Mortgage Collateral hereunder to any third party or affiliate without the prior written consent of the Bank.
(g) At any time that any advances to Borrower are outstanding that are secured wholly or partially with collateral pledged by an affiliate of Borrower pursuant to a PLEDGE AND SECURITY AGREEMENT (as permitted under the Credit Policy), Borrower hereby agrees that it shall cause such affiliate to comply with all terms and conditions of such PLEDGE AND SECURITY AGREEMENT.
(h) All taxes, assessments and governmental charges levied or assessed or imposed upon or with respect to the secured property, including any property subject to the lien of any Mortgage Collateral, shall be paid and if Borrower fails to promptly pay such taxes, assessments or governmental charges, Bank may (but shall not be required to) pay the same and any such expense shall be an additional Obligation hereunder.
(i) Borrower will notify Bank promptly in writing of any changes in the location of its principal place of business or jurisdiction of incorporation, organization or formation. Borrower shall promptly inform Bank of any change in location of any of the secured property from the Borrower's principal place of business or otherwise. Borrower shall promptly respond to any inquiry by Bank concerning the location of Borrower's principal place of business, jurisdiction of incorporation, organization or formation or the location of any of the secured property.
7. EVENTS OF DEFAULT: ACCELERATION. Any one or more of the
following shall constitute events of default hereunder: (a) default by Borrower
in the payment or performance, when due or payable, of any of the Obligations;
(b) the making by the Borrower of any misrepresentation to the Bank hereunder,
or otherwise for the purpose of obtaining loan advances or an extension of same;
(c) failure of the Borrower after request by the Bank to furnish promptly
financial information or to permit promptly the inspection of books or records;
(d) failure of Borrower to perform or observe any of the provisions of this
Agreement or of any other instrument pertaining to the Obligations or secured
property (subject to a ten (10) day cure period after written notice from the
Bank is received by the Borrower); (e) issuance of an injunction or attachment
against property of the Borrower which the Bank in good faith considers
materially adverse to such Borrower's financial condition; (f) appointment of a
receiver or liquidator of any part of the property of the Borrower, or if the
management of Borrower is assumed by any supervisory authority; (g) the
commencement by or against the Borrower of any
proceeding under any bankruptcy, arrangement, reorganization, insolvency or
similar law for the relief of debtors; (h) termination for any reason of
Borrower's membership in the Bank or its status as a nonmember mortgagee and/or
state housing finance agency eligible for advances hereunder; (i) an event of
default occurs under any PLEDGE AND SECURITY AGREEMENT between any affiliate of
Borrower and Bank; (j) the occurrence of such a change in the condition or
affairs (financial or otherwise) of the Borrower, or of an affiliate supplying
secured property securing the Obligations, as in the good faith opinion of the
Bank impairs the Bank's security or increases its risk; or (k) if the Bank in
good faith deems itself insecure. Upon occurrence of any of the events of
default and failure by the Borrower to cure within the applicable cure period,
if any, any or all of the Obligations shall, at the option of the Bank and
notwithstanding any time or credit allowed by any instrument evidencing or
document relating to the Obligations, be immediately due and payable without
notice or demand (except for the events of default noted in Subsections (j) and
(k) above, for which the Bank must give written notice to the Borrower). The
Bank may then, without first resorting to any other property securing the
Obligations from other parties (including, without limitation, property provided
by any affiliate of Borrower), exercise any one or more of the rights and
remedies granted pursuant to this Agreement and/or the Credit Policy and also
exercise any or all of the rights and remedies afforded to a secured party under
the Uniform Commercial Code as enacted in Ohio or the Borrower's state of
operation or to the Bank under the Act. In case of any event of default
hereunder, Borrower agrees, upon the request of the Bank, to promptly dissolve
or cause the dissolution of any subsidiary or affiliate providing secured
property under a PLEDGE AND SECURITY AGREEMENT and the distribution of such
secured property to Borrower. Upon repossession or recovery of the secured
property by the Bank, it may, after reasonable written notification to the
Borrower, sell the secured property at public or private sale, at which sale the
Bank may become the purchaser. The proceeds of sale of the secured property
shall be applied to the Obligations in such manner and order of priority as the
Bank may determine. Pending any such action, the Bank may liquidate the secured
property and/or continue to use and exercise rights of ownership pertaining to
the secured property. Borrower does hereby make, constitute and appoint Bank as
its true and lawful attorney-in-fact to deal with the secured property and, in
the Borrower's name and stead to sell, assign, collect, compromise, settle and
release of record any portion of the secured property as fully as Borrower could
do if acting for itself. The Borrower hereby agrees to be liable to the Bank for
any deficiency that may result upon such liquidation and sale of the secured
property and waives all claims for damages by reason of any seizure,
repossession, retention, use or sale of said secured property. The requirement
of reasonable notice, if necessary, shall be met if such notice is mailed,
postage prepaid, to the first of the places of business of he Borrower shown in
this Agreement at least ten (10) days before the time of the sale or other
disposition. While exercising its rights as a secured party hereunder, including
use and receipt of benefits from the secured property, and provided the Bank's
actions are commercially reasonable under the circumstances or do not constitute
negligence or willful misconduct, the Bank shall not be liable in any fashion to
the Borrower or third party (including without limitation Borrower's customers
or shareholders) for any damages arising from such use, or any obligations,
duties or liabilities of the Borrower in connection therewith (including without
limitation Borrower's contracts, agreements, guarantees, commitments or
warranties). Each of the rights, powers and remedies provided herein or now or
hereafter existing at law or in equity or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power or remedy
provided for in this Agreement or hereafter existing at law or in equity or
otherwise. The exercise of any such rights, powers or remedies shall not
preclude the simultaneous or later exercise of any or all other such rights,
powers or remedies.
