United States
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended : December 31, 2003
Commission File Number : 33-23094
Middlefield Banc Corp.
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Ohio
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34-1585111 | |
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(
State or other jurisdiction
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( IRS Employer | |
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of incorporation or organization
)
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Identification No. ) |
15985 East High Street, Middlefield, Ohio 44062-0035
(440) 632-1666
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Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices
)
Securities registered pursuant to section 12(b) of the Act : none
Securities registered pursuant to section 12(g) of the Act : common stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value on June 30, 2003 of common stock held by non-affiliates of the registrant was approximately $34.2 million. As of March 19, 2004, there were 1,172,114 shares of common stock issued and outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for the 2004 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Portions of the Annual Report to Shareholders for the year ended December 31, 2003 are incorporated by reference into Part I, Part II and Part IV of this report.
Table of Contents
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Item 1 — Business
Middlefield Banc Corp . Incorporated in 1988 under the Ohio General Corporation Law, Middlefield Banc Corp. (“Middlefield”) is a one-bank holding company registered under the Bank Holding Company Act of 1956. Its sole subsidiary is The Middlefield Banking Company (the “Bank”), an Ohio-chartered commercial bank that began operations in 1901. The bank engages in a general commercial banking business in northeastern Ohio. Our principal executive offices are located at 15985 East High Street, Middlefield, Ohio 44062-0035, and our telephone number is (440) 632-1666.
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. Middlefield currently does not plan to engage in any nonbanking activities, although it may do so as opportunities arise.
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 offers online banking and bill payment services services to individuals and online cash management services to business customers through its website at www.middlefieldbank.com.
Engaged in a general commercial banking business in northeastern Ohio, the bank offers 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. Benefiting from the area’s proximity both to Cleveland and Warren, 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.
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Forward-looking Statements . This document contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) about Middlefield Banc Corp. and subsidiaries. Information incorporated in this document by reference, future filings by Middlefield Banc Corp. on Form 10-Q and Form 8-K, and future oral and written statements by Middlefield Banc Corp. and its management may also contain forward-looking statements. Forward-looking statements include statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates, and deposit growth. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” and similar expressions are intended to identify these forward-looking statements.
Forward-looking statements are necessarily subject to many risks and uncertainties. A number of things could cause actual results to differ materially from those indicated by the forward-looking statements. These include the factors we discuss immediately below, those addressed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” other factors discussed elsewhere in this document or identified in our filings with the Securities and Exchange Commission, and those presented elsewhere by our management from time to time. Many of the risks and uncertainties are beyond our control. The following factors could cause our operating and financial performance to differ materially from the plans, objectives, assumptions, expectations, estimates, and intentions expressed in forward-looking statements:
| • | the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than we expect, resulting in a deterioration in the credit quality of our loan assets, among other things |
| • | the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest-rate policies of the Federal Reserve Board |
| • | inflation, interest rate, market, and monetary fluctuations |
| • | the development and acceptance of new products and services of Middlefield Banc Corp. and subsidiaries and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors’ products and services |
| • | the willingness of users to substitute our products and services for those of competitors |
| • | the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance) |
| • | changes in consumer spending and saving habits |
Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions as of the date the statements are made. Investors should exercise caution because Middlefield Banc Corp. cannot give any assurance that its beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. Middlefield Banc Corp. disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.
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. 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%.
Although Ohio bank law imposes no material restrictions on the kinds of loans The Middlefield Banking Company may make, real estate-based lending has historically been the bank’s primary focus. For prudential reasons, the bank avoids lending on the security of real estate located in regions with which the bank is not familiar, and as a consequence almost all of the bank’s real-estate secured loans are secured by real property in northeastern
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Ohio. Ohio bank law does restrict the amount of loans an Ohio-chartered bank such as The Middlefield Banking Company may make, however, providing generally that loans and extensions of credit to any one borrower may not exceed 15% of capital. An additional margin of 10% of capital is allowed for loans fully secured by readily marketable collateral. This 15% legal lending limit has not been a material restriction on The Middlefield Banking Company’s lending. The Middlefield Banking Company can accommodate loan volumes exceeding the legal lending limit by selling loan participations to other banks. The Middlefield Banking Company’s internal policy is to maintain its credit exposure to any one borrower at less than $1.5 million, which is comfortably within the range of the bank’s legal lending limit. As of December 31, 2003, the bank’s 15%-of-capital limit on loans to a single borrower was approximately $3.7 million.
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, 2003, 2002, and 2001, along with a reconciliation to loans receivable, net.
The following table presents maturity information for the loan portfolio at December 31, 2003. The table does not include prepayments or scheduled principal repayments. All loans are shown as maturing based on contractual maturities.
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*
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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, 2004 that have pre-determined interest rates and the dollar amount of all loans due after December 31, 2004 that have floating or adjustable rates
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 $134 million or 69.5% of the bank’s total loan portfolio at December 31, 2003.
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 74.8% of the portfolio of conventional mortgage loans secured by 1-4 family real estate at December 31, 2003 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, 2003, residential mortgage loans of approximately $486,000 were over 90 days delinquent or nonaccruing on that date, representing .36% of the residential mortgage loan portfolio.
Commercial and Industrial Loans and Commercial Real Estate Loans . The bank’s commercial loan services include —
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| · accounts receivable, inventory and working capital loans | ||||
| · renewable operating lines of credit | ||||
| · loans to finance capital equipment | ||||
| · term business loans | ||||
| · short-term notes | ||||
| · selected guaranteed or subsidized loan programs for small businesses | ||||
| · loans to professionals | ||||
| · 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 $200,000 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, 2003, commercial and commercial real estate loans totaled $ 49.9 million, or 25.9% of the bank’s total loan portfolio. At December 31, 2003, commercial and commercial real estate loans of approximately $4,000 were over 90 days delinquent or nonaccruing on that date, and represented .01% of the commercial and commercial real estate loan portfolios.
Real Estate Construction . The Middlefield Banking Company originates several different types of loans that it categorizes as construction loans, including —
| · residential construction loans to borrowers who will occupy the premises upon completion of construction, | ||||
| · residential construction loans to builders, | ||||
| · commercial construction loans, and | ||||
| · real estate acquisition and development loans. | ||||
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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, 2003, real estate construction loans totaled $3.4 million, or 1.8% 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, 2003, the bank had approximately $5.5 million in its consumer installment loan portfolio, representing 2.8% of total loans. Consumer installment loans of approximately $19,000 were over 90 days delinquent or nonaccruing on that date, representing .34% 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 President, 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. Net of origination costs, loan origination fees are amortized over the life of a 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 . 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.
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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 firm performs semi-annual loan reviews for the bank.
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, discouraging 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 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 FDIC-insured institution’s determination about classification of its assets and the amount of its allowances is subject to review by the FDIC, 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, 2003, 2002, and 2001 classified assets were as follows:
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.
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Ohio bank law prescribes the kinds of investments an Ohio-chartered bank may make. Permitted investments include local, state, and federal government securities, mortgage-backed securities, and securities of federal government agencies. An Ohio-chartered bank also may invest up to 10% of its assets in corporate debt and equity securities, or a higher percentage in certain circumstances. Similar to the legal lending limit on loans to any one borrower, Ohio bank law also limits to 15% of capital the amount an Ohio-chartered bank may invest in the securities of any one issuer, other than local, state, and federal government and federal government agency issuers and mortgage-backed securities issuers. These Ohio bank law provisions have not been a material constraint upon the bank’s investment activities.
All securities-related activity is reported to the bank’s board of directors. 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.
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The following table sets forth the amortized cost and estimated market value of the bank’s investment portfolio at the dates indicated.
[Continued from above table, first column(s) repeated]
[Continued from above table, first column(s) repeated]
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The contractual maturity of investment securities at December 31, 2003 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.
[Continued from above table, first column(s) repeated]
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As of December 31, 2003, the bank also held 13,107 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, 2002 was approximately $1,310,700.
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, 2003, including certificates of deposit, by time remaining until maturity.
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 satisfy the demand for loans or general business purposes, the bank can obtain funds from the FHLB of Cincinnati. Interest and principal are payable monthly, and the line of credit is secured by a blanket pledge collateral agreement. At December 31, 2003, the bank had $17.7 million of FHLB borrowings outstanding. Middlefield also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.
The outstanding balances and related information about short-term
borrowings, which includes securities sold under agreements to repurchase are
summarized as follows:
2003
2002
2001
$
444,819
$
785,778
$
660,678
726,874
977,343
637,106
2,327,544
1,176,829
833,008
0.23
%
0.33
%
0.79
%
0.56
%
0.73
%
2.42
%
Personnel .
As of December 31, 2003 Middlefield and the bank had 72 full-time equivalent employees. None of the employees is represented by a collective bargaining group. Management considers its relations with employees to be excellent.
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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.
Recent Legislation to Curtail Corporate Accounting Irregularities. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”). The Securities and Exchange Commission (the “SEC”) has promulgated certain regulations pursuant to the Act and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company’s expenses.
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 —
| – | 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), | |||
| – | acquiring all or substantially all of the assets of another bank, or | |||
| – | merging or consolidating with another bank holding company. | |||
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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 satisfying 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 does, 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.
Financial Holding Companies . On November 12, 1999 the Gramm-Leach-Bliley Act became law, repealing much of 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 —
| – | financial in nature or incidental to that financial activity, or | |||
| – | 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 —
| – | acting as principal, agent, or broker for insurance, | |||
| – | underwriting, dealing in, or making a market in securities, and | |||
| – | providing financial and investment advice. | |||
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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. Although Middlefield has become a financial holding company, 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. 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 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.
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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 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 satisfy 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 —
| – | the allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets, |
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| – | any qualifying perpetual preferred stock exceeding the amount includable in Tier 1 capital, | |||
| – | mandatory convertible securities, and | |||
| – | 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, 2003, 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, 2003.
Minimum Necessary
Minimum Necessary
to be Well
to be Adequately
At December 31, 2003
Capitalized
Capitalized
15.79
%
10.00
%
8.00
%
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| Minimum Necessary | Minimum Necessary | |||||||||||
| to be Well | to be Adequately | |||||||||||
|
At December 31, 2003
|
Capitalized
|
Capitalized
|
||||||||||
|
Tier 1 Risk-Based Capital Ratio
|
14.54 | % | 6.00 | % | 4.00 | % | ||||||
|
Leverage Ratio
|
8.89 | % | 5.00 | % | 4.00 | % | ||||||
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 by capital maintenance requirements of their primary federal bank regulatory agency as well. 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 declares 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.
Recent Legislation . On July 30, 2002 the Sarbanes-Oxley Act of 2002 became law. The goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures made under the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934. The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC, securities exchanges, and Nasdaq to adopt extensive additional disclosure, corporate governance, and other related rules. The final scope of all of these new requirements is not yet clear. Some of the changes are effective already, but others will become effective in the future.
The Sarbanes-Oxley Act has an impact on a wide variety of corporate governance and disclosure issues, including the composition of audit committees, certification of financial statements by the chief executive officer and the chief financial officer, forfeiture of bonuses and profits made by directors and senior officers in the 12-month period covered by restated financial statements, a prohibition on insider trading during pension plan black-out periods, disclosure of off-balance sheet transactions, a prohibition on personal loans to directors and officers (excluding Federally insured financial institutions), expedited filing requirements for stock transaction reports by officers and directors, the formation of a public accounting oversight board, auditor independence, and various increased criminal penalties for violations of securities laws.
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
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company or entity that controls or is under common control with the bank. Generally, section 23A and section 23B of the Federal Reserve Act —
| – | 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, | |||
| – | impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company, | |||
| – | impose restrictions on the use of a holding company’s stock as collateral for loans by the subsidiary bank, and | |||
| – | 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 legal limit on loans to any one borrower, which in general terms is 15% of 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 most other purposes. 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 address 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 are 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 25 years that the CRA has existed, and particularly in the last decade, 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 id 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.”
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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 its 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 $1,310,700 at December 31, 2003.
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 transactions 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.
Risk Factors
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. 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 much 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.
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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.
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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.
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. Since then, 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.
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. 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.
21
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, 2003 the bank could have declared dividends of approximately $3.4 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.
22
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.
Item 2 — Properties
The bank’s offices are:
Location
County
Owned/Leased
Other Information
Geauga
owned
Geauga
owned
Portage
owned
Portage
leased
three-year lease renewed in November 2001, with option
to renew for seven additional consecutive three-year terms
Geauga
owned
opened in September, 2001
Ashtabula
owned
opened in April, 2003
At December 31, 2003 the net book value of the bank’s investment in premises and equipment totaled $6.8 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.
Item 3 — Legal Proceedings
From time to time Middlefield and the bank are 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.
23
Item 4 — Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Middlefield Banc Corp.’s security holders during the fourth quarter of 2003.
Part II
Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters
Information relating to the market for Middlefield’s common equity and
related shareholder matters appears under “Market for Middlefield’s Common
Equity and Related Stockholder Matters” in Middlefield’s 2003 Annual Report
to Shareholders on page 21 and is incorporated herein by reference.
Information relating to dividend restrictions for Registrant’s common stock
appears under
” Supervision and Regulation.”
Item 6 — Selected Financial Data
The above-captioned information appears under “Selected Financial Data” in Middlefield’s 2003 Annual Report to Shareholders and is incorporated herein by reference.
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Middlefield’s 2003 Annual Report to Shareholders and is incorporated herein by reference.
Item 7A — Quantitative and Qualitative Disclosures About Market Risk
The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section “Quantitative and Qualitative Disclosures About Market Risk” in Middlefield’s 2003 Annual Report to Shareholders and is incorporated herein by reference.
Item 8 — Financial Statements and Supplementary Data
The Consolidated Financial Statements of Middlefield Banc Corp. and its subsidiary, together with the report thereon by S.R. Snodgrass, A.C. appears in the Middlefield’s 2003 Annual Report to Shareholders and are incorporated herein by reference.
Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9a — Controls and Procedures
Middlefield’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2003, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Middlefield’s disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Middlefield’s disclosure controls and procedures as of December 31, 2003 were effective in ensuring that material information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported on a timely basis.
24
Additionally, there were no changes in Middlefield’s internal control over financial reporting that occurred during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, Middlefield’s internal control over financial reporting.
Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States of America.
There have been no significant changes in Middlefield’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2003.
Part III
Item 10 — Directors and Executive Officers of the Registrant
Incorporated by reference to the definitive proxy statement for the 2003 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.
Item 11 — Executive Compensation
Incorporated by reference to the definitive proxy statement for the 2004 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.
Item 12 — Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the definitive proxy statement for the 2004 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.
Item 13 — Certain Relationships and Related Transactions
Incorporated by reference to the definitive proxy statement for the 2004 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.
Item 14 — Principal Accountant Fees and Services
Incorporated by reference to the definitive proxy statement for the 2004 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.
Part IV
Item 15 — Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Listed below are all financial statements and exhibits filed as part of this report.
|
(a)(1)
|
The consolidated balance sheet of Middlefield Banc Corp. and subsidiary as of December 31, 2003 and 2002, 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, 2003, together with the related notes and the independent auditors’ report of S.R. Snodgrass, A.C., independent accountants. |
25
(a)(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is shown elsewhere in the document in the Financial Statements or Notes thereto, or in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(a)(3) Exhibits
See the list of exhibits below
(b) Reports on Form 8-K Filed During the Quarter ended December 31, 2003
None.
(c) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number
Description
Location
Second Amended and Restated Articles of
Incorporation of Middlefield Banc Corp.
Incorporated by
reference to the
identically
numbered exhibit to
the registration
statement on Form
10 (File No.
033-23094) filed on
April 17, 2001
Regulations of Middlefield Banc Corp.
Incorporated by
reference to the
identically
numbered exhibit to
the registration
statement on Form
10 (File No.
033-23094) filed on
April 17, 2001
Specimen Stock Certificate
Incorporated by
reference to the
identically
numbered exhibit to
the registration
statement on Form
10 (File No.
033-23094) filed on
April 17, 2001
*
1999 Stock Option Plan of Middlefield Banc Corp.
Incorporated by
reference to the
identically
numbered exhibit to
the registration
statement on Form
10 (File No.
033-23094) filed on
April 17, 2001
*
Severance Agreement of President and Chief
Executive Officer
filed herewith
*
Severance Agreement of Executive Vice President
filed herewith
*
Severance Agreement of Vice President
filed herewith
Federal Home Loan Bank of Cincinnati Agreement
for Advances and Security Agreement dated
September 14, 2000
Incorporated by
reference to the
identically
numbered exhibit to
the registration
statement on Form
10 (File No.
033-23094) filed on
April 17, 2001
*
Reserved
Reserved
26
`
| Exhibit | ||||
|
Number
|
Description
|
Location
|
||
|
10.7
|
* | Director Retirement Agreement with Richard T. Coyne | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.8
|
* | Director Retirement Agreement with Frances H. Frank | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.9
|
* | Director Retirement Agreement with Thomas C. Halstead | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.10
|
* | Director Retirement Agreement with George F. Hasman | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.11
|
* | Director Retirement Agreement with Donald D. Hunter | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.12
|
* | Director Retirement Agreement with Martin S. Paul | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.13
|
* | Director Retirement Agreement with Donald E. Villers | Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002 | |
|
|
||||
|
10.14
|
* | DBO Agreement with Donald L. Stacy | filed herewith | |
|
|
||||
|
10.15
|
* | DBO Agreement with Jay P. Giles | filed herewith | |
|
|
||||
|
10.16
|
* | DBO Agreement with Alfred F. Thompson, Jr. | filed herewith | |
|
|
||||
|
10.17
|
* | DBO Agreement with Nancy C. Snow | filed herewith | |
|
|
||||
|
10.18
|
* | DBO Agreement with Teresa M. Hetrick | filed herewith | |
|
|
||||
|
10.19
|
* | DBO Agreement with Jack L. Lester | filed herewith | |
|
|
||||
|
10.20
|
* | DBO Agreement with James R. Heslop, II | filed herewith | |
|
|
||||
|
10.21
|
* | DBO Agreement with Thomas G. Caldwell | filed herewith | |
|
|
||||
|
23
|
Consent of S.R. Snodgrass, A.C., independent auditors of Middlefield Banc Corp. | filed herewith | ||
|
|
||||
|
31.1
|
Section 302 Certification | filed herewith | ||
|
|
||||
|
31.2
|
Section 302 Certification | filed herewith | ||
|
|
||||
|
32
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | filed herewith | ||
|
|
||||
|
99.1
|
* | Form of Indemnification Agreement with directors of Middlefield Banc Corp. and executive officers of Middlefield Banc Corp. and The Middlefield Banking Company | Incorporated by reference to the identically numbered exhibit to Amendment No. 1 of the registration statement on Form 10 (File No. 033-23094) filed on June 14, 2001 |
* Management contract or compensatory plan or arrangement
27
28
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Middlefield Banc Corp.
|
||||
| By: | /s/ Thomas G. Caldwell | |||
|
Thomas G. Caldwell
President and Chief Executive Officer |
||||
| March 30, 2004 | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
/s/ Thomas G. Caldwell
|
March 30, 2004 | |
|
|
||
|
Thomas G. Caldwell
|
||
|
President, Chief Executive Officer, and Director
|
||
|
|
||
|
/s/ Donald L. Stacy
|
March 30, 2004 | |
|
|
||
|
Donald L. Stacy, Treasurer and Chief Financial Officer
|
||
|
(Principal accounting and financial officer)
|
||
|
|
||
|
/s/ Richard T. Coyne
|
March 30, 2004 | |
|
|
||
|
Richard T. Coyne, Director
|
||
|
|
||
|
/s/ Frances H. Frank
|
March 30, 2004 | |
|
|
||
|
Frances H. Frank, Director
|
||
|
|
||
|
/s/ Thomas C. Halstead
|
March 30, 2004 | |
|
|
||
|
Thomas C. Halstead, Director
|
||
|
|
||
|
/s/ George F. Hasman
|
March 30, 2004 | |
|
|
||
|
George F. Hasman, Director
|
||
|
|
||
|
/s/ James R. Heslop, II
|
March 30, 2004 | |
|
|
||
|
James R. Heslop, II, Executive Vice President,
|
||
|
Chief Operating Officer, and Director
|
||
|
|
||
|
/s/ Donald D. Hunter
|
March 30, 2004 | |
|
|
||
|
Donald D. Hunter, Chairman of the Board
|
||
|
and Director
|
||
|
|
||
|
/s/ Martin S. Paul
|
March 30, 2004 | |
|
|
||
|
Martin S. Paul, Director
|
||
|
|
||
|
/s/ Donald E. Villers
|
March 30, 2004 | |
|
|
||
|
Donald E. Villers, Director
|
29
Exhibit 10.2
AMENDED AND RESTATED SEVERANCE AGREEMENT
This AMENDED AND RESTATED SEVERANCE AGREEMENT (this "Agreement") dated as of this 12th day of August, 2003, by and between Middlefield Banc Corp., an Ohio corporation ("Middlefield"), and Thomas G. Caldwell, President and Chief Executive Officer of Middlefield (the "Executive"), amends and restates in its entirety the Severance Agreement dated November 28, 2001 by and between Middlefield and the Executive.
WHEREAS, the Executive is the President and Chief Executive Officer of Middlefield, the Executive is employed by Middlefield and its subsidiary The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank, and the Executive has made and is expected to continue to make major contributions to the profitability, growth, and financial strength of Middlefield and its subsidiaries,
WHEREAS, Middlefield recognizes that, as is the case for most companies, the possibility of a Change in Control (as defined in Section 1(c)) exists,
WHEREAS, Middlefield desires to assure itself of the current and future continuity of management and desires to establish minimum severance benefits for certain of its officers and other key employees, including the Executive, if a Change in Control occurs,
WHEREAS, Middlefield wishes to ensure that officers and other key employees are not practically disabled from discharging their duties if a proposed or actual transaction involving a Change in Control arises,
WHEREAS, Middlefield desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of Middlefield and subsidiary,
WHEREAS, none of the conditions or events included in the definition of the term "golden parachute payment" that is set forth in Section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of Middlefield, is contemplated insofar as either of Middlefield or any of its subsidiaries is concerned, and
WHEREAS, Middlefield's board of directors has approved an amendment of section 2(a)(1) of the November 28, 2001 Severance Agreement for the purpose of increasing the lump sum cash severance payment from two times the Executive's annual compensation to 2.5 times annual compensation, without intending to modify or amend any other provisions of this Agreement, including but not limited to the term of the Agreement stated in section 5.
NOW THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. CHANGE IN CONTROL COMBINED WITH EMPLOYMENT TERMINATION
(a) TERMINATION OF EXECUTIVE WITHIN TWO YEARS AFTER A CHANGE IN CONTROL. If a Change in Control occurs during the term of this Agreement and if either of the following also occurs, the Executive shall be entitled to severance and termination benefits specified in Section 2 of this Agreement --
(1) Termination by Middlefield or Subsidiary: the Executive's employment with Middlefield or its Subsidiary(ies) is involuntarily terminated within two years after a Change in Control, except for termination under Section 4 of this Agreement. For purposes of this Agreement, "Subsidiary" means an entity in
which Middlefield directly or indirectly beneficially owns 50% or more of the outstanding voting securities, or
(2) Termination by the Executive for Good Reason: the Executive terminates his employment with Middlefield or Subsidiary(ies) for Good Reason (as defined in Section 3) within two years after a Change in Control.
If the Executive is removed from office or if his employment terminates after discussions with a third party regarding a Change in Control commence, and if those discussions ultimately conclude with a Change in Control, then for purposes of this Agreement the removal of the Executive or termination of his employment shall be deemed to have occurred after the Change in Control.
(b) TERMINATION BY THE EXECUTIVE DURING A 90-DAY PERIOD 12 MONTHS AFTER A CHANGE IN CONTROL. The Executive shall also be entitled to severance and termination benefits under Section 2 of this Agreement if he terminates employment with Middlefield and Subsidiary(ies) for any reason or for no reason during the 90_day period beginning on the date that is 12 months after a Change in Control.
(c) DEFINITION OF CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control" means any of the following events occur:
(1) Merger: Middlefield merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a Subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3)-- each director who is first elected by the board
(or first nominated by the board for election by stockholders)
by a vote of at least two-thirds (b) of the directors who were
directors at the beginning of the period shall be deemed to
have been a director at the beginning of the two-year period,
or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
2. SEVERANCE AND TERMINATION BENEFITS
(a) SEVERANCE AND TERMINATION BENEFITS. The severance and termination benefits to which the Executive is entitled under Section 1 are as follows --
(1) Lump Sum Payment: Middlefield shall make a lump sum payment to the Executive in an amount in cash equal to 2.5 times the Executive's annual compensation. For purposes of this Agreement, annual compensation means (a) the Executive's annual base salary on the date of the Change in Control or the Executive's termination of employment (at
whichever date the Executive's current annual base salary is greater), plus (b) the average of the bonuses and incentive compensation earned for the three calendar years immediately preceding the year in which the Change in Control occurs, regardless of when the bonus or incentive compensation is paid. Middlefield recognizes that the bonus and incentive compensation earned by the Executive for a particular year's service might be paid in the year after the calendar year in which the bonus or incentive compensation is earned. The amount payable to the Executive hereunder shall not be reduced to account for the time value of money or discounted to present value. The payment required under this Section 2(a)(1) is payable no later than 5 business days after the date the Executive's employment terminates. If the Executive terminates employment for Good Reason, the date of termination shall be the date specified by the Executive in his notice of termination.
(2) Benefit Plans: Middlefield shall cause the Executive to become fully vested in any qualified and non-qualified plans, programs or arrangements in which the Executive participated if the plan, program, or arrangement does not address the effect of a change in control. Middlefield also shall contribute or cause a Subsidiary to contribute to the Executive's Middlefield Banking Company 401(k) Employee Savings and Investment Plan account the matching and voluntary contributions, if any, that would have been made had the Executive's employment not terminated before the end of the plan year.
(3) Insurance Coverage: Middlefield shall cause to be continued life, health and disability insurance coverage substantially identical to the coverage maintained for the Executive before his termination. The insurance coverage may cease when the Executive becomes employed by another employer or 24 months after the Executive's termination, whichever occurs first. At the end of the 24-month period, the Executive shall have the option to continue health insurance coverage at his own expense for a period not less than the number of months by which the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation period exceeds 24 months.
(b) NO MITIGATION REQUIRED. Middlefield hereby acknowledges that it will be difficult and could be impossible (1) for the Executive to find reasonably comparable employment after his employment terminates, and (2) to measure the amount of damages the Executive suffers as a result of termination. Additionally, Middlefield acknowledges that its general severance pay plans do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, Middlefield further acknowledges that the payment of severance and termination benefits by Middlefield under this Agreement is reasonable and will be liquidated damages, and the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise.
3. GOOD REASON
For purposes of this Agreement, "Good Reason" means the occurrence of any of the events or conditions described in clauses (a) through (f) hereof without the Executive's express written consent --
(a) CHANGE IN OFFICE OR POSITION OR TERMINATION AS A DIRECTOR: failure to elect or reelect or otherwise to maintain the Executive in the office or position, or a substantially equivalent office or position, of or with Middlefield and Subsidiary(ies) that the Executive held immediately before the Change in Control, or the removal or failure to nominate the Executive as a director of Middlefield (or any successor thereto) if the Executive shall have been a director of Middlefield immediately before the Change in Control,
(b) ADVERSE CHANGE IN THE SCOPE OF HIS DUTIES OR COMPENSATION AND BENEFITS:
(1) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties associated with the Executive's position with Middlefield compared to the nature or scope of the authorities, powers, functions, responsibilities or duties associated with the position immediately before the Change in Control,
(2) a reduction in the aggregate of the Executive's annual compensation received from Middlefield, or
(3) the termination or denial of the Executive's rights to benefits under Middlefield's or Subsidiary's(ies') benefit, compensation and incentive plans and arrangements or a reduction in the scope or value thereof, which situation is not remedied within 10 calendar days after written notice to Middlefield from the Executive,
(c) ADVERSE CHANGE IN CIRCUMSTANCES: the Executive determines that a change in circumstances has occurred after a Change in Control, including without limitation a change in the scope of the business or other activities for which the Executive is responsible compared to his responsibilities immediately before the Change in Control, (1) which renders the Executive substantially unable to carry out, substantially hinders the Executive's performance of, or causes the Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties associated with the office or position held by the Executive immediately before the Change in Control, and (2) which situation is not remedied within 10 calendar days after written notice to Middlefield from the Executive of such determination. Provided his determination is made in good faith, the Executive's determination will be conclusive and binding upon the parties hereto. The Executive's determination will be presumed to have been made in good faith, unless Middlefield establishes by clear and convincing evidence that it was not made in good faith,
(d) LIQUIDATION AND MERGER OF MIDDLEFIELD: the liquidation, dissolution, merger, consolidation or reorganization of Middlefield or transfer of all or substantially all of the business or assets of either Middlefield or The Middlefield Banking Company, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of the business or assets have been transferred (directly or by operation of law) assumes all duties and obligations of Middlefield under this Agreement,
(e) RELOCATION OF THE EXECUTIVE: Middlefield relocates its principal executive offices, or requires the Executive to have his principal location of work changed, to any location that is more than 15 miles from the location thereof immediately before the Change in Control, or requires the Executive to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately before the Change in Control, or
(f) BREACH OF THIS AGREEMENT: without limiting the generality or effect of the foregoing, any material breach of this Agreement by Middlefield or any successor thereto.
4. TERMINATION FOR WHICH NO SEVERANCE OR TERMINATION BENEFITS ARE PAYABLE
(a) NO SEVERANCE FOR TERMINATION FOR CAUSE. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance or termination benefits if his employment terminates for Cause.
(1) Cause Means Commission of Any of the Following Acts: For purposes of this Agreement, "Cause" means the Executive shall have committed any of the following acts --
(a) Fraud, Embezzlement, Theft or Other Crime: an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with
Middlefield or a Subsidiary, or commission of a felony or commission of a misdemeanor involving moral turpitude,
(b) Negligence, Disloyalty or Violation of Law or Policy:
the Executive's gross negligence or gross neglect of
duties, disloyalty, dishonesty, or willful violation
of any law or significant policy of Middlefield
committed in connection with the Executive's
employment and resulting in an adverse effect on
Middlefield or a Subsidiary,
(c) Disclosure of Trade Secrets: intentional wrongful disclosure of secret processes or confidential information of Middlefield or a Subsidiary, causing material harm to Middlefield or the Subsidiary,
(d) Competing with Middlefield: intentional wrongful engagement in any competitive activity. For purposes of this Agreement, competitive activity means the Executive's participation, without the written consent of a senior executive officer of Middlefield, in the management of any business enterprise if (1) the enterprise engages in substantial and direct competition with Middlefield, (2) the enterprise's revenues derived from any product or service competitive with any product or service of Middlefield or Subsidiary(ies) amounted to 10% or more of the enterprise's revenues for its most recently completed fiscal year, and (3) Middlefield's revenues from the product or service amounted to 10% of Middlefield's revenues for its most recently completed fiscal year. A competitive activity does not include mere ownership of securities in an enterprise and the exercise of rights appurtenant thereto, provided the Executive's share ownership does not give him practical or legal control of the enterprise. For this purpose, ownership of less than 5% of the enterprise's outstanding voting securities shall conclusively be presumed to be insufficient for practical or legal control, and ownership of more than 50% shall conclusively be presumed to constitute practical and legal control.
If the Executive is now or hereafter becomes subject to an agreement not to compete with Middlefield or Subsidiary(ies), a breach by the Executive of that other noncompetition agreement shall be grounds for denial of severance and termination benefits for Cause under this clause (d) of Section 4(a)(1). But if the Executive engages in a competitive activity under circumstances justifying denial of severance or termination benefits for Cause under this clause (d), that shall not necessarily be grounds for concluding that the Executive has also breached the other noncompetition agreement to which he is or may become subject. This clause (d) is not intended to and shall not be construed to supersede or amend any provision of an employment or noncompetition agreement to which the Executive is or may become subject. This clause (d) does not grant to the Executive any right or privilege to engage in other activities or enterprises, whether in competition with Middlefield or otherwise, or
(e) Termination for Cause under an Employment Agreement:
any actions that have caused the Executive to be
terminated for cause under any employment agreement
existing on the date hereof or hereafter entered into
between the Executive and Middlefield or a
Subsidiary.
(2) Definition of "Intentional": For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive's part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interests of Middlefield.
(3) Termination for Cause Can Occur Solely by Formal Board Action. The Executive shall not be deemed under this Agreement to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of at least three_fourths (3/4) of the directors of Middlefield then in office at a meeting of the board of directors called and held for such purpose, which resolution shall (a) contain findings that, in the good faith opinion of the board, the Executive has committed an act constituting Cause and (b) specify the particulars thereof in detail. Notice of that meeting and the proposed determination of Cause shall be given to the Executive a reasonable amount of time before the board's meeting. The Executive and his counsel (if the Executive chooses to have counsel present) shall have a reasonable opportunity to be heard by the board at the meeting. Nothing in this Agreement limits the Executive's or his beneficiaries' right to contest the validity or propriety of the board's determination of Cause, and they shall have the right to contest the validity or propriety of the board's determination of Cause even if that right does not exist under any employment agreement of the Executive.
(b) NO SEVERANCE UNDER THIS AGREEMENT FOR THE EXECUTIVE'S DEATH OR DISABILITY. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance payments or termination benefits under this Agreement if--
(1) Death: the Executive dies while actively employed by Middlefield or a Subsidiary, or
(2) Disability: the Executive becomes totally disabled while actively employed by Middlefield or a Subsidiary. For purposes of this agreement, the term "totally disabled" means that because of injury or sickness, the Executive is unable to perform his duties.
The benefits, if any, payable to the Executive or his beneficiary(ies) or estate relating to his death or disability shall be determined solely by such benefit plans or arrangements as Middlefield or Subsidiary may have with the Executive relating to death or disability, not by this Agreement.
5. TERM OF AGREEMENT
The initial term of this Agreement shall be for a period of three years, commencing November 28, 2001. On the first anniversary of the November 28, 2001 effective date of this Agreement, and on each anniversary thereafter, the Agreement shall be extended automatically for one additional year unless Middlefield's board of directors gives notice to the Executive in writing at least 90 days before the anniversary that the term of this Agreement will not be extended. If the board of directors determines not to extend the term, it shall promptly notify the Executive. References herein to the term of this Agreement mean the initial term and extensions of the initial term. Unless terminated earlier, this Agreement shall terminate when the Executive reaches age 65. If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in force until its term expires. The board's decision not to extend the term of this Agreement shall not -- by itself -- give the Executive any rights under this Agreement to claim an adverse change in his position, compensation or circumstances or otherwise to claim entitlement to severance or termination benefits under this Agreement.
6. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT
The parties hereto acknowledge and agree that (a) this Agreement is not a management or employment agreement and (b) nothing in this Agreement shall give the Executive any rights or impose any obligations to continued employment by Middlefield or any Subsidiary or successor of Middlefield, nor shall it give Middlefield any rights or impose any obligations for the continued performance of duties by the Executive for Middlefield or any Subsidiary or successor of Middlefield.
7. PAYMENT OF LEGAL FEES
Middlefield desires that the Executive not be required to incur legal fees and the related costs and expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise, because the amounts thereof would substantially detract from the benefits intended to be extended to the Executive under this Agreement. Therefore, even if the Executive does not prevail in whole or in part in litigation or other legal action associated with the interpretation, enforcement or defense of Executive's rights under this Agreement, Middlefield hereby agrees to pay and be solely financially responsible for any and all attorneys' and related fees, costs and expenses incurred by the Executive in the litigation or other legal action, up to a maximum of $500,000. The fees and expenses of counsel selected by the Executive shall be paid or reimbursed to the Executive by Middlefield on a regular, periodic basis, upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with counsel's customary practices. Anything herein to the contrary notwithstanding, nothing in this Agreement authorizes Middlefield to pay or the Executive to demand payment of fees, costs and expenses if and to the extent payment of fees, costs and expenses constitutes a "prohibited indemnification payment" within the meaning of Federal Deposit Insurance Corporation Rule 359.1(l)(1) [12 CFR 359.1(l)(1)]. Middlefield's obligation in this Section 7 to pay the Executive's legal fees operates separately from and in addition to any legal fee reimbursement obligation Middlefield or a Subsidiary may have under any separate employment or other agreement between the Executive and Middlefield.
Middlefield irrevocably authorizes the Executive to retain from time to time counsel of Executive's choice to advise and represent him in the interpretation, enforcement or defense of the parties' rights and responsibilities under this Agreement, if--
(1) the Executive concludes that Middlefield has failed to comply with any of its obligations under this Agreement, or
(2) if Middlefield or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive under this Agreement,
including without limitation the initiation or defense of any litigation or other legal action, whether by or against Middlefield or any director, officer, stockholder or other person affiliated with Middlefield, in any jurisdiction.
8. WITHHOLDING OF TAXES
Middlefield may withhold from any benefits payable under this Agreement all Federal, state, local or other taxes as may be required by law, governmental regulation or ruling.