8. WAIVERS: CONTINUED LIABILITY. The Bank shall not be deemed to have waived any of its rights in this Agreement or to the secured property unless such waiver is in writing and signed by the Bank and such waiver shall not operate as a waiver of any other default or of the same default on a subsequent occasion. No renewal or extension of time of payment of the Obligations at any rate of interest, no release, surrender, exchange or modification of the secured property, no release of any person primarily or secondarily liable on the Obligations (including any maker, endorser, quarantor or surety), no delay in enforcement of payment of the Obligations and no delay, omission or forbearance in exercising any right or power with respect to the Obligations, the secured property, or this Agreement shall affect the liability of the Borrower to the Bank.
9. DURATION. The term of this Agreement shall commence with the date hereof and end on the termination date, which is the date when the Borrower has paid in full all of the Obligations secured hereby, and either: (i) the Bank gives written notice to the Borrower that no further advances are to be made hereunder, or (ii) the Borrower gives written notice to the Bank that it does not intend to apply for further advances hereunder. Until such termination, this Agreement shall be a continuing one, and after such termination any liabilities hereunder of the Borrower to the Bank not satisfied prior to such termination shall survive and remain in full force and effect until satisfied.
10. ATTORNEY-IN-FACT. Borrower hereby appoints the Bank its irrevocable attorney-in-fact, with full power of substitution, in its name or otherwise, but at the Borrower's sole cost and expense (i) to transfer any shares of stock or Securities Collateral hereby or otherwise secured to Bank into the name of the Bank or its designee or assignee, (ii) to endorse on behalf of the Borrower any promissory notes or other instruments delivered by the Borrower to the Bank, (iii) to execute and/or record such documents and instruments as the Bank, in its sole judgment, deems necessary or appropriate to further evidence or perfect or affect a transfer of the security
interest granted to the Bank herein or otherwise, and (iv) to record this Agreement as a power of attorney where the Bank deems appropriate.
11. NOTICE. (a) Any written notice, approval, or direction provided for in this Agreement to be given by the Bank to the Borrower shall include and be satisfied by notice given to the Borrower by: (i) hand delivery, regular first class mail, or any other form of physical delivery, or (ii) facsimile, whether or not receipt of such facsimile is confirmed with the Borrower or a follow-up hard copy is mailed or otherwise physically delivered to the Borrower, and (b) any written notice provided for in this Agreement to be given by the Borrower to the Bank shall only include and be satisfied by notice given to the Bank by: (i) registered or certified mail (postage prepaid, return receipt requested) or some other form of delivery whereby receipt is confirmed, or (ii) facsimile, but only if receipt by the Bank is confirmed by the Borrower and a follow-up hard copy is delivered to the Bank by the means specified in subsection (b)(i) of this Section 11.
12. GENERAL. All rights and liabilities hereunder shall be governed and limited by and construed in accordance with the Act and the laws of the State of Ohio (matters related to eligibility for advances and the rate of interest assessed by the Bank on advances or other Obligations shall be governed solely by the Act). This Agreement shall inure to the benefit and bind the Bank and the Borrower and their respective successors and assigns. Any provision hereof which may prove limited or unenforceable, under any laws or judicial rulings shall not affect the validity or enforcement of the remainder of the provision or of any other provision.
FEDERAL HOME LOAN BANK
OF CINCINNATI Borrower:
THE MIDDLEFIELD BANKING COMPANY
By /s/
----------------------------
its Senior Vice President (Name of Borrower)
By /s/ By /s/
----------------------------- -----------------------------------------
its Assistant Vice President [Signature of Officer Authorized By
Board to Execute This Agreement]
September 20, 2000 Thomas G. Caldwell President & CEO
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Type Name of Authorized Officer and Title
And /s/
--------------------------------
[Signature of Officer Authorized By
Board to Execute This Agreement]
|
Witnesses to Signature of
Borrower's Officers: [IMPRESS CORPORATE SEAL HERE] /s/ ------------------------------- R. E. West /s/ ------------------------------- Jay T. Giles |
STATE OF Ohio ) |
COUNTY OF Geauga ) S:
On this September 14, 2000, before me appeared Thomas G. Caldwell, to me personally known, who being by me duly sworn, did say that he is President of the above-named Borrower, a corporation; that the seal affixed to the foregoing instrument is the seal of said corporation; that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors; and said President acknowledged said instrument to be the free act and deed of said corporation and his or her free act and deed as such officer, for the uses and purposes in said instrument mentioned.
My commission expires:
GAIL A. NEIKIRK Notary Public
My Commission Expires May 20, 2001 Notary Public, /s/ Gail A. Neikirk
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(signature)
|
---------------------------------- County of Geauga
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State of Ohio
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|
[IMPRESS NOTARY SEAL HERE]
Exhibit 21
SUBSIDIARIES OF MIDDLEFIELD BANC CORP.
Middlefield Banc Corp.'s only subsidiary is The Middlefield Banking Company, an Ohio-chartered non-member bank. The Middlefield Banking Company is
wholly owned by Middlefield Banc Corp.