9. SUCCESSORS AND ASSIGNS
(a) THIS AGREEMENT IS BINDING ON MIDDLEFIELD'S SUCCESSORS. This Agreement shall be binding upon Middlefield and any successor to Middlefield, including any persons acquiring directly or indirectly all or substantially all of the business or assets of Middlefield by purchase, merger, consolidation, reorganization or otherwise. Any such successor shall thereafter be deemed to be the "Corporation" for purposes of this Agreement. But this Agreement and Middlefield's obligations under this Agreement are not otherwise assignable, transferable or delegable by Middlefield. By agreement in form and substance satisfactory to the Executive, Middlefield shall require any successor to all or substantially all of the business or assets of Middlefield expressly to assume and agree to perform this Agreement in the same manner and to the same extent Middlefield would be required to perform if no such succession had occurred.
(b) THIS AGREEMENT IS ENFORCEABLE BY THE EXECUTIVE AND HIS HEIRS. This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes and legatees.
(c) THIS AGREEMENT IS PERSONAL IN NATURE AND IS NOT ASSIGNABLE. This Agreement is personal in nature. Without written consent of the other party, neither party shall assign, transfer or delegate this Agreement or any rights or obligations under this Agreement except as expressly provided in this Section 9. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder is not assignable or transferable, whether by pledge, creation of a security interest, or otherwise, except for a transfer by Executive's will or by the laws of descent and distribution. If the Executive attempts an assignment or transfer that is contrary to this Section 9, Middlefield shall have no liability to pay any amount to the assignee or transferee.
10. 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 address as either party may designate by like notice.
(a) If to Middlefield, to: Middlefield Banc Corp.
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
Attn: Corporate Secretary
(b) If to the Executive, to: Mr. Thomas G. Caldwell 15985 East High Street Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
11. CAPTIONS AND COUNTERPARTS
The headings and subheadings used in this Agreement are included solely for convenience and shall not affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement.
12. AMENDMENTS AND WAIVERS
No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing or writings signed by the Executive and by Middlefield. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.
13. SEVERABILITY
The provisions of this Agreement shall be deemed severable. The invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement. Any provision held to be invalid or unenforceable shall be reformed to the extent (and only to the extent) necessary to make it valid and enforceable.
14. GOVERNING LAW
The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State.
15. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between Middlefield and the Executive concerning the subject matter hereof. No rights are granted to the Executive under this Agreement other than those specifically set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
WITNESSES: MIDDLEFIELD BANC CORP.
By:
James R. Heslop, II
Its: Executive Vice President
and Chief Operating
Officer
WITNESSES: EXECUTIVE
Thomas G. Caldwell
County of Geauga )
) ss:
State of Ohio )
|
Before me this day of , 2003, personally appeared the above named James R. Heslop, II, and Thomas G. Caldwell, who acknowledged that they did sign the foregoing instrument and that the same was their free act and deed.
Exhibit 10.3
AMENDED AND RESTATED SEVERANCE AGREEMENT
This AMENDED AND RESTATED SEVERANCE AGREEMENT (this "Agreement") dated as of this 12th day of August, 2003, by and between Middlefield Banc Corp., an Ohio corporation ("Middlefield"), and James R. Heslop, II, Executive Vice President and Chief Operating Officer of Middlefield (the "Executive"), amends and restates in its entirety the Severance Agreement dated November 28, 2001 by and between Middlefield and the Executive.
WHEREAS, the Executive is an Executive Vice President and Chief Operating Officer of Middlefield, the Executive is employed by Middlefield and its subsidiary The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank, and the Executive has made and is expected to continue to make major contributions to the profitability, growth, and financial strength of Middlefield and its subsidiaries,
WHEREAS, Middlefield recognizes that, as is the case for most companies, the possibility of a Change in Control (as defined in Section 1(c)) exists,
WHEREAS, Middlefield desires to assure itself of the current and future continuity of management and desires to establish minimum severance benefits for certain of its officers and other key employees, including the Executive, if a Change in Control occurs,
WHEREAS, Middlefield wishes to ensure that officers and other key employees are not practically disabled from discharging their duties if a proposed or actual transaction involving a Change in Control arises,
WHEREAS, Middlefield desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of Middlefield and subsidiary,
WHEREAS, none of the conditions or events included in the definition of the term "golden parachute payment" that is set forth in Section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of Middlefield, is contemplated insofar as either of Middlefield or any of its subsidiaries is concerned, and
WHEREAS, Middlefield's board of directors has approved an amendment of section 2(a)(1) of the November 28, 2001 Severance Agreement for the purpose of increasing the lump sum cash severance payment from two times the Executive's annual compensation to 2.5 times annual compensation, without intending to modify or amend any other provisions of this Agreement, including but not limited to the term of the Agreement stated in section 5.
NOW THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. CHANGE IN CONTROL COMBINED WITH EMPLOYMENT TERMINATION
(a) TERMINATION OF EXECUTIVE WITHIN TWO YEARS AFTER A CHANGE IN CONTROL. If a Change in Control occurs during the term of this Agreement and if either of the following also occurs, the Executive shall be entitled to severance and termination benefits specified in Section 2 of this Agreement --
(1) Termination by Middlefield or Subsidiary: the Executive's employment with Middlefield or its Subsidiary(ies) is involuntarily terminated within two years after a Change in Control, except for termination under Section 4 of this Agreement. For purposes of this Agreement, "Subsidiary" means an entity in
which Middlefield directly or indirectly beneficially owns 50% or more of the outstanding voting securities, or
(2) Termination by the Executive for Good Reason: the Executive terminates his employment with Middlefield or Subsidiary(ies) for Good Reason (as defined in Section 3) within two years after a Change in Control.
If the Executive is removed from office or if his employment terminates after discussions with a third party regarding a Change in Control commence, and if those discussions ultimately conclude with a Change in Control, then for purposes of this Agreement the removal of the Executive or termination of his employment shall be deemed to have occurred after the Change in Control.
(b) TERMINATION BY THE EXECUTIVE DURING A 90-DAY PERIOD 12 MONTHS AFTER A CHANGE IN CONTROL. The Executive shall also be entitled to severance and termination benefits under Section 2 of this Agreement if he terminates employment with Middlefield and Subsidiary(ies) for any reason or for no reason during the 90_day period beginning on the date that is 12 months after a Change in Control.
(c) DEFINITION OF CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control" means any of the following events occur:
(1) Merger: Middlefield merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a Subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
2. SEVERANCE AND TERMINATION BENEFITS
(a) SEVERANCE AND TERMINATION BENEFITS. The severance and termination benefits to which the Executive is entitled under Section 1 are as follows --
(1) Lump Sum Payment: Middlefield shall make a lump sum payment to the Executive in an amount in cash equal to 2.5 times the Executive's annual compensation. For purposes of this Agreement, annual compensation means (a) the Executive's annual base salary on
the date of the Change in Control or the Executive's termination of employment (at whichever date the Executive's current annual base salary is greater), plus (b) the average of the bonuses and incentive compensation earned for the three calendar years immediately preceding the year in which the Change in Control occurs, regardless of when the bonus or incentive compensation is paid. Middlefield recognizes that the bonus and incentive compensation earned by the Executive for a particular year's service might be paid in the year after the calendar year in which the bonus or incentive compensation is earned. The amount payable to the Executive hereunder shall not be reduced to account for the time value of money or discounted to present value. The payment required under this Section 2(a)(1) is payable no later than 5 business days after the date the Executive's employment terminates. If the Executive terminates employment for Good Reason, the date of termination shall be the date specified by the Executive in his notice of termination.
(2) Benefit Plans: Middlefield shall cause the Executive to become fully vested in any qualified and non-qualified plans, programs or arrangements in which the Executive participated if the plan, program, or arrangement does not address the effect of a change in control. Middlefield also shall contribute or cause a Subsidiary to contribute to the Executive's Middlefield Banking Company 401(k) Employee Savings and Investment Plan account the matching and voluntary contributions, if any, that would have been made had the Executive's employment not terminated before the end of the plan year.
(3) Insurance Coverage: Middlefield shall cause to be continued life, health and disability insurance coverage substantially identical to the coverage maintained for the Executive before his termination. The insurance coverage may cease when the Executive becomes employed by another employer or 24 months after the Executive's termination, whichever occurs first. At the end of the 24-month period, the Executive shall have the option to continue health insurance coverage at his own expense for a period not less than the number of months by which the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation period exceeds 24 months.
(b) NO MITIGATION REQUIRED. Middlefield hereby acknowledges that it will be difficult and could be impossible (1) for the Executive to find reasonably comparable employment after his employment terminates, and (2) to measure the amount of damages the Executive suffers as a result of termination. Additionally, Middlefield acknowledges that its general severance pay plans do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, Middlefield further acknowledges that the payment of severance and termination benefits by Middlefield under this Agreement is reasonable and will be liquidated damages, and the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise.
3. GOOD REASON
For purposes of this Agreement, "Good Reason" means the occurrence of any of the events or conditions described in clauses (a) through (f) hereof without the Executive's express written consent --
(a) CHANGE IN OFFICE OR POSITION OR TERMINATION AS A DIRECTOR: failure to elect or reelect or otherwise to maintain the Executive in the office or position, or a substantially equivalent office or position, of or with Middlefield and Subsidiary(ies) that the Executive held immediately before the Change in Control, or the removal or failure to nominate the Executive as a director of Middlefield (or any successor thereto) if the Executive shall have been a director of Middlefield immediately before the Change in Control,
(b) ADVERSE CHANGE IN THE SCOPE OF HIS DUTIES OR COMPENSATION AND BENEFITS:
(1) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties associated with the Executive's position with Middlefield compared to the nature or scope of the authorities, powers, functions, responsibilities or duties associated with the position immediately before the Change in Control,
(2) a reduction in the aggregate of the Executive's annual compensation received from Middlefield, or
(3) the termination or denial of the Executive's rights to benefits under Middlefield's or Subsidiary's(ies') benefit, compensation and incentive plans and arrangements or a reduction in the scope or value thereof, which situation is not remedied within 10 calendar days after written notice to Middlefield from the Executive,
(c) ADVERSE CHANGE IN CIRCUMSTANCES: the Executive determines that a change in circumstances has occurred after a Change in Control, including without limitation a change in the scope of the business or other activities for which the Executive is responsible compared to his responsibilities immediately before the Change in Control, (1) which renders the Executive substantially unable to carry out, substantially hinders the Executive's performance of, or causes the Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties associated with the office or position held by the Executive immediately before the Change in Control, and (2) which situation is not remedied within 10 calendar days after written notice to Middlefield from the Executive of such determination. Provided his determination is made in good faith, the Executive's determination will be conclusive and binding upon the parties hereto. The Executive's determination will be presumed to have been made in good faith, unless Middlefield establishes by clear and convincing evidence that it was not made in good faith,
(d) LIQUIDATION AND MERGER OF MIDDLEFIELD: the liquidation, dissolution, merger, consolidation or reorganization of Middlefield or transfer of all or substantially all of the business or assets of either Middlefield or The Middlefield Banking Company, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of the business or assets have been transferred (directly or by operation of law) assumes all duties and obligations of Middlefield under this Agreement,
(e) RELOCATION OF THE EXECUTIVE: Middlefield relocates its principal executive offices, or requires the Executive to have his principal location of work changed, to any location that is more than 15 miles from the location thereof immediately before the Change in Control, or requires the Executive to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately before the Change in Control, or
(f) BREACH OF THIS AGREEMENT: without limiting the generality or effect of the foregoing, any material breach of this Agreement by Middlefield or any successor thereto.
4. TERMINATION FOR WHICH NO SEVERANCE OR TERMINATION BENEFITS ARE PAYABLE
(a) NO SEVERANCE FOR TERMINATION FOR CAUSE. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance or termination benefits if his employment terminates for Cause.
(1) Cause Means Commission of Any of the Following Acts: For purposes of this Agreement, "Cause" means the Executive shall have committed any of the following acts --
(a) Fraud, Embezzlement, Theft or Other Crime: an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with
Middlefield or a Subsidiary, or commission of a felony or commission of a misdemeanor involving moral turpitude,
(b) Negligence, Disloyalty or Violation of Law or Policy:
the Executive's gross negligence or gross neglect of
duties, disloyalty, dishonesty, or willful violation
of any law or significant policy of Middlefield
committed in connection with the Executive's
employment and resulting in an adverse effect on
Middlefield or a Subsidiary,
(c) Disclosure of Trade Secrets: intentional wrongful disclosure of secret processes or confidential information of Middlefield or a Subsidiary, causing material harm to Middlefield or the Subsidiary,
(d) Competing with Middlefield: intentional wrongful engagement in any competitive activity. For purposes of this Agreement, competitive activity means the Executive's participation, without the written consent of a senior executive officer of Middlefield, in the management of any business enterprise if (1) the enterprise engages in substantial and direct competition with Middlefield, (2) the enterprise's revenues derived from any product or service competitive with any product or service of Middlefield or Subsidiary(ies) amounted to 10% or more of the enterprise's revenues for its most recently completed fiscal year, and (3) Middlefield's revenues from the product or service amounted to 10% of Middlefield's revenues for its most recently completed fiscal year. A competitive activity does not include mere ownership of securities in an enterprise and the exercise of rights appurtenant thereto, provided the Executive's share ownership does not give him practical or legal control of the enterprise. For this purpose, ownership of less than 5% of the enterprise's outstanding voting securities shall conclusively be presumed to be insufficient for practical or legal control, and ownership of more than 50% shall conclusively be presumed to constitute practical and legal control.
If the Executive is now or hereafter becomes subject to an agreement not to compete with Middlefield or Subsidiary(ies), a breach by the Executive of that other non-competition agreement shall be grounds for denial of severance and termination benefits for Cause under this clause (d) of Section 4(a)(1). But if the Executive engages in a competitive activity under circumstances justifying denial of severance or termination benefits for Cause under this clause (d), that shall not necessarily be grounds for concluding that the Executive has also breached the other non-competition agreement to which he is or may become subject. This clause (d) is not intended to and shall not be construed to supersede or amend any provision of an employment or non-competition agreement to which the Executive is or may become subject. This clause (d) does not grant to the Executive any right or privilege to engage in other activities or enterprises, whether in competition with Middlefield or otherwise, or
(e) Termination for Cause under an Employment Agreement:
any actions that have caused the Executive to be
terminated for cause under any employment agreement
existing on the date hereof or hereafter entered into
between the Executive and Middlefield or a
Subsidiary.
(2) Definition of "Intentional": For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive's part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interests of Middlefield.
(3) Termination for Cause Can Occur Solely by Formal Board Action. The Executive shall not be deemed under this Agreement to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of at least three_fourths (3/4) of the directors of Middlefield then in office at a meeting of the board of directors called and held for such purpose, which resolution shall (a) contain findings that, in the good faith opinion of the board, the Executive has committed an act constituting Cause and (b) specify the particulars thereof in detail. Notice of that meeting and the proposed determination of Cause shall be given to the Executive a reasonable amount of time before the board's meeting. The Executive and his counsel (if the Executive chooses to have counsel present) shall have a reasonable opportunity to be heard by the board at the meeting. Nothing in this Agreement limits the Executive's or his beneficiaries' right to contest the validity or propriety of the board's determination of Cause, and they shall have the right to contest the validity or propriety of the board's determination of Cause even if that right does not exist under any employment agreement of the Executive.
(b) NO SEVERANCE UNDER THIS AGREEMENT FOR THE EXECUTIVE'S DEATH OR DISABILITY. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance payments or termination benefits under this Agreement if --
(1) Death: the Executive dies while actively employed by Middlefield or a Subsidiary, or
(2) Disability: the Executive becomes totally disabled while actively employed by Middlefield or a Subsidiary. For purposes of this agreement, the term "totally disabled" means that because of injury or sickness, the Executive is unable to perform his duties.
The benefits, if any, payable to the Executive or his beneficiary(ies) or estate relating to his death or disability shall be determined solely by such benefit plans or arrangements as Middlefield or Subsidiary may have with the Executive relating to death or disability, not by this Agreement.
5. TERM OF AGREEMENT
The initial term of this Agreement shall be for a period of three years, commencing November 28, 2001. On the first anniversary of the November 28, 2001 effective date of this Agreement, and on each anniversary thereafter, the Agreement shall be extended automatically for one additional year unless Middlefield's board of directors gives notice to the Executive in writing at least 90 days before the anniversary that the term of this Agreement will not be extended. If the board of directors determines not to extend the term, it shall promptly notify the Executive. References herein to the term of this Agreement mean the initial term and extensions of the initial term. Unless terminated earlier, this Agreement shall terminate when the Executive reaches age 65. If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in force until its term expires. The board's decision not to extend the term of this Agreement shall not -- by itself -- give the Executive any rights under this Agreement to claim an adverse change in his position, compensation or circumstances or otherwise to claim entitlement to severance or termination benefits under this Agreement.
6. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT
The parties hereto acknowledge and agree that (a) this Agreement is not a management or employment agreement and (b) nothing in this Agreement shall give the Executive any rights or impose any obligations to continued employment by Middlefield or any Subsidiary or successor of Middlefield, nor shall it give Middlefield any rights or impose any obligations for the continued performance of duties by the Executive for Middlefield or any Subsidiary or successor of Middlefield.
7. PAYMENT OF LEGAL FEES
Middlefield desires that the Executive not be required to incur legal fees and the related costs and expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise, because the amounts thereof would substantially detract from the benefits intended to be extended to the Executive under this Agreement. Therefore, even if the Executive does not prevail in whole or in part in litigation or other legal action associated with the interpretation, enforcement or defense of Executive's rights under this Agreement, Middlefield hereby agrees to pay and be solely financially responsible for any and all attorneys' and related fees, costs and expenses incurred by the Executive in the litigation or other legal action, up to a maximum of $500,000. The fees and expenses of counsel selected by the Executive shall be paid or reimbursed to the Executive by Middlefield on a regular, periodic basis, upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with counsel's customary practices. Anything herein to the contrary notwithstanding, nothing in this Agreement authorizes Middlefield to pay or the Executive to demand payment of fees, costs and expenses if and to the extent payment of fees, costs and expenses constitutes a "prohibited indemnification payment" within the meaning of Federal Deposit Insurance Corporation Rule 359.1(l)(1) [12 CFR 359.1(l)(1)]. Middlefield's obligation in this Section 7 to pay the Executive's legal fees operates separately from and in addition to any legal fee reimbursement obligation Middlefield or a Subsidiary may have under any separate employment or other agreement between the Executive and Middlefield.
Middlefield irrevocably authorizes the Executive to retain from time to time counsel of Executive's choice to advise and represent him in the interpretation, enforcement or defense of the parties' rights and responsibilities under this Agreement, if --
(1) the Executive concludes that Middlefield has failed to comply with any of its obligations under this Agreement, or
(2) if Middlefield or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive under this Agreement,
including without limitation the initiation or defense of any litigation or other legal action, whether by or against Middlefield or any director, officer, stockholder or other person affiliated with Middlefield, in any jurisdiction.
8. WITHHOLDING OF TAXES
Middlefield may withhold from any benefits payable under this Agreement all Federal, state, local or other taxes as may be required by law, governmental regulation or ruling.
9. SUCCESSORS AND ASSIGNS
(a) THIS AGREEMENT IS BINDING ON MIDDLEFIELD'S SUCCESSORS. This Agreement shall be binding upon Middlefield and any successor to Middlefield, including any persons acquiring directly or indirectly all or substantially all of the business or assets of Middlefield by purchase, merger, consolidation, reorganization or otherwise. Any such successor shall thereafter be deemed to be the "Corporation" for purposes of this Agreement. But this Agreement and Middlefield's obligations under this Agreement are not otherwise assignable, transferable or delegable by Middlefield. By agreement in form and substance satisfactory to the Executive, Middlefield shall require any successor to all or substantially all of the business or assets of Middlefield expressly to assume and agree to perform this Agreement in the same manner and to the same extent Middlefield would be required to perform if no such succession had occurred.
(b) THIS AGREEMENT IS ENFORCEABLE BY THE EXECUTIVE AND HIS HEIRS. This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes and legatees.
(c) THIS AGREEMENT IS PERSONAL IN NATURE AND IS NOT ASSIGNABLE. This Agreement is personal in nature. Without written consent of the other party, neither party shall assign, transfer or delegate this Agreement or any rights or obligations under this Agreement except as expressly provided in this Section 9. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder is not assignable or transferable, whether by pledge, creation of a security interest, or otherwise, except for a transfer by Executive's will or by the laws of descent and distribution. If the Executive attempts an assignment or transfer that is contrary to this Section 9, Middlefield shall have no liability to pay any amount to the assignee or transferee.
10. 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 address as either party may designate by like notice.
(a)If to Middlefield, to: Middlefield Banc Corp.
15985 East High Street
P.O. Box 35 Middlefield, Ohio 44062
Attn: Corporate Secretary
(b)If to the Executive, to: Mr. James R. Heslop, II 15985 East High Street Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
11. CAPTIONS AND COUNTERPARTS
The headings and subheadings used in this Agreement are included solely for convenience and shall not affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement.
12. AMENDMENTS AND WAIVERS
No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing or writings signed by the Executive and by Middlefield. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.
13. SEVERABILITY
The provisions of this Agreement shall be deemed severable. The invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement. Any provision held to be invalid or unenforceable shall be reformed to the extent (and only to the extent) necessary to make it valid and enforceable.
14. GOVERNING LAW
The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State.
15. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between Middlefield and the Executive concerning the subject matter hereof. No rights are granted to the Executive under this Agreement other than those specifically set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
WITNESSES: MIDDLEFIELD BANC CORP.
By:
Thomas G. Caldwell
Its: President and Chief
Executive Officer
WITNESSES: EXECUTIVE
James R. Heslop, II
County of Geauga )
) ss:
State of Ohio )
|
Before me this day of , 2003, personally appeared the above named Thomas G. Caldwell and James R. Heslop, II, who acknowledged that they did sign the foregoing instrument and that the same was their free act and deed.
Exhibit 10.4
SEVERANCE AGREEMENT
This SEVERANCE AGREEMENT (this "Agreement") is entered into as of this 12th day of August, 2003, by and between Middlefield Banc Corp., an Ohio corporation ("Middlefield"), and Jay P. Giles, Senior Vice President (the "Executive") of The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank and wholly owned subsidiary of Middlefield.
WHEREAS, the Executive is employed by The Middlefield Banking Company and the Executive has made and is expected to continue to make major contributions to the profitability, growth, and financial strength of Middlefield and its subsidiaries,
WHEREAS, Middlefield recognizes that, as is the case for most companies, the possibility of a Change in Control (as defined in Section 1(c)) exists,
WHEREAS, Middlefield desires to assure itself of the current and future continuity of management and desires to establish minimum severance benefits for certain of its officers and other key employees, including the Executive, if a Change in Control occurs,
WHEREAS, Middlefield wishes to ensure that officers and other key employees are not practically disabled from discharging their duties if a proposed or actual transaction involving a Change in Control arises,
WHEREAS, Middlefield desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of Middlefield and subsidiary, and
WHEREAS, none of the conditions or events included in the definition of the term "golden parachute payment" that is set forth in Section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of Middlefield, is contemplated insofar as either of Middlefield or any of its subsidiaries is concerned,
NOW THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. CHANGE IN CONTROL COMBINED WITH EMPLOYMENT TERMINATION
(a) TERMINATION OF EXECUTIVE WITHIN TWO YEARS AFTER A CHANGE IN CONTROL. If a Change in Control occurs during the term of this Agreement and if either of the following also occurs, the Executive shall be entitled to severance and termination benefits specified in Section 2 of this Agreement --
(1) Termination by Middlefield or Subsidiary: the Executive's employment with Middlefield or its Subsidiary(ies) is involuntarily terminated within two years after a Change in Control, except for termination under Section 4 of this Agreement. For purposes of this Agreement, "Subsidiary" means an entity in which Middlefield directly or indirectly beneficially owns 50% or more of the outstanding voting securities, or
(2) Termination by the Executive for Good Reason: the Executive terminates his employment with Middlefield or Subsidiary(ies) for Good Reason (as defined in Section 3) within two years after a Change in Control.
If the Executive is removed from office or if his employment terminates after discussions with a third party regarding a Change in Control commence, and if those discussions ultimately conclude with a
Change in Control, then for purposes of this Agreement the removal of the Executive or termination of his employment shall be deemed to have occurred after the Change in Control.
(b) TERMINATION BY THE EXECUTIVE DURING A 90-DAY PERIOD 12 MONTHS AFTER A CHANGE IN CONTROL. The Executive shall also be entitled to severance and termination benefits under Section 2 of this Agreement if he terminates employment with Middlefield and Subsidiary(ies) for any reason or for no reason during the 90_day period beginning on the date that is 12 months after a Change in Control.
(c) DEFINITION OF CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control" means any of the following events occur:
(1) Merger: Middlefield merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a Subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
2. SEVERANCE AND TERMINATION BENEFITS
(a) SEVERANCE AND TERMINATION BENEFITS. The severance and termination benefits to which the Executive is entitled under Section 1 are as follows --
(1) Lump Sum Payment: Middlefield shall make a lump sum payment to the Executive in an amount in cash equal to two times the Executive's annual compensation. For purposes of this Agreement, annual compensation means (a) the Executive's annual base salary on the date of the Change in Control or the Executive's termination of employment (at whichever date the Executive's current annual base salary is greater), plus (b) the average of the bonuses and incentive compensation earned for the three calendar years immediately preceding the year in which the Change in Control occurs, regardless of when the bonus or incentive compensation is paid. Middlefield recognizes that the bonus and incentive compensation earned by the Executive for a particular year's service might be paid in the year after the calendar year in which the bonus or incentive compensation is earned. The amount payable to the Executive hereunder shall not be reduced to account for the time value of money or discounted to present value. The payment
required under this Section 2(a)(1) is payable no later than 5 business days after the date the Executive's employment terminates. If the Executive terminates employment for Good Reason, the date of termination shall be the date specified by the Executive in his notice of termination.
(2) Benefit Plans: Middlefield shall cause the Executive to become fully vested in any qualified and non-qualified plans, programs or arrangements in which the Executive participated if the plan, program, or arrangement does not address the effect of a change in control. Middlefield also shall contribute or cause a Subsidiary to contribute to the Executive's Middlefield Banking Company 401(k) Employee Savings and Investment Plan account the matching and voluntary contributions, if any, that would have been made had the Executive's employment not terminated before the end of the plan year.
(3) Insurance Coverage: Middlefield shall cause to be continued life, health and disability insurance coverage substantially identical to the coverage maintained for the Executive before his termination. The insurance coverage may cease when the Executive becomes employed by another employer or 24 months after the Executive's termination, whichever occurs first. At the end of the 24-month period, the Executive shall have the option to continue health insurance coverage at his own expense for a period not less than the number of months by which the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation period exceeds 24 months.
(b) NO MITIGATION REQUIRED. Middlefield hereby acknowledges that it will be difficult and could be impossible (1) for the Executive to find reasonably comparable employment after his employment terminates, and (2) to measure the amount of damages the Executive suffers as a result of termination. Additionally, Middlefield acknowledges that its general severance pay plans do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, Middlefield further acknowledges that the payment of severance and termination benefits by Middlefield under this Agreement is reasonable and will be liquidated damages, and the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise.
3. GOOD REASON
For purposes of this Agreement, "Good Reason" means the occurrence of any of the events or conditions described in clauses (a) through (f) hereof without the Executive's express written consent --
(a) CHANGE IN OFFICE OR POSITION OR TERMINATION AS A DIRECTOR: failure to elect or reelect or otherwise to maintain the Executive in the office or position, or a substantially equivalent office or position, of or with Middlefield and Subsidiary(ies) that the Executive held immediately before the Change in Control, or the removal or failure to nominate the Executive as a director of Middlefield (or any successor thereto) if the Executive shall have been a director of Middlefield immediately before the Change in Control,
(b) ADVERSE CHANGE IN THE SCOPE OF HIS DUTIES OR COMPENSATION AND BENEFITS:
(1) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties associated with the Executive's position with Middlefield and Subsidiary(ies) compared to the nature or scope of the authorities, powers, functions, responsibilities or duties associated with the position immediately before the Change in Control,
(2) a reduction in the aggregate of the Executive's annual compensation received from Middlefield and Subsidiary(ies), or
(3) the termination or denial of the Executive's rights to benefits under Middlefield's or Subsidiary's(ies') benefit, compensation and incentive plans and arrangements or a reduction in the scope or value thereof, which situation is not remedied within 10 calendar days after written notice to Middlefield from the Executive,
(c) ADVERSE CHANGE IN CIRCUMSTANCES: the Executive determines that a change in circumstances has occurred after a Change in Control, including without limitation a change in the scope of the business or other activities for which the Executive is responsible compared to his responsibilities immediately before the Change in Control, (1) which renders the Executive substantially unable to carry out, substantially hinders the Executive's performance of, or causes the Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties associated with the office or position held by the Executive immediately before the Change in Control, and (2) which situation is not remedied within 10 calendar days after written notice to Middlefield from the Executive of such determination. Provided his determination is made in good faith, the Executive's determination will be conclusive and binding upon the parties hereto. The Executive's determination will be presumed to have been made in good faith, unless Middlefield establishes by clear and convincing evidence that it was not made in good faith,
(d) LIQUIDATION AND MERGER OF MIDDLEFIELD: the liquidation, dissolution, merger, consolidation or reorganization of Middlefield or transfer of all or substantially all of the business or assets of either Middlefield or The Middlefield Banking Company, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of the business or assets have been transferred (directly or by operation of law) assumes all duties and obligations of Middlefield under this Agreement,
(e) RELOCATION OF THE EXECUTIVE: Middlefield relocates its principal executive offices, or requires the Executive to have his principal location of work changed, to any location that is more than 15 miles from the location thereof immediately before the Change in Control, or requires the Executive to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately before the Change in Control, or
(f) BREACH OF THIS AGREEMENT: without limiting the generality or effect of the foregoing, any material breach of this Agreement by Middlefield or any successor thereto.
4. TERMINATION FOR WHICH NO SEVERANCE OR TERMINATION BENEFITS ARE PAYABLE
(a) NO SEVERANCE FOR TERMINATION FOR CAUSE. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance or termination benefits if his employment terminates for Cause.
(1) Cause Means Commission of Any of the Following Acts: For purposes of this Agreement, "Cause" means the Executive shall have committed any of the following acts
(a) Fraud, Embezzlement, Theft or Other Crime: an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with Middlefield or a Subsidiary, or commission of a felony or commission of a misdemeanor involving moral turpitude,
(b) Negligence, Disloyalty or Violation of Law or Policy:
the Executive's gross negligence or gross neglect of
duties, disloyalty, dishonesty, or willful violation
of any law or significant policy of Middlefield
committed in connection with the Executive's
employment and resulting in an adverse effect on
Middlefield or a Subsidiary,
(c) Disclosure of Trade Secrets: intentional wrongful disclosure of secret processes or confidential information of Middlefield or a Subsidiary, causing material harm to Middlefield or the Subsidiary,
(d) Competing with Middlefield: intentional wrongful engagement in any competitive activity. For purposes of this Agreement, competitive activity means the Executive's participation, without the written consent of a senior executive officer of Middlefield, in the management of any business enterprise if (1) the enterprise engages in substantial and direct competition with Middlefield, (2) the enterprise's revenues derived from any product or service competitive with any product or service of Middlefield or Subsidiary(ies) amounted to 10% or more of the enterprise's revenues for its most recently completed fiscal year, and (3) Middlefield's revenues from the product or service amounted to 10% of Middlefield's revenues for its most recently completed fiscal year. A competitive activity does not include mere ownership of securities in an enterprise and the exercise of rights appurtenant thereto, provided the Executive's share ownership does not give him practical or legal control of the enterprise. For this purpose, ownership of less than 5% of the enterprise's outstanding voting securities shall conclusively be presumed to be insufficient for practical or legal control, and ownership of more than 50% shall conclusively be presumed to constitute practical and legal control.
If the Executive is now or hereafter becomes subject to an agreement not to compete with Middlefield or Subsidiary(ies), a breach by the Executive of that other non-competition agreement shall be grounds for denial of severance and termination benefits for Cause under this clause (d) of Section 4(a)(1). But if the Executive engages in a competitive activity under circumstances justifying denial of severance or termination benefits for Cause under this clause (d), that shall not necessarily be grounds for concluding that the Executive has also breached the other non-competition agreement to which he is or may become subject. This clause (d) is not intended to and shall not be construed to supersede or amend any provision of an employment or non-competition agreement to which the Executive is or may become subject. This clause (d) does not grant to the Executive any right or privilege to engage in other activities or enterprises, whether in competition with Middlefield or otherwise, or
(e) Termination for Cause under an Employment Agreement:
any actions that have caused the Executive to be
terminated for cause under any employment agreement
existing on the date hereof or hereafter entered into
between the Executive and Middlefield or a
Subsidiary.
(2) Definition of "Intentional": For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive's part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interests of Middlefield.
(3) Termination for Cause Can Occur Solely by Formal Board Action. The Executive shall not be deemed under this Agreement to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of at least three_fourths (3/4) of the directors of Middlefield then in office at a meeting of the board of directors called and held for such purpose, which resolution shall (a) contain findings that, in the good faith opinion of the board, the Executive has committed an act constituting Cause and (b) specify the particulars thereof
in detail. Notice of that meeting and the proposed determination of Cause shall be given to the Executive a reasonable amount of time before the board's meeting. The Executive and his counsel (if the Executive chooses to have counsel present) shall have a reasonable opportunity to be heard by the board at the meeting. Nothing in this Agreement limits the Executive's or his beneficiaries' right to contest the validity or propriety of the board's determination of Cause, and they shall have the right to contest the validity or propriety of the board's determination of Cause even if that right does not exist under any employment agreement of the Executive.
(b) NO SEVERANCE UNDER THIS AGREEMENT FOR THE EXECUTIVE'S DEATH OR DISABILITY. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance payments or termination benefits under this Agreement if --
(1) Death: the Executive dies while actively employed by Middlefield or a Subsidiary, or
(2) Disability: the Executive becomes totally disabled while actively employed by Middlefield or a Subsidiary. For purposes of this agreement, the term "totally disabled" means that because of injury or sickness, the Executive is unable to perform his duties.
The benefits, if any, payable to the Executive or his beneficiary(ies) or estate relating to his death or disability shall be determined solely by such benefit plans or arrangements as Middlefield or Subsidiary may have with the Executive relating to death or disability, not by this Agreement.
5. TERM OF AGREEMENT
The initial term of this Agreement shall be for a period of three years, commencing August 12, 2003. On the first anniversary of the August 12, 2003 effective date of this Agreement, and on each anniversary thereafter, the Agreement shall be extended automatically for one additional year unless Middlefield's board of directors gives notice to the Executive in writing at least 90 days before the anniversary that the term of this Agreement will not be extended. If the board of directors determines not to extend the term, it shall promptly notify the Executive. References herein to the term of this Agreement mean the initial term and extensions of the initial term. Unless terminated earlier, this Agreement shall terminate when the Executive reaches age 65. If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in force until its term expires. The board's decision not to extend the term of this Agreement shall not -- by itself -- give the Executive any rights under this Agreement to claim an adverse change in his position, compensation or circumstances or otherwise to claim entitlement to severance or termination benefits under this Agreement.
6. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT
The parties hereto acknowledge and agree that (a) this Agreement is not a management or employment agreement and (b) nothing in this Agreement shall give the Executive any rights or impose any obligations to continued employment by Middlefield or any Subsidiary or successor of Middlefield, nor shall it give Middlefield any rights or impose any obligations for the continued performance of duties by the Executive for Middlefield or any Subsidiary or successor of Middlefield.
7. PAYMENT OF LEGAL FEES
Middlefield desires that the Executive not be required to incur legal fees and the related costs and expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise, because the amounts thereof would substantially detract from the benefits intended to be extended to the Executive under this Agreement. Therefore, even if the Executive does not prevail in whole or in part in litigation or other legal action associated with the interpretation, enforcement or defense of Executive's rights under this Agreement, Middlefield hereby agrees to pay and be solely financially responsible for any and all attorneys' and related fees, costs and expenses incurred by the Executive in the litigation or other legal action, up to a maximum of $500,000. The fees and expenses
of counsel selected by the Executive shall be paid or reimbursed to the
Executive by Middlefield on a regular, periodic basis, upon presentation by the
Executive of a statement or statements prepared by such counsel in accordance
with counsel's customary practices. Anything herein to the contrary
notwithstanding, nothing in this Agreement authorizes Middlefield to pay or the
Executive to demand payment of fees, costs and expenses if and to the extent
payment of fees, costs and expenses constitutes a "prohibited indemnification
payment" within the meaning of Federal Deposit Insurance Corporation Rule
359.1(l)(1) [12 CFR 359.1(l)(1)]. Middlefield's obligation in this Section 7 to
pay the Executive's legal fees operates separately from and in addition to any
legal fee reimbursement obligation Middlefield or a Subsidiary may have under
any separate employment or other agreement between the Executive and
Middlefield.
Middlefield irrevocably authorizes the Executive to retain from time to time counsel of Executive's choice to advise and represent him in the interpretation, enforcement or defense of the parties' rights and responsibilities under this Agreement, if --
(1) the Executive concludes that Middlefield has failed to comply with any of its obligations under this Agreement, or
(2) if Middlefield or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive under this Agreement,
including without limitation the initiation or defense of any litigation or other legal action, whether by or against Middlefield or any director, officer, stockholder or other person affiliated with Middlefield, in any jurisdiction.
8. WITHHOLDING OF TAXES
Middlefield may withhold from any benefits payable under this Agreement all Federal, state, local or other taxes as may be required by law, governmental regulation or ruling.
9. SUCCESSORS AND ASSIGNS
(a) THIS AGREEMENT IS BINDING ON MIDDLEFIELD'S SUCCESSORS. This Agreement shall be binding upon Middlefield and any successor to Middlefield, including any persons acquiring directly or indirectly all or substantially all of the business or assets of Middlefield by purchase, merger, consolidation, reorganization or otherwise. Any such successor shall thereafter be deemed to be the "Corporation" for purposes of this Agreement. But this Agreement and Middlefield's obligations under this Agreement are not otherwise assignable, transferable or delegable by Middlefield. By agreement in form and substance satisfactory to the Executive, Middlefield shall require any successor to all or substantially all of the business or assets of Middlefield expressly to assume and agree to perform this Agreement in the same manner and to the same extent Middlefield would be required to perform if no such succession had occurred.
(b) THIS AGREEMENT IS ENFORCEABLE BY THE EXECUTIVE AND HIS HEIRS. This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes and legatees.
(c) THIS AGREEMENT IS PERSONAL IN NATURE AND IS NOT ASSIGNABLE. This Agreement is personal in nature. Without written consent of the other party, neither party shall assign, transfer or delegate this Agreement or any rights or obligations under this Agreement except as expressly provided in this Section 9. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder is not assignable or transferable, whether by pledge, creation of a security interest, or otherwise, except for a transfer by Executive's will or by the laws of descent and distribution. If the Executive
attempts an assignment or transfer that is contrary to this Section 9, Middlefield shall have no liability to pay any amount to the assignee or transferee.
10. 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 address as either party may designate by like notice.
(a)If to Middlefield, to: Middlefield Banc Corp.
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
Attn: Corporate Secretary
(b)If to the Executive, to: Mr. Jay P.Giles 15985 East High Street Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
11. CAPTIONS AND COUNTERPARTS
The headings and subheadings used in this Agreement are included solely for convenience and shall not affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement.
12. AMENDMENTS AND WAIVERS
No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing or writings signed by the Executive and by Middlefield. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.
13. SEVERABILITY
The provisions of this Agreement shall be deemed severable. The invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement. Any provision held to be invalid or unenforceable shall be reformed to the extent (and only to the extent) necessary to make it valid and enforceable.
14. GOVERNING LAW
The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State.
15. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between Middlefield and the Executive concerning the subject matter hereof. No rights are granted to the Executive under this Agreement other than those specifically set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above.
WITNESSES: MIDDLEFIELD BANC CORP.
By:
James R. Heslop, II
Its: Executive Vice President/
Chief Operating Officer
WITNESSES: EXECUTIVE
Jay P. Giles
County of Geauga )
) ss:
State of Ohio )
|
Before me this 12th day of August, 2003, personally appeared the above named Thomas G. Caldwell and Jay P. Giles, who acknowledged that they did sign the foregoing instrument and that the same was their free act and deed.
EXHIBIT 10.14
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20 day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Donald L. Stacy (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before the age of 85 while employed by the Bank, or (ii) if the Executive dies before age 85 but after having terminated employment on or after Early Retirement Age, or because of Disability, or within 12 months after a Change in Control. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur--
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.6 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching age 85, the Bank shall pay to the Executive's designated beneficiary a survivor income benefit of $222,619. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Benefit. If the Executive terminates employment due to Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.3 Change in Control Benefit. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Executive's 85th birthday.
2.5 Amount of Benefits. If the Employee was no longer employed by
the Bank at the time of death but benefits are nevertheless payable under
Section 2.2, 2.3, or 2.4, the Bank shall pay to the Employee's beneficiary a
survivor income benefit of $111,309. The survivor income benefit shall be paid
in a single lump sum within 90 days after submission of proof of a claim
substantiating the Employee's death. If the Employee dies after reaching age 85,
no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
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this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Donald L. Stacy
15985 East High Street
Middlefield, OH 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By:________________________ By: __________________________
James R. Heslop, 2nd
Donald L. Stacy Its: Executive Vice President/Chief Operating
Officer
Chief Financial Officer
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BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Patricia K. Stacy
Contingent: Taylor P. Stacy and Marshall A. Stacy, equally
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Donald L. Stacy
Title: Chief Financial Officer
Received by the Bank this ________ day of ___________________, 2003
EXHIBIT 10.15
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20 day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Jay P. Giles (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before the age of 85 while employed by the Bank, or (ii) if the Executive dies before age 85 but after having terminated employment on or after Early Retirement Age, or because of Disability, or within 12 months after a Change in Control. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.6 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching age 85, the Bank shall pay to the Executive's designated beneficiary a survivor income benefit of $262,861. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Benefit. If the Executive terminates employment due to Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.3 Change in Control Benefit. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Executive's 85th birthday.
2.5 Amount of Benefits. If the Employee was no longer employed by
the Bank at the time of death but benefits are nevertheless payable under
Section 2.2, 2.3, or 2.4, the Bank shall pay to the Employee's beneficiary a
survivor income benefit of $131,430. The survivor income benefit shall be paid
in a single lump sum within 90 days after submission of proof of a claim
substantiating the Employee's death. If the Employee dies after reaching age 85,
no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Sections. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
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this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Jay P. Giles
15985 East High Street
Middlefield, OH 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By:________________________ By: _______________________________________
Jay P. Giles James R. Heslop, 2nd
SVP/Senior Commercial Lender Its: Executive Vice President/Chief
Operating Officer
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BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Successor Trustee under the Jay P. Giles Declaration of Trust dated March 24, 2000
Contingent:
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Jay P. Giles
Title: Senior Vice President/Senior Commercial Lender
Received by the Bank this ________ day of ___________________, 2003
EXHIBIT 10.16
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20th day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Alfred F. Thompson, Jr. (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before Normal Retirement Age while employed by the Bank, or (ii) if the Executive dies after Termination of Employment but before Normal Retirement Age, provided the Executive terminated employment due to Disability, Change in Control, or attaining Early Retirement Age. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur--
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Normal Retirement Age" means the Executive's 65nd birthday.
1.6 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.7 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching Normal Retirement Age, the Bank shall pay to the Executive's designated beneficiary the survivor income benefit described in Section 2.5. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Continuation. If the Executive terminates employment due to Disability and then dies before reaching Normal Retirement Age and without recovering from such Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5.
2.3 Change in Control Continuation. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive dies before attaining Normal Retirement Age.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Normal Retirement Age.
2.5 Amount of Benefits. The survivor income benefit shall be $123,412. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Employee's death. If the Employee dies after Normal Retirement Age, no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
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this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Alfred F. Thompson, Jr.
15985 East High Street
Middlefield, OH 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By:________________________ By: ____________________________________
James R. Heslop, 2nd
Alfred F. Thompson, Jr. Its: EVP/COO
Vice President - Sr. Retail Lender
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BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Diana L. Thompson
Contingent: Joseph R. Cannatti, Jr.
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Alfred F. Thompson, Jr.
Title: Vice President - Sr. Retail Lender
Received by the Bank this ________ day of ___________________, 2003.
EXHIBIT 10.17
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20th day of June, 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Nancy C. Snow (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before Normal Retirement Age while employed by the Bank, or (ii) if the Executive dies after Termination of Employment but before Normal Retirement Age, provided the Executive terminated employment due to Disability, Change in Control, or attaining Early Retirement Age. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The
Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Normal Retirement Age" means the Executive's 71st birthday.
1.6 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.7 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes
of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching Normal Retirement Age, the Bank shall pay to the Executive's designated beneficiary the survivor income benefit described in Section 2.5. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Continuation. If the Executive terminates employment due to Disability and then dies before reaching Normal Retirement Age and without recovering from such Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5.
2.3 Change in Control Continuation. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive dies before attaining Normal Retirement Age.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Normal Retirement Age.
2.5 Amount of Benefits. The survivor income benefit shall be $134,066. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Employee's death. If the Employee dies after Normal Retirement Age, no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
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this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Nancy C. Snow
15985 East High Street
Middlefield, OH 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By:________________________ By: ______________________
James R. Heslop, II
Nancy C. Snow Its: EVP/COO
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Vice President /Corporate Secretary/Branch Manager
BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Nancy C. Snow
Title: Vice President /Corporate Secretary/Branch Manager
Received by the Bank this ________ day of ___________________, 2003.
EXHIBIT 10.18
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20th day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Teresa M. Hetrick (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before the age of 85 while employed by the Bank, or (ii) if the Executive dies before age 85 but after having terminated employment on or after Early Retirement Age, or because of Disability, or within 12 months after a Change in Control. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.6 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching age 85, the Bank shall pay to the Executive's designated beneficiary a survivor income benefit of $170,137. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Benefit. If the Executive terminates employment due to Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.3 Change in Control Benefit. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Executive's 85th birthday.
2.5 Amount of Benefits. If the Employee was no longer employed by
the Bank at the time of death but benefits are nevertheless payable under
Section 2.2, 2.3, or 2.4, the Bank shall pay to the Employee's beneficiary a
survivor income benefit of $85,069. The survivor income benefit shall be paid in
a single lump sum within 90 days after submission of proof of a claim
substantiating the Employee's death. If the Employee dies after reaching age 85,
no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
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this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Teresa M. Hetrick
15985 East High Street
Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By: ________________________ By: ______________________
James R. Heslop, 2nd
Teresa M. Hetrick Its: EVP/COO
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Senior Vice President - Operations/Administration
BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Michael R. Hetrick
Contingent: Neil M. Hetrick and Jacklyn E. Hetrick, equally
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF ------ THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Teresa M. Hetrick
Title: Senior Vice President - Operations/Administration
Received by the Bank this ________ day of ___________________, 2003.
EXHIBIT 10.19
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20th day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Jack L. Lester (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before Normal Retirement Age while employed by the Bank, or (ii) if the Executive dies after Termination of Employment but before Normal Retirement Age, provided the Executive terminated employment due to Disability, Change in Control, or attaining Early Retirement Age. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Normal Retirement Age" means the Executive's 65nd birthday.
1.6 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.7 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the
Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching Normal Retirement Age, the Bank shall pay to the Executive's designated beneficiary the survivor income benefit described in Section 2.5. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Continuation. If the Executive terminates employment due to Disability and then dies before reaching Normal Retirement Age and without recovering from such Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5.
2.3 Change in Control Continuation. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive dies before attaining Normal Retirement Age.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Normal Retirement Age.
2.5 Amount of Benefits. The survivor income benefit shall be $134,131. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Employee's death. If the Employee dies after Normal Retirement Age, no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
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this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Jack L. Lester
15985 East High Street
Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By:________________________ By: ______________________
James R. Heslop, 2nd
Jack L. Lester Its: EVP/COO
Vice President - Security/Compliance
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BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Cheryl A. Lester
Contingent: Nancy Szydlowski and Wendy Juhasz, equally
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Jack L. Lester
Title: Vice President - Security/Compliance
Received by the Bank this ________ day of ___________________, 2003.
EXHIBIT 10.20
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20th day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and James R. Heslop, II (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before the age of 85 while employed by the Bank, or (ii) if the Executive dies before age 85 but after having terminated employment on or after Early Retirement Age, or because of Disability, or within 12 months after a Change in Control. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.6 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching age 85, the Bank shall pay to the Executive's designated beneficiary a survivor income benefit of $368,970. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Benefit. If the Executive terminates employment due to Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.3 Change in Control Benefit. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Executive's 85th birthday.
2.5 Amount of Benefits. If the Employee was no longer employed by
the Bank at the time of death but benefits are nevertheless payable under
Section 2.2, 2.3, or 2.4, the Bank shall pay to the Employee's beneficiary a
survivor income benefit of $368,970. The survivor income benefit shall be paid
in a single lump sum within 90 days after submission of proof of a claim
substantiating the Employee's death. If the Employee dies after reaching age 85,
no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
|
the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
|
this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
James R. Heslop, 2nd
15985 East High Street
Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By: _______________________ By: ______________________
Thomas G. Caldwell
James R. Heslop, II Its: President/CEO
Executive Vice President & COO
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BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Debra K. Heslop
Contingent: Allison A. Heslop and Kristen E. Heslop, equally
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: James R. Heslop, II
Title: Executive Vice President & COO
Received by the Bank this ________ day of ___________________, 2003.
EXHIBIT 10.21
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
THIS EXECUTIVE SURVIVOR INCOME AGREEMENT (this "Agreement') is made this 20th day of June , 2003, by and between The Middlefield Banking Company, an Ohio-chartered, FDIC-insured nonmember bank with its main office in Middlefield, Ohio (the "Bank"), and Thomas G. Caldwell (the "Executive").
WHEREAS, to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide benefits to the Executive's beneficiary(ies) (i) if the Executive dies before the age of 85 while employed by the Bank, or (ii) if the Executive dies before age 85 but after having terminated employment on or after Early Retirement Age, or because of Disability, or within 12 months after a Change in Control. The Bank will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive's life.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Change in Control" means the definition of Change in Control specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Change in Control, Change in Control means any of the following events occur
(1) Merger: Middlefield Banc Corp. ("Middlefield") merges into or consolidates with another corporation, or merges another corporation into Middlefield, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of Middlefield's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or other entity,
(2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 15% or more of a class of Middlefield's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a subsidiary in a fiduciary capacity),
(3) Change in Board Composition: during any period of two
consecutive years, individuals who constitute Middlefield's
board of directors at the beginning of the two-year period
cease for any reason to constitute at least a majority
thereof; provided, however, that -- for purposes of this
clause (3) -- each director who is first elected by the board
(or first 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 shall be deemed
to have been a director at the beginning of the two-year
period, or
(4) Sale of Assets: Middlefield sells to a third party substantially all of Middlefield's assets. For purposes of this Agreement, sale of substantially all of Middlefield's assets includes sale of The Middlefield Banking Company.
1.2 "Disability" means the Executive suffers a sickness, accident, or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or the Social Security Administration's determination upon the request of the Bank.
1.3 "Early Retirement Age" means the Executive's 55th birthday, provided the Executive has at least 10 Years of Service with the Bank on that date. If the Executive does not have 10 Years of Service with the Bank by the date of his 55th birthday, the Executive's Early Retirement Age means the date on which the Executive has 10 Years of Service with the Bank, provided such 10 Years of Service occurs before the Executive reaches age 65. For purposes of this Agreement, years of service means the total number of twelve-month periods during which the Executive serves as an employee of the Bank.
1.4 "Good Reason" means the definition of Good Reason specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of Good Reason, Good Reason means the occurrence of any of the events or conditions described in clauses (a) through (e) hereof without the Executive's express written consent -
(a) a material reduction in Executive's title or responsibilities;
(b) a reduction in base salary as in effect on the date of a Change in Control;
(c) relocation of the Bank's principal executive offices, or requiring the Executive to change his or her principal work location, to any location that is more than 15 miles from the location of the Bank's principal executive offices on the date of this Agreement;
(d) the failure by the Bank to continue to provide the Executive with compensation and benefits substantially similar to those provided to him or her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Bank 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; or
(e) the failure of the Bank to obtain a satisfactory agreement from any successor or assignee of the Bank to assume and agree to perform this Agreement.
1.5 "Termination for Cause" means the definition of termination for cause specified in any employment or severance agreement existing on the date hereof or hereafter entered into between the Executive and the Bank. If the Executive is not a party to an employment or severance agreement containing a definition of termination for cause, Termination for Cause means the Bank has terminated the Executive's employment for any of the following reasons:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral turpitude; or
(c) Fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank.
1.6 "Termination of Employment" with the Bank means that the Executive shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of termination of the
Executive's employment, the Bank shall have the sole and absolute right to decide the dispute, unless a Change in Control shall have occurred.
ARTICLE 2
ENTITLEMENT TO BENEFIT
2.1 Pre-Termination of Employment Survivor Income Benefit. If the Executive dies in active service to the Bank before reaching age 85, the Bank shall pay to the Executive's designated beneficiary a survivor income benefit of $471,741. The survivor income benefit shall be paid in a single lump sum within 90 days after submission of proof of a claim substantiating the Executive's death.
2.2 Disability Benefit. If the Executive terminates employment due to Disability, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.3 Change in Control Benefit. If the Executive's employment with the Bank terminates involuntarily within 12 months after a Change in Control (excepting Termination for Cause) or in the event the Executive terminates employment voluntarily for Good Reason within 12 months after such Change in Control, the Bank shall pay the Executive's designated beneficiary the survivor income benefit described in Section 2.5 provided the Executive dies before reaching age 85.
2.4 Early Retirement Benefit. If the Executive terminates employment on or after Early Retirement Age, the Bank shall pay to the Executive's designated beneficiary in a single lump sum the survivor income benefit described in Section 2.5 following the Executive's death, provided the Executive's death occurs before the Executive's 85th birthday.
2.5 Amount of Benefits. If the Employee was no longer employed by
the Bank at the time of death but benefits are nevertheless payable under
Section 2.2, 2.3, or 2.4, the Bank shall pay to the Employee's beneficiary a
survivor income benefit of $471,741. The survivor income benefit shall be paid
in a single lump sum within 90 days after submission of proof of a claim
substantiating the Employee's death. If the Employee dies after reaching age 85,
no survivor income benefits shall be payable under this Agreement.
ARTICLE 3
BENEFICIARIES
3.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
3.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 4
GENERAL LIMITATIONS
4.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement if Termination of Employment is due to the Executive's actions resulting in Termination for Cause.
4.2 Suicide or Misstatement. The Bank shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on any application or resume provided to the Bank, or on any application for any benefits provided by the Bank to the Executive.
4.3 Removal. If the Executive is removed from office or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.
4.4 Default. Notwithstanding any provision of this Agreement to the contrary, if the Bank is in "default" or "in danger of default" as those terms are defined in Section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.
4.5 Termination of Participation. The Executive's rights under this Agreement shall cease if the Executive's employment with the Bank terminates, except as provided in Section 2.2 (termination because of Disability), Section 2.3 (termination within 12 months after a Change in Control), or Section 2.4 (termination because of Early Retirement Age).
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1 Claims Procedure. A participant or beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
5.1.1 Initiation - Written Claim. The claimant initiates a claim by
submitting to the Bank a written claim for the benefits.
5.1.2 Timing of Bank Response. The Bank shall respond to such
claimant within 90 days after receiving the claim. If the Bank
determines that special circumstances require additional time
for processing the claim, the Bank can extend the response
period by an additional 90 days by notifying the claimant in
writing, prior to the end of the initial 90-day period, that
an additional period is required. The notice of extension must
set forth the special circumstances and the date by which the
Bank expects to render its decision.
5.1.3 Notice of Decision. If the Bank denies part or all of the
claim, the Bank shall notify the claimant in writing of such
denial. The Bank shall write the notification in a manner
calculated to be understood by the claimant. The notification
shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A description of any additional information or material
necessary for the claimant to perfect the claim and an
explanation of why it is needed;
(d) An explanation of the Agreement's review procedures and
the time limits applicable to such procedures; and
(e) A statement of the claimant's right to bring a civil
action under ERISA (Employee Retirement Income Security Act)
Section 502(a) following an adverse benefit determination on
review.
5.2 Review Procedure. If the Bank denies part or all of the claim,
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the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
5.2.1 Initiation - Written Request. To initiate the review, the
claimant, within 60 days after receiving the Bank's notice of
denial, must file with the Bank a written request for review.
5.2.2 Additional Submissions - Information Access. The claimant
shall then have the opportunity to submit written comments,
documents, records, and other information relating to the
claim. The Bank shall also provide the claimant, upon request
and free of charge, reasonable access to, and copies of, all
documents, records, and other information relevant (as defined
in applicable ERISA regulations) to the claimant's claim for
benefits.
5.2.3 Considerations on Review. In considering the review, the Bank
shall take into account all materials and information the
claimant submits relating to the claim, without regard to
whether such information was submitted or considered in the
initial benefit determination.
5.2.4 Timing of Bank Response. The Bank shall respond in writing to
such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can
extend the response period by an additional 60 days by
notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required.
The notice of extension must set forth the special
circumstances and the date by which the Bank expects to render
its decision.
5.2.5 Notice of Decision. The Bank shall notify the claimant in
writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the
claimant. The notification shall set forth:
(a) The specific reasons for the denial;
(b) A reference to the specific provisions of the Agreement on
which the denial is based;
(c) A statement that the claimant is entitled to receive, upon
request and free of charge, reasonable access to, and copies
of, all documents, records, and other information relevant (as
defined in applicable ERISA regulations) to the claimant's
claim for benefits; and
(d) A statement of the claimant's right to bring a civil
action under ERISA Section 502(a).
ARTICLE 6
MISCELLANEOUS
6.1 Amendments and Termination. The Bank may amend or terminate
|
this Agreement at any time if, pursuant to legislative, judicial, or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits).
6.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
6.3 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. The Agreement does not affect the employment status of the Executive, whether the Executive is an employee at will or otherwise. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
6.4 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
6.5 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement if no such succession had occurred.
6.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
6.7 Applicable Law. Except to the extent preempted by the laws of the United States of America, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.
6.8 Unfunded Arrangement. The Executive's beneficiary(ies) are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary(ies) have no preferred or secured claim.
6.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive's beneficiary by virtue of this Agreement other than those specifically set forth herein.
6.10 Administration. The Bank shall have all powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
6.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
6.12 Severability. If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with the law,. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision not held invalid, and the remainder of such provision, together with all other provisions of this Agreement, shall continue in full force and effect to the full extent consistent with the law.
6.13 Headings. The headings of Sections herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
6.14 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 address as either party may designate by like notice.
(a) If to the Bank, to:
Board of Directors
The Middlefield Banking Company
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
(b) If to the Executive, to:
Thomas G. Caldwell 15985
East High Street
Middlefield, Ohio 44062
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
EXECUTIVE: BANK:
THE MIDDLEFIELD BANKING COMPANY
By: _______________________ By: ______________________
James R. Heslop, II
Thomas G. Caldwell Its: EVP/COO
President & CEO
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BENEFICIARY DESIGNATION
THE MIDDLEFIELD BANKING COMPANY
EXECUTIVE SURVIVOR INCOME AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: Tami J. Caldwell
Contingent: Brandon G. Caldwell and Brittany M. Caldwell
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S) AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ___________________________
Date _______________________________
By: Thomas G. Caldwell
Title: President & CEO
Received by the Bank this ________ day of ___________________, 2003.
.
.
.
Exhibit 13
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
December 31,
2003 2002
------------ -------------
ASSETS
Cash and due from banks $ 3,956,453 $ 1,775,324
Federal funds sold 930,000 350,000
------------ -------------
Cash and cash equivalents 4,886,453 2,125,324
Interest-bearing deposits in other institutions 539,147 571,969
Investment securities available for sale 49,966,511 35,917,057
Investment securities held to maturity (estimated
market value of $1,915,366 and $6,405,918) 1,858,904 6,242,095
Loans 192,880,153 174,943,131
Less allowance for loan losses 2,521,270 2,300,485
------------ -------------
Net loans 190,358,883 172,642,646
Premises and equipment 6,807,930 6,480,730
Bank-owned life insurance 5,202,385 -
Accrued interest and other assets 2,749,235 2,265,712
------------ -------------
TOTAL ASSETS $262,369,448 $ 226,245,533
============ =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 29,423,027 $ 26,610,912
Interest-bearing demand 7,369,754 7,216,385
Money market 15,708,932 10,660,657
Savings 69,570,895 50,195,270
Time 97,767,302 92,701,270
------------ -------------
Total deposits 219,839,910 187,384,494
Short-term borrowings 444,819 785,778
Other borrowings 17,665,661 15,690,053
Accrued interest and other liabilities 914,744 638,800
------------ -------------
TOTAL LIABILITIES 238,865,134 204,499,125
------------ -------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,279,128 and 1,209,123 shares issued 10,038,156 7,883,155
Retained earnings 15,085,868 15,051,110
Accumulated other comprehensive income 125,199 475,428
Treasury stock, at cost (55,309 and 52,578 shares) (1,744,909) (1,663,285)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 23,504,314 21,746,408
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $262,369,448 $ 226,245,533
============ =============
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
2003 2002 2001
------------ ------------- ------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 12,846,525 $ 12,340,920 $ 11,807,799
Interest-bearing deposits in other institutions 17,188 48,293 61,718
Federal funds sold 48,947 64,994 138,415
Investment securities:
Taxable 1,196,221 1,190,508 1,162,092
Tax-exempt 486,485 424,357 462,715
Other dividend income 51,797 50,891 73,830
------------ ------------- ------------
Total interest and dividend income 14,647,163 14,119,963 13,706,569
------------ ------------- ------------
INTEREST EXPENSE
Deposits 4,905,826 5,478,030 6,198,365
Short-term borrowings 4,048 7,175 15,411
Other borrowings 815,033 662,881 534,146
------------ ------------- ------------
Total interest expense 5,724,907 6,148,086 6,747,922
------------ ------------- ------------
NET INTEREST INCOME 8,922,256 7,971,877 6,958,647
Provision for loan losses 315,000 300,000 170,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,607,256 7,671,877 6,788,647
------------ ------------- ------------
NONINTEREST INCOME
Service charges on deposit accounts 1,033,928 955,121 930,431
Investment securities gains 542 - 97,807
Earnings on bank-owned life insurance 202,385 - -
Other income 191,289 188,096 165,955
------------ ------------- ------------
Total noninterest income 1,428,144 1,143,217 1,194,193
------------ ------------- ------------
NONINTEREST EXPENSE
Salaries and employee benefits 3,085,451 2,523,433 2,316,342
Occupancy 403,591 357,500 291,706
Equipment 333,163 324,659 292,168
Data processing costs 470,393 427,164 361,839
Professional fees 218,838 246,285 247,222
Ohio state franchise tax 265,050 250,050 225,081
Advertising 168,849 65,263 63,201
Postage and freight 161,632 140,628 121,377
Other expense 998,483 871,357 822,438
------------ ------------- ------------
Total noninterest expense 6,105,450 5,206,339 4,741,374
------------ ------------- ------------
Income before income taxes 3,929,950 3,608,755 3,241,466
Income taxes 1,131,330 1,107,806 970,859
------------ ------------- ------------
NET INCOME $ 2,798,620 $ 2,500,949 $ 2,270,607
============ ============= ============
EARNINGS PER SHARE
Basic $ 2.29 $ 2.06 $ 1.87
Diluted $ 2.29 $ 2.06 $ 1.86
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other Total
Common Stock Retained Comprehensive Treasury Stockholders' Comprehensive
Shares Amount Earnings Income Stock Equity Income
--------- ----------- ------------- ------------- ----------- ------------- -------------
Balance, December 31, 2000 1,148,676 $ 6,287,011 $ 13,343,980 $ 88,811 $(1,476,440) $ 18,243,362
Net income 2,270,607 2,270,607 $ 2,270,607
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $23,133 44,906 44,906 44,906
-------------
Comprehensive income $ 2,315,513
=============
Cash dividends ($.64 per share) (772,068) (772,068)
--------- ----------- ------------- ------------- ----------- -------------
Balance, December 31, 2001 1,148,676 6,287,011 14,842,519 133,717 (1,476,440) 19,786,807
Net income 2,500,949 2,500,949 $ 2,500,949
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $176,033 341,711 341,711 341,711
-------------
Comprehensive income $ 2,842,660
=============
Exercise of stock options 988 23,509 23,509
Sale of treasury stock 795 17,225 18,020
Purchase of treasury stock (204,070) (204,070)
Five percent stock dividend
(including cash paid for
fractional shares) 54,997 1,429,662 (1,434,607) (4,945)
Dividend reinvestment plan 4,462 142,178 142,178
Cash dividends ($.70 per share) (857,751) (857,751)
--------- ----------- ------------- ------------- ----------- -------------
Balance, December 31, 2002 1,209,123 7,883,155 15,051,110 475,428 (1,663,285) 21,746,408
Net income 2,798,620 2,798,620 $ 2,798,620
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
tax benefit of $180,421 (350,229) (350,229) (350,229)
-------------
Comprehensive income $ 2,448,391
=============
Exercise of stock options 847 19,916 19,916
Common stock issued 5,612 170,513 170,513
Purchase of treasury stock (81,624) (81,624)
Five percent stock dividend
(including cash paid for
fractional shares) 57,972 1,797,165 (1,801,961) (4,796)
Dividend reinvestment plan 5,574 167,407 167,407
Cash dividends ($.79 per share) (961,901) (961,901)
--------- ----------- ------------- ------------ ----------- -------------
Balance, December 31, 2003 1,279,128 $10,038,156 $ 15,085,868 $ 125,199 $(1,744,909) $ 23,504,314
========= =========== ============= ============= =========== =============
|
2003 2002 2001
---- ---- ----
Components of comprehensive income (loss):
Change in net unrealized gain (loss)
on investments available for sale $ (349,871) $ 341,711 $ 109,459
Realized gains included in net income,
net of taxes of $184, $0, and $33,254 (358) - (64,553)
------------ ----------- ------------
Total $ (350,229) $ 341,711 $ 44,906
============ =========== ============
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,798,620 $ 2,500,949 $ 2,270,607
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 315,000 300,000 170,000
Depreciation and amortization 377,546 354,550 300,531
Amortization of premium and
discount on investment securities 259,890 159,047 69,237
Amortization of net deferred loan costs (fees) (117,524) (76,684) (31,666)
Investment securities gains (542) - (97,807)
Earnings on bank-owned life insurance (202,385) - -
Deferred income taxes (69,934) (72,302) 54,403
Decrease (increase) in accrued interest receivable (11,796) 34,337 140,147
Increase (decrease) in accrued interest payable (77,862) (121,258) 38,927
Other, net 184,434 124,129 (211,763)
------------ ------------ ------------
Net cash provided by operating activities 3,455,447 3,202,768 2,702,616
------------ ------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits
in other institutions, net 32,822 668,238 (255,766)
Investment securities available for sale:
Proceeds from repayments and maturities 16,167,324 10,006,949 5,144,986
Purchases (32,985,572) (24,359,041) (16,392,621)
Proceeds from sales 1,991,917 - 2,092,980
Investment securities held to maturity:
Proceeds from repayments and maturities 4,370,070 3,960,491 7,853,057
Purchases - - (200,000)
Increase in loans, net (17,913,713) (22,099,859) (17,637,544)
Purchase of Federal Home Loan Bank stock (52,000) (189,700) (143,100)
Purchase of bank-owned life insurance (5,000,000) - -
Purchase of premises and equipment (704,746) (590,483) (1,112,856)
------------ ------------ ------------
Net cash used for investing activities (34,093,898) (32,603,405) (20,650,864)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 32,455,416 20,001,766 20,216,682
Increase (decrease) in short-term borrowings, net (340,959) 125,100 117,456
Proceeds from other borrowings 5,000,000 7,000,000 -
Repayment of other borrowings (3,024,392) (611,281) (560,262)
Purchase of treasury stock (81,624) (204,070) -
Sale of treasury stock - 18,020 -
Exercise of stock options 19,916 23,509 -
Common stock issued 170,513 - -
Proceeds from dividend reinvestment plan 167,407 142,178 -
Cash dividends (966,697) (862,696) (772,068)
------------ ------------ ------------
Net cash provided by financing activities 33,399,580 25,632,526 19,001,808
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 2,761,129 (3,768,111) 1,053,560
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,125,324 5,893,435 4,839,875
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,886,453 $ 2,125,324 $ 5,893,435
============ ============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 5,802,769 $ 6,269,344 $ 6,708,995
Income taxes 1,295,000 1,054,000 980,000
|
See accompanying notes to consolidated financial statements.
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 includes interest earnings on residential real estate, commercial mortgage, commercial and consumer financings, as well as interest earnings on investment securities and deposit services to its customers through five 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 accounting principles generally accepted in the United States of America. In preparing the financial statements, 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
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 a level yield 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 that is wholly owned by other financial institutions. This equity security is accounted for at cost and classified with other assets.
LOANS
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable loan losses inherent 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.
Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances concerning the loan, the credit worthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.
PREMISES AND EQUIPMENT
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, which range from three to twenty years for furniture, fixtures, and equipment and three to forty years for buildings and leasehold improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
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.
EARNINGS PER SHARE
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are 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.
STOCK OPTIONS
The Company maintains a stock option plan for key officers, employees, and non-employee directors. Had compensation expense for the stock option plans been recognized in accordance with the fair vale accounting provisions of FAS No. 123, Accounting for Stock-Based Compensation, net income applicable to common stock, basic, and diluted net income per common share for the year ended December 31 would have been as follows:
2003 2002 2001
------------- ------------- -------------
Net income as reported: $ 2,798,620 $ 2,500,949 $ 2,270,607
Less pro forma expense related to option 52,459 52,434 37,644
------------- ------------- -------------
Pro forma net income $ 2,746,161 $ 2,448,515 $ 2,232,963
============= ============= =============
Basic net income per common share:
As reported $ 2.29 $ 2.06 $ 1.87
Pro forma 2.25 2.02 1.83
Diluted net income per common share:
As reported $ 2.29 $ 2.06 $ 1.86
Pro forma 2.25 2.01 1.83
|
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:
Expected
Grant Dividend Risk-free Expected Expected
Year Yield Interest Rate Volatility Life (in years)
---- ----- ------------- ---------- ---------------
2000 2.50% 5.29% 5.00% 9.95
2002 2.72 4.19 27.04 9.94
2003 2.72 4.25 14.00 9.94
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCKHOLDERS' EQUITY
The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 3, 2003, payable December 12, 2003. As a result of the dividend, 57,972 additional shares of the Company's common stock were issued, common stock was increased by $1,797,165, and retained earnings decreased by $1,801,961.
The Board of Directors approved a 5 percent stock dividend to stockholders of record as of June 1, 2002, payable June 14, 2002. As a result of the dividend, 54,997 additional shares of the Company's common stock were issued; common stock was increased by $1,429,662 and retained earnings decreased by $1,434,607.
Fractional shares paid were paid in cash. All average shares outstanding and all per share amounts included in the financial statements are based on the increased number of shares after giving retroactive effects to the stock dividend.
CASH FLOW INFORMATION
The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions "Cash and due from banks" and "Federal funds sold."
ADVERTISING COSTS
Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to $168,849, $65,263, and $63,201 for 2003, 2002, and 2001, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") revised Statement of Financial Accounting Standards ("FAS") No. 132, Employers' Disclosures about Pension and Other Postretirement Benefit. This statement retains the disclosures required by FAS No. 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on changes in the benefit obligations and fair value of plan assets. Additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. This statement retains reduced disclosure requirements for nonpublic entities from FAS No. 132, and it includes reduced disclosure for certain of the new requirements. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company's disclosure requirements.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which was effective January 1, 2003, did not have a material effect on the Company's financial position or results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The new statement is effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material effect on the Company's financial position or results of operations.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a "ramp-up" effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entity's full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companies -- regardless of the accounting method used -- by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim, as well as annual financial statements. The transition guidance and annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. The amendments set forth in FAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No.149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This statement is effective for contracts entered into or modified after September 30, 2003, except as stated below and for hedging relationships designated after September 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to FAS No. 133, Implementation Issues, that have been effective for fiscal quarters that began prior to September 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after September 30, 2003. The adoption of this statement did not have a material effect on the Company's financial position or results of operations.
In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of this statement did not have a material effect on the Company's reported equity.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation clarifies that a guarantor is required to disclose: (a) the nature of the guarantee, including the approximate term of the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantor's obligations under the guarantee; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a material effect on the Company's financial position or results of operations.
In December 2003, the FASB issued a revision to Interpretation 46, Consolidation of Variable Interest Entities, which established standards for identifying a variable interest entity (VIE) and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004. The adoption of this interpretation has not and is not expected to have a material effect on the Company's financial position or results of operations.
RECLASSIFICATION OF COMPARATIVE AMOUNTS
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.
2003 2002 2001
---- ---- ----
Weighted-average common shares
outstanding 1,274,309 1,205,155 1,206,110
Average treasury stock shares (54,833) (47,786) (45,722)
--------- --------- ---------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 1,219,476 1,157,369 1,160,388
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 3,362 1,899 1,203
--------- --------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,222,838 1,159,268 1,161,591
========= ========= =========
|
Options to purchase 9,975 shares of common stock at prices from $29.52 to $30.24 per share were outstanding during 2002 and 2001 but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. In 2003, there were no options to purchase shares of common stock that were anti-dilutive.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market values of securities available for sale are as follows:
2003
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
U.S. Government agency
securities $ 6,061,807 $ 132,978 $ (17,744) $ 6,177,041
Obligations of states and
political subdivisions:
Taxable 209,534 6,195 - 215,729
Tax-exempt 14,564,866 324,412 (48,570) 14,840,708
Corporate securities 349,910 9,059 - 358,969
Mortgage-backed securities 28,590,695 112,244 (328,875) 28,374,064
----------- ----------- ----------- -----------
Total $49,776,812 $ 584,888 $ (395,189) $49,966,511
=========== =========== =========== ===========
|
3. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
2002
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Government agency
securities $ 3,737,068 $ 162,442 $ - $ 3,899,510
Obligations of states and
political subdivisions:
Taxable 1,160,507 21,107 - 1,181,614
Tax-exempt 10,113,698 290,242 (27,762) 10,376,178
Corporate securities 349,747 23,659 - 373,406
Mortgage-backed securities 19,835,691 263,981 (13,323) 20,086,349
----------- ----------- ----------- -----------
Total $35,196,711 $ 761,431 $ (41,085) $35,917,057
=========== =========== =========== ===========
|
The following table shows the Company's gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2003.
Less than Twelve Months Twelve Months or Greater Total
---------------------------- --------------------------- --------------------------
Estimated Gross Estimated Gross Estimated Gross
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
U.S. Government agency
securities $ 1,047,461 $ (17,744) $ - $ - $ 1,047,461 $ (17,744)
Obligations of states and
political subdivisions 2,303,600 (48,570) - - 2,303,600 (48,570)
Mortgage-backed securities 17,700,010 (317,263) 1,236,753 (11,612) 18,936,763 (328,875)
------------ ---------- ---------- ---------- ------------ ----------
Total $ 21,051,071 $ (383,577) $1,236,753 $ (11,612) $ 22,287,824 $ (395,189)
============ ========== ========== ========== ============ ==========
|
The Company's investment securities portfolio contains unrealized losses of direct obligations of the U.S. Treasury, securities, including mortgage-related instruments, issued or backed by the full faith and credit of the U.S. Government or are generally viewed as having the implied guarantee of the U.S. Government, and debt obligations of a U.S. state or political subdivision.
On a quarterly basis, the Company evaluates the severity and duration of impairment for its investment securities portfolio unless the Company has the ability to hold the security to maturity without incurring a loss. Generally, impairment is considered other than temporary when an investment security has sustained a declined of 10 percent or more for six months.
The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest, during the period.
The amortized cost and estimated market value of debt securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
Estimated
Amortized Market
Cost Value
------------ -------------
Due in one year or less $ 3,831,887 $ 3,910,936
Due after one year through five years 7,584,355 7,779,391
Due after five years through ten years 8,905,904 9,018,376
Due after ten years 29,454,666 29,257,808
------------ -------------
Total $ 49,776,812 $ 49,966,511
============ =============
|
Investment securities with an approximate carrying value of $21,323,044 and $11,397,600 at December 31, 2003 and 2002, 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 years ended December 31, 2003 and 2001. The Company had no sales in 2002.
2003 2001
---- ----
Proceeds from sales $1,991,917 $ 2,092,980
Gross gains 6,350 97,807
Gross losses 5,808 -
|
4. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market values of investment securities held to maturity are as follows:
2003
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ----------- ------------
Obligations of states and
political subdivisions:
Taxable $ 945,234 $ 17,769 $ - $ 963,003
Tax-exempt 913,670 38,693 - 952,363
------------ ------------ -------- ------------
Total $ 1,858,904 $ 56,462 $ - $ 1,915,366
============ ============ ======== ============
|
2002
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ----------- ------------
Obligations of states and
political subdivisions:
Taxable $ 1,370,215 $ 50,360 $ - $ 1,420,575
Tax-exempt 3,368,276 95,092 - 3,463,368
Corporate securities 1,503,604 18,371 - 1,521,975
------------ ------------ ----------- ------------
Total $ 6,242,095 $ 163,823 $ - $ 6,405,918
============ ============ =========== ============
|
4. INVESTMENT SECURITIES HELD TO MATURITY (CONTINUED)
The amortized cost and estimated market value of debt securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 1,431,872 $ 1,455,469
Due after one year through five years 290,186 300,884
Due after five years through ten years 36,846 40,960
Due after ten years 100,000 118,053
----------- -----------
Total $ 1,858,904 $ 1,915,366
=========== ===========
|
Investment securities held to maturity with carrying values of approximately $685,186 and $1,535,726 and estimated market values of approximately $704,240 and $1,590,910 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits and other purposes required by law.
5. LOANS
Major classifications of loans are summarized as follows:
2003 2002
------------ ------------
Commercial and industrial $ 42,063,086 $ 32,915,776
Real estate - construction 3,433,614 3,207,434
Real estate - mortgage:
Residential 134,007,401 123,843,881
Commercial 7,865,893 9,520,812
Consumer installment 5,510,159 5,455,228
------------ ------------
192,880,153 174,943,131
Less allowance for loan losses 2,521,270 2,300,485
------------ ------------
Net loans $190,358,883 $172,642,646
============ ============
|
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, 2003 and 2002, 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:
2003 2002 2001
---------- ---------- ----------
Balance, January 1 $2,300,485 $2,062,252 $2,037,322
Add:
Provisions charged to operations 315,000 300,000 170,000
Recoveries 120,814 49,942 57,388
Less loans charged off 144,157 119,155 265,884
---------- ---------- ----------
Balance, December 31 $2,521,270 $2,300,485 $2,062,252
========== ========== ==========
|
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2003 2002
----------- -----------
Land and land improvements $ 1,295,938 $ 1,094,647
Building and leasehold improvements 6,815,018 6,068,568
Furniture, fixtures, and equipment 2,656,874 2,452,273
Construction in progress - 447,595
----------- -----------
10,767,830 10,063,083
Less accumulated depreciation and amortization 3,959,900 3,582,353
----------- -----------
Total $ 6,807,930 $ 6,480,730
=========== ===========
|
Depreciation and amortization charged to operations was $377,547 in 2003, $354,550 in 2002, and $300,531 in 2001.
8. OTHER ASSETS
The components of other assets are as follows:
2003 2002
---------- ----------
FHLB stock $1,297,700 $1,245,700
Accrued interest on investment securities 281,438 294,077
Accrued interest on loans 449,085 424,650
Deferred tax asset, net 337,471 87,117
Other 383,541 214,168
---------- ----------
Total $2,749,235 $2,265,712
========== ==========
|
9. DEPOSITS
Time deposits at December 31, 2003, mature $46,193,688, $23,504,838, $7,033,704, $9,054,077, and $11,980,995 during 2004, 2005, 2006, 2007, and 2008, respectively.
Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated $18,834,869 and $17,677,677 at December 31, 2003 and 2002, respectively.
Maturities on time deposits of $100,000 or more at December 31, 2003, are as follows:
Within three months $ 1,486,844
Beyond three but within six months 1,773,454
Beyond six but within twelve months 3,956,701
Beyond one year 11,617,870
-------------
Total $ 18,834,869
=============
|
10. SHORT-TERM BORROWINGS
The outstanding balances and related information of short-term borrowings which includes securities sold under agreements to repurchase are summarized as follows:
2003 2002
---------- ----------
Balance at year-end $ 444,819 $ 785,778
Average balance outstanding 726,874 977,343
Maximum month-end balance 2,327,544 1,176,829
Weighted-average rate at year-end 0.23% 0.33%
Weighted-average rate during the year 0.56 0.73
|
Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.
The Company maintains a $4,000,000 line of credit at an adjustable rate, currently 4 percent, from Lorain National Bank. At December 31, 2003 and 2002, there were no outstanding balances on this line.
11. OTHER BORROWINGS
Other borrowings consist of advances from the FHLB as follows:
Weighted- Stated interest
Maturity range average rate range
Description from to interest rate from to 2003 2002
----------- -------- -------- ------------- ---- ---- ------------ -----------
Fixed rate 08/09/04 08/09/06 3.30% 2.70 % 3.87% $ 1,560,000 $ 3,000,000
Fixed rate amortizing 07/01/07 02/01/23 3.59 2.70 6.40 8,105,661 4,690,053
Convertible 09/04/08 07/28/10 5.43 4.53 6.45 8,000,000 8,000,000
------------ -----------
$ 17,665,661 $15,690,053
============ ===========
|
11. OTHER BORROWINGS (CONTINUED)
The scheduled maturities of advances outstanding are as follows:
2003
------------------------------------
Year Ending Weighted-
December 31, Amount average Rate
------------ ------ ------------
2004 $ 2,728,089 3.51%
2005 2,190,158 3.60
2006 1,761,155 3.73
2007 902,873 3.56
2008 6,635,268 4.92
Beyond 2008 3,448,118 5.14
------------
$ 17,665,661 4.39%
============
|
The Bank entered into a ten-year "Convertible Select" fixed commitment advance arrangements with the FHLB. Rates may be reset at the FHLB's discretion on a quarterly basis based on the three-month LIBOR rate. At each rate change the Bank may exercise a put option and satisfy the obligation without penalty.
Advances from the FHLB maturing July 1, 2007, February 1, 2012, June 4, 2012, February 2, 2013, June 4, 2017, February 1, 2018, and February 1, 2023 require monthly principal and interest payments and an annual 20 percent paydown of outstanding principal. 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. Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $113 million at December 31, 2003.
12. OTHER LIABILITIES
The components of other liabilities are as follows:
2003 2002
---- ----
Accrued interest payable $ 408,084 $ 485,946
Other 506,660 152,854
---------- ----------
Total $ 914,744 $ 638,800
========== ==========
|
13. INCOME TAXES
The provision for federal income taxes consists of:
2003 2002 2001
----------- ----------- -----------
Current payable $ 1,201,264 $ 1,180,108 $ 916,456
Deferred (69,934) (72,302) 54,403
----------- ----------- -----------
Total provision $ 1,131,330 $ 1,107,806 $ 970,859
=========== =========== ===========
|
13. INCOME TAXES (CONTINUED)
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:
2003 2002
---- ----
Deferred tax assets:
Allowance for loan losses $788,299 $713,232
Supplemental retirement plan 37,300 19,348
-------- --------
Gross deferred tax assets 825,599 732,580
-------- --------
Deferred tax liabilities:
Deferred origination fees, net 157,979 173,186
Premises and equipment 141,866 122,908
Net unrealized gain on securities 64,498 244,918
Other 123,785 104,451
-------- --------
Gross deferred tax liabilities 488,128 645,463
-------- --------
Net deferred tax assets $337,471 $ 87,117
======== ========
|
No valuation allowance was established at December 31, 2003 and 2002, 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:
2003 2002 2001
---------------------- --------------------- ---------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Provision at statutory
rate $ 1,336,030 34.0% $ 1,226,976 34.0% $1,102,098 34.0%
Tax-free income (236,760) (6.1) (147,425) (4.1) (157,362) (4.9)
Nondeductible interest
expense 22,789 0.6 21,590 0.6 26,068 0.8
Other 9,271 0.4 6,665 0.2 55 0.1
----------- ----- ----------- ----- ---------- ----
Actual tax expense
and effective rate $ 1,131,330 28.9% $ 1,107,806 30.7% $ 970,859 30.0%
=========== ===== =========== ===== ========== ====
|
14. EMPLOYEE BENEFITS
RETIREMENT PLAN
The Bank maintains a section 401(k) employee savings and investment plan for all full-time 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 six years beginning at the second year in 20 percent increments. Contributions for 2003, 2002, and 2001 to this plan amounted to $56,731, $53,268, and $49,130, respectively.
14. EMPLOYEE BENEFITS (CONTINUED)
SUPPLEMENTAL RETIREMENT PLAN
Effective December 1, 2001, the Bank adopted a Directors Retirement Plan to provide post-retirement payments over a ten-year period to members of the Board of Directors who have completed five or more years of service. The Plan requires payment of 25 percent of the final average annual board fees paid to a director in the three years preceding the director's retirement. The expense of the plan for the years ended December 31, 2003, 2002, and 2001, amounted to $52,800, $52,800, and $4,107, respectively.
STOCK OPTION PLAN
The Company maintains a stock option plan ("the Plan") for granting incentive stock options and non-qualified stock options for key officers and employees and non-employee directors of the Company. A total of 126,640 shares of authorized and unissued or issued common stock are reserved for issuance under the Plan, which expires ten years from the date of stockholder 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
Exercise Exercise
2003 Price 2002 Price
---- ----- ---- -----
Outstanding, January 1 31,968 $ 25.69 23,084 $ 24.87
Granted 18,270 29.52 9,923 27.14
Exercised (877) 23.41 (1,038) 21.77
Forfeited - - - -
------ ------
Outstanding, December 31 49,361 $ 27.14 31,968 $ 25.69
====== ======
Exercisable at year-end 31,091 25.74 22,046 25.03
====== ======
|
The following table summarizes the characteristics of stock options at December 31, 2003:
Outstanding Exercisable
------------------------------ -----------------
Contractual Average Average
Exercise Average Exercise Exercise
Grant Date Price Shares Life Price Shares Price
---------- ----- ------ ---- ----- ------ -----
June 14, 1999 $ 28.80 7,503 5.45 $28.80 7,503 $ 28.80
November 23, 1999 28.12 2,748 5.90 28.12 2,748 28.12
December 11, 2000 21.77 10,917 6.95 21.77 10,917 21.77
December 9, 2002 27.14 9,923 8.94 27.14 9,923 27.14
December 8, 2003 29.52 18,270 9.94 29.52 - -
------ ------
49,361 31,091
====== ======
|
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:
2003 2002
----------- -----------
Commitments to extend credit $29,349,316 $20,131,380
Standby letters of credit 67,800 86,692
----------- -----------
Total $29,417,116 $20,218,072
=========== ===========
|
These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Company's exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
16. REGULATORY RESTRICTIONS
LOANS
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 10 percent of the Bank's common stock and capital surplus.
DIVIDENDS
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 2004 was $3,401,475 plus 2004 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, 2003 and 2002, 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 10 percent, 6 percent, and 5 percent, respectively.
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.
2003 2002
-------------------------- --------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital
(to Risk-weighted Assets)
Actual $ 25,395,628 15.79% $ 22,997,205 16.72%
For Capital Adequacy Purposes 12,865,299 8.00 11,001,899 8.00
To Be Well Capitalized 16,081,624 10.00 13,752,374 10.00
Tier I Capital
(to Risk-weighted Assets)
Actual $ 23,379,115 14.54% $ 21,270,980 15.47%
For Capital Adequacy Purposes 6,432,650 4.00 5,500,950 4.00
To Be Well Capitalized 9,648,975 6.00 8,251,424 6.00
Tier I Capital
(to Average Assets)
Actual $ 23,379,115 8.89% $ 21,270,980 9.42%
For Capital Adequacy Purposes 10,514,492 4.00 9,033,386 4.00
To Be Well Capitalized 13,143,115 5.00 11,291,733 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:
2003 2002
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and due from banks $ 3,956,453 $ 3,956,453 $ 1,775,324 $ 1,775,324
Federal funds sold 930,000 930,000 350,000 350,000
Interest-bearing deposits
in other institutions 539,147 539,147 571,969 571,969
Investment securities:
Available for sale 49,966,511 49,966,511 35,917,057 35,917,057
Held to maturity 1,858,904 1,915,366 6,242,095 6,405,918
Net loans 190,358,883 199,157,402 172,642,646 182,439,113
Bank-owned life insurance 5,202,385 5,202,385 - -
Federal Home Loan Bank stock 1,297,700 1,297,700 1,245,700 1,245,700
Accrued interest receivable 730,523 730,523 718,727 718,727
Financial liabilities:
Deposits $219,839,910 $223,046,359 $187,384,494 $191,025,787
Short-term borrowings 444,819 444,819 785,778 785,778
Other borrowings 17,665,661 17,763,971 15,690,053 16,390,391
Accrued interest payable 408,084 408,084 485,946 485,946
|
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:
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, INTEREST-BEARING DEPOSITS IN OTHER INSTITUTIONS, FEDERAL HOME LOAN BANK STOCK, ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE, AND SHORT-TERM BORROWINGS
The fair value is equal to the current carrying value.
BANK-OWNED LIFE INSURANCE
The fair value is equal to the cash surrender value of the life insurance policies.
INVESTMENT SECURITIES
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.
LOANS, DEPOSITS, AND OTHER BORROWINGS
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.
COMMITMENTS TO EXTEND CREDIT
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,
2003 2002
------------------- ------------------
ASSETS
Cash and due from banks $ 329,683 $ 292,947
Interest-bearing deposits in other institutions 539,147 283,969
Investment in subsidiary bank 22,635,484 21,169,492
------------------- ------------------
TOTAL ASSETS $ 23,504,314 $ 21,746,408
=================== ==================
STOCKHOLDERS' EQUITY $ 23,504,314 $ 21,746,408
=================== ==================
|
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
2003 2002 2001
------------------ ----------------- ----------------
INCOME
Dividends from subsidiary bank $ 1,044,637 $ 1,020,895 $ 854,703
Interest income
5,179 6,963 4,709
------------------ ----------------- ----------------
Total income 1,049,816 1,027,858 859,412
EXPENSES 99,473 166,800 152,626
------------------ ----------------- ----------------
Income before income tax benefit 950,343 861,058 706,786
Income tax benefit (32,056) (54,636) (48,063)
------------------ ----------------- ----------------
Income before equity in undistributed
net income of subsidiary 982,399 915,695 754,849
Equity in undistributed net income
of subsidiary 1,816,221 1,585,254 1,515,758
------------------ ----------------- ----------------
NET INCOME $ 2,798,620 $ 2,500,949 $ 2,270,607
================== ================= ================
|
19. PARENT COMPANY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
------------------ ------------------ -----------------
OPERATING ACTIVITIES
Net income $ 2,798,620 $ 2,500,949 $ 2,270,607
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net
income of subsidiary (1,816,221) (1,585,254) (1,515,758)
Other
- - 32,210
------------------ ------------------ -----------------
Net cash provided by
operating activities 982,399 915,695 787,059
------------------ ------------------ -----------------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing
deposits in other institutions (255,178) 93,237 (350,766)
------------------ ------------------ -----------------
Net cash provided by (used for)
investing activities (255,178) 93,237 (350,766)
------------------ ------------------ -----------------
FINANCING ACTIVITIES
Purchase of treasury stock (81,624) (204,070) -
Sale of treasury stock - 18,020 -
Exercise of stock options 19,916 23,509 -
Common stock issued 170,513 - -
Proceeds from dividend reinvestment plan 167,407 142,178 -
Cash dividends (966,697) (862,696) (772,068)
------------------ ------------------ -----------------
Net cash used for financing activities (690,485) (883,059) (772,068)
------------------ ------------------ -----------------
Increase (decrease) in cash 36,736 (125,875) (335,775)
CASH AT BEGINNING OF YEAR 292,947 167,074 502,849
------------------ ------------------ -----------------
CASH AT END OF YEAR $ 329,683 $ 292,947 $ 167,074
================== ================== =================
|
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
---------- ---------- ------------- -----------
Total interest income $3,587,523 $3,626,098 $3,700,273 $3,681,472
Total interest expense 1,451,033 1,450,680 1,430,071 1,393,123
---------- ---------- ---------- ----------
Net interest income 2,136,490 2,175,418 2,270,202 2,288,349
Provision for loan losses 105,000 105,000 105,000 -
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 2,031,490 2,070,418 2,165,202 2,288,349
Total noninterest income 276,579 358,101 375,364 469,897
Total noninterest expense 1,310,758 1,613,208 1,592,379 1,589,105
---------- ---------- ---------- ----------
Income before income taxes 997,311 815,311 948,187 1,169,141
Income taxes 344,565 200,363 246,000 340,402
---------- ---------- ---------- ----------
Net income $ 652,746 $ 614,948 $ 702,187 $ 828,739
========== ========== ========== ==========
Per share data:
Net income
Basic $ 0.53 $ 0.50 $ 0.58 $ 0.68
Diluted 0.53 0.50 0.57 0.68
Average shares outstanding
Basic 1,214,251 1,214,057 1,216,920 1,219,449
Diluted 1,216,402 1,217,239 1,220,484 1,223,684
|
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
--------- ---------- ------------- ------------
Total interest income $3,426,323 $3,499,140 $ 3,585,611 $3,557,998
Total interest expense 1,536,068 1,512,260 1,590,727 1,509,031
---------- ---------- ----------- ----------
Net interest income 1,890,255 1,986,880 1,994,884 2,048,967
Provision for loan losses 75,000 75,000 75,000 75,000
---------- ---------- ----------- ----------
Net interest income after
provision for loan losses 1,815,255 1,911,880 1,919,884 1,973,967
Total noninterest income 261,077 283,715 285,499 363,817
Total noninterest expense 1,259,422 1,345,672 1,268,026 1,333,219
---------- ---------- ----------- ----------
Income before income taxes 816,910 849,923 937,357 1,004,565
Income taxes 268,000 278,000 298,000 263,806
---------- ---------- ----------- ----------
Net income $ 548,910 $ 571,923 $ 639,357 $ 740,759
========== ========== =========== ==========
Per share data:
Net income
Basic $ 0.45 $ 0.47 $ 0.53 $ 0.61
Diluted 0.45 0.47 0.53 0.61
Average shares outstanding
Basic 1,216,296 1,216,598 1,213,990 1,214,300
Diluted 1,217,465 1,217,156 1,217,241 1,216,811
|
REPORT OF INDEPENDENT AUDITORS
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ S.R.Snodgrass, A.C. Wexford, PA January 16, 2004 |
SELECTED FINANCIAL DATA
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, 1999 through 2003.
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
(In thousands, except share and per share amounts and
ratios) 2003 2002 2001 2000 1999
--------- ---------- --------- ---------- ----------
INCOME STATEMENT DATA:
Interest income ....................................... $ 14,647 $ 14,120 $ 13,707 $ 12,770 $ 11,449
Interest expense ...................................... 5,725 6,148 6,748 5,910 5,048
---------- ---------- ---------- ---------- ----------
Net interest income ................................... 8,922 7,972 6,959 6,860 6,401
Provision for loan losses ............................. 315 300 170 275 296
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses ... 8,607 7,672 6,789 6,585 6,105
Noninterest income, including securities gains (losses) 1,428 1,143 1,194 983 804
Noninterest expense ................................... 6,105 5,206 4,741 4,409 4,254
---------- ---------- ---------- ---------- ----------
Income before income taxes ............................ 3,930 3,609 3,242 3,159 2,655
Income taxes .......................................... 1,131 1,108 971 922 735
---------- ---------- ---------- ---------- ----------
Net income ................................... $ 2,799 $ 2,501 $ 2,271 $ 2,237 $ 1,920
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Investment securities ................................. $ 51,826 $ 42,159 $ 31,409 $ 29,811 $ 31,818
Loans, net ............................................ $ 190,359 $ 172,643 $ 150,766 $ 133,267 $ 119,472
Total deposits ........................................ $ 219,840 $ 187,384 $ 167,383 $ 147,166 $ 135,094
FHLB Cincinnati advances .............................. $ 17,666 $ 15,690 $ 9,301 $ 9,862 $ 9,602
Total stockholders' equity ............................ $ 23,504 $ 21,746 $ 19,791 $ 18,243 $ 17,689
Total assets .......................................... $ 262,369 $ 226,246 $ 197,858 $ 176,489 $ 165,512
PER COMMON SHARE DATA: (1)
Basic net income ...................................... $ 2.29 $ 2.06 $ 1.87 $ 1.83 $ 1.52
Diluted net income .................................... $ 2.29 $ 2.06 $ 1.86 $ 1.83 $ 1.52
Book value ............................................ $ 19.21 $ 17.90 $ 17.28 $ 15.00 $ 14.05
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic ................................................. 1,219,476 1,215,337 1,218,407 1,221,576 1,260,259
Diluted ............................................... 1,222,838 1,217,231 1,219,671 1,221,576 1,260,259
SELECTED RATIOS:
Return on average total stockholders' equity .......... 12.39 % 12.08 % 11.89 % 12.83 % 11.17 %
Return on average total assets ........................ 1.13 % 1.17 % 1.22 % 1.31 % 1.21 %
Dividend payout ratio ................................. 34.54 % 34.49 % 33.94 % 26.61 % 29.82 %
Efficiency ratio (2) .................................. 58.99 % 57.12 % 58.16 % 56.21 % 59.05 %
ASSET QUALITY RATIOS:
Reserve for loan losses to ending total loans ......... 1.31 % 1.31 % 1.35 % 1.51 % 1.45 %
Net loan charge-offs to average loans ................. 0.05 % 0.04 % 0.10 % -- % 0.07 %
CAPITAL RATIOS:
Average stockholders' equity to average assets ........ 9.11 % 9.70 % 10.24 % 10.20 % 10.83 %
Leverage ratio (3) .................................... 8.99 % 9.42 % 9.94 % 10.32 % 10.93 %
Total risk-based capital ratio (3) .................... 15.79 % 16.72 % 17.82 % 17.75 % 18.39 %
|
(1) Per share amounts are adjusted for a 5% stock dividend paid in 2003 and 2002, a 10% stock dividend paid in 1998, 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.
Management's Discussion and Analysis
In the following pages, management presents an analysis of Middlefield Banc Corp's (the Corporation) financial condition and results of operations as of and for the year ended December 31, 2003 as compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.
Middlefield is an Ohio corporation organized to become the holding company of The Middlefield Banking Company ("Bank"). The Bank is a state-chartered bank located in Middlefield, Ohio. Middlefield and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earnings on residential real estate, commercial mortgage, commercial, and consumer financings as well as interest earnings on investment securities and deposit services to its customers through six locations.
FORWARD LOOKING STATEMENT
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. Forward-looking statements can be identified by terminology such as "believes," "expects," "anticipates," "estimates," "intends," "should," "will," "plans," "potential" and similar words. Forward-looking statements are also statements that are not statements of historical fact. Forward-looking statements necessarily involve risks and uncertainties. They are merely predictive or statements of probabilities, involving known and unknown risks, uncertainties and other factors. If one or more of these risks of uncertainties occurs or if the underlying assumptions prove incorrect, actual results could differ materially from those expressed in or implied by the forward-looking statements.
Forward-looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond Middlefield's control. Although Middlefield believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a representation by Middlefield or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOAN LOSSES
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company's allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment, which is affected by changing economic conditions and various external factors and which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company's methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of "Notes to Consolidated Financial Statements" commencing on the following pages of this Annual Report.
RESULTS OF OPERATIONS
For the fifth year in a row your Company posted record earnings. Middlefield recorded net income of $2.8 million in 2003, which represents an increase of $300,000, or 11.92%, over 2002. Net income for 2002 of $2.5 million represented an increase of $230,000, or 10.1%, over 2001. Diluted earnings per share have increased each of the past three years to $2.29 per share for 2003, $2.06 per share for 2002, and $1.86 per share for 2001.
NET INTEREST INCOME -- 2003 Compared to 2002. Net interest income, by definition, is the difference between interest income generated on earning assets and the interest expense incurred on interest-bearing liabilities. Net interest income for 2003 increased to $8.9 million, compared to $8.0 million for 2002. Interest income for 2003 was $14.6 million as compared to $14.1 million for 2002. This increase of $527,000 or 3.7% was influenced primarily by an increase in interest earned on loans receivable of $506,000, while offset by decreases in interest earned on interest-bearing deposits in other institutions, and federal funds sold, of $31,000, and $16,000 respectively. Although the 2003 rate environment was characterized by lower interest rate yields, 2003's increase in interest income was driven by increases in average balances of interest-earning assets. The average balance of loans receivable and investment securities increased $19.9 million to $183.7 million and $9.8 million to $45.0 million, respectively, during 2003. The tax-equivalent yield on interest earning assets decreased to 6.32% for 2003 from 6.99% for 2002, and primarily resulted from a 91 basis point and 54 basis point decrease in investment securities and loans receivable, respectively. During 2003, $22.5 million in called, sold, and re-payed investment securities were reinvested at substantially lower rates. The inflow of deposits coupled with the rapid repayment of mortgage-backed securities has resulted in reinvestment options at substantially lower rates than the previous year. The lower interest rate environment resulted when interest rates were driven downward by an aggressive rate reduction policy by the Federal Reserve Board over the past few years.
Interest expense decreased $423,000 or 6.9% for 2003 to $5,725,000 from $6,148,000 for 2002. Interest expense incurred on deposits decreased $572,000 for 2003 as compared to 2002 and was primarily attributable to the current interest rate environment that resulted in a lowering of the cost of funds to 2.90% for 2003 as compared to 3.68% for 2002. Offsetting the declining rates was an increase in the average balance of interest-bearing liabilities of $30.4 million to $197.5 million for 2003. In particular, the average balance of savings and certificates of deposits increased $11.4 million and $8.7 million, respectively. Core deposit growth also was driven by a general shift in customer preference away from the equity markets and into insured bank deposits. Although the Bank reduced its costs on all deposit products during 2003, certificates of deposits were the primary target as such costs decreased by 89 basis points. Interest expense on borrowings increased to $819,000 for 2003 as compared to $670,000 for 2002 and resulted primarily from an additional $5.4 million in borrowings with the Federal Home Loan Bank in 2003. The Company borrowed from the FHLB in varying maturities at an average rate of 2.9% to lock into what management believes to be a low cost of funds.
NET INTEREST INCOME -- 2002 Compared to 2001. Net interest income for 2002 increased to $8.0 million, compared to $7.0 million for 2001. Interest income for 2002 was $14.1 million as compared to $13.7 million for 2001. This increase of $413,000 or 3.0% was influenced primarily by an increase in interest earned on loans receivable of $533,000, while offset by decreases in interest earned on federal funds sold, investment securities, and interest-bearing deposits in other institutions of $73,000, $33,000, and $14,000 respectively. Although Middlefield intentionally caused a decrease to its interest rate yields, interest income was driven by increases in average balances of interest-earning assets. The average balance of loans receivable and investment securities increased $20.3 million to $163.8 million and $5.3 million to $35.2 million, respectively, during 2002. The tax-equivalent yield on interest earning assets decreased to 6.99% for 2002 from 7.79% for 2001, and primarily resulted from a 102 basis point and 69 basis point decrease in investment securities and loans receivable, respectively. During 2002, $14.0 million in called, matured, and repayed investment securities were reinvested at substantially lower rates. The inflow of deposits coupled with the rapid repayment of mortgage-backed securities has resulted in reinvestment options at substantially lower rates than the previous year. The lower interest rate environment resulted during 2001, when interest rates were driven downward by an aggressive rate reduction policy by the Federal Reserve Board.
Interest expense decreased $600,000 or 8.9% for 2002 to $6.1 million from $6.7 million for 2001. Interest expense incurred on deposits decreased $720,000 for 2002 as compared to 2001 and was primarily attributable to the current interest rate environment that resulted in a lowering of the cost of funds to 3.68% for 2002 as compared to 4.71% for 2001. Offsetting the declining rates was an increase in the average balance of interest-bearing liabilities of $23.9 million to $167.2 million for 2002. In particular, the average balance of savings and certificates of deposits increased $10.6 million and $6.7 million, respectively. Core deposit growth also was driven by a general shift in customer preference away from the equity markets and into insured bank deposits. Although the Bank reduced its costs on all deposit products during 2002, certificates of deposits were the primary target as such costs decreased by 113 basis points. Interest expense on borrowings increased to $670,000 for 2002 as compared to $550,000 for 2001 and resulted primarily from an additional $7.0 million in borrowings with the Federal Home Loan Bank that The Middlefield Banking Company did not have at December 31, 2001.
Year ended December 31,
------------------------------------------------------------------------------
2003 2002
----------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable (1) $183,683 $ 12,847 6.99% $163,828 $ 12,341 7.53%
Investment securities 45,011 1,683 4.30% 35,169 1,615 5.21%
Other interest-earning
assets 6,883 117 1.70% 6,116 164 2.68%
--------- -------- -------- -------- --------
Total interest - earning
assets 235,577 14,647 6.32% 205,113 14,120 6.99%
Non-interest - earning assets 12,327 -------- 8,368 --------
-------- --------
Total assets $247,904 $213,481
======== ========
Interest - bearing
liabilities:
Interest-bearing demand $ 8,623 61 0.71% $ 7,905 109 1.38%
Money market 13,555 259 1.94% 9,090 199 2.19%
Savings 57,413 828 1.44% 46,045 948 2.06%
Certificates of deposit 98,512 3,758 3.81% 89,857 4,222 4.70%
Other borrowings 19,635 819 4.17% 14,258 670 4.70%
--------- -------- -------- -------- -------- ----------
Total interest -
bearing liabilities 197,538 5,725 2.90% 167,155 6,148 3.68%
-------- --------
Non-interest - bearing liabilities:
Other liabilities 27,773 25,621
--------- --------
Total liabilities 225,311 192,776
--------- --------
Stockholders' equity 22,594 20,705
--------- --------
Total liabilities and
stockholders' equity $ 247,905 $213,481
========= ========
Net interest income $ 8,922 $ 7,972
======== ========
Interest rate spread (3) 3.42% 3.31%
======== ==========
Net yield on interest -
earning assets (4) 3.89% 3.99%
======== ==========
Ratio of average interest -
earning assets to average
interest - bearing
liabilities 119.26% 122.71%
======== ==========
Year ended December 31,
-------------------------------------
2001
------------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----------
Interest-earning assets:
Loans receivable (1) $143,560 $ 11,808 8.23%
Investment securities 29,887 1,625 6.24%
Other interest-earning
assets 5,647 274 4.85%
-------- --------
Total interest - earning
assets 179,094 13,707 7.79%
Non-interest - earning assets 7,455 --------
--------
Total assets $186,549
========
Interest - bearing
liabilities:
Interest-bearing demand $ 6,296 153 2.43%
Money market 8,123 244 3.00%
Savings 35,432 954 2.69%
Certificates of deposit 83,177 4,847 5.83%
Other borrowings 10,211 550 5.39%
-------- -------- ----------
Total interest -
bearing liabilities 143,239 6,748 4.71%
--------
Non-interest - bearing liabilities:
Other liabilities 24,336
-------
Total liabilities 167,455
-------
Stockholders' equity 19,094
-------
Total liabilities and
stockholders' equity $186,549
========
Net interest income $ 6,959
========
Interest rate spread (3) 3.08%
==========
Net yield on interest -
earning assets (4) 3.89%
==========
Ratio of average interest -
earning assets to average
interest - bearing
liabilities 125.03%
==========
|
(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.
Year Ended December 31, Year Ended December 31,
--------------------------------- -----------------------------------
2003 vs. 2002 2002 vs. 2001
--------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------- -----------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In Thousands) (In Thousands)
Interest income:
Loans Receivable $ 1,235 $ (729) $ 506 $ 1,320 $ (787) $ 533
Investment securities 182 (114) 68 (138) 128 (10)
Other interest-earning assets 24 (71) (47) 25 (135) (110)
------- ------- ------- ------- ------- -------
Total interest-earning assets 1,441 (914) 527 1,207 (794) 413
------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand 11 (59) (48) 64 (108) (44)
Money market 79 (19) 60 35 (80) (45)
Savings 563 (683) (120) (28) 22 (6)
Certificates 487 (951) (464) 443 (1,068) (625)
Other interest-bearing liabilities 212 (63) 149 177 (57) 120
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,352 (1,775) (423) 690 (1,290) (600)
------- ------- ------- ------- ------- -------
Change in net interest income $ 89 $ 861 $ 950 $ 517 $ 496 $ 1,013
======= ======= ======= ======= ======= =======
|
LOAN LOSS PROVISION -- 2003 Compared to 2002. The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses was $315,000 in 2003 as compared to $300,000 in 2002. 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 2003 was principally a result of an increase in net charge-offs to average loans during the year.
2002 Compared to 2001. The provision for loan losses was $300,000 in 2002 as compared to $170,000 in 2001. The change in the loan loss provision in 2002 was principally a result of an increase in nonperforming loans during the year coupled with an increase in classified assets from 2001 to 2002.
NONINTEREST INCOME -- 2003 Compared to 2002. Noninterest income is made up of bank related fees and service charges, as well as other income-producing services. These include ATM/interchange income, safe deposit box rental income and other miscellaneous items. In addition the bank invested in Bank Owned Life Insurance (BOLI) in 2003. The earnings from this investment are reflected in the Company's noninterest income. Total noninterest income increased 25% in 2003 to $1.5 million from $1.1 million for 2002. The increase is accounted for principally by the income from the purchase of bank owned life insurance (BOLI) of $202,000 in 2003. An increase in fee income from deposit accounts also contributed significantly to 2003's increased noninterest income. Deposit account service fees have progressively increased as the number of accounts and volume of related transactions have increased.
2002 Compared to 2001. Total noninterest income decreased slightly in 2002 to $1.1 million from $1.2 million for 2001. The decrease is accounted for principally by the recognition of investment security gains of $98,000 in 2001 that was not repeated in 2002. Offsetting this decline was an increase in fee income from deposit accounts, as well as increases in ATM surcharges and debit card fees. Such fees have progressively increased as the number of accounts and volume of related transactions have increased.
Transaction deposit accounts grew at a steady pace in 2003, 2002, and 2001. In general, management prices deposits at rates competitive with rates offered by the other banks in Middlefield's market, which rates tend to be somewhat lower than rates offered by thrift institutions and credit unions. Middlefield 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, Middlefield has not adopted the most aggressive fee structure. Deposit growth is 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 -- 2003 Compared to 2002. Noninterest expense increased 17.3% to $6.1 million for 2003 as compared to $5.2 million for 2002. Compensation and employee benefits increased $562,000, or 22.3%, primarily as a result of normal merit raises and the establishment of an employee profit sharing plan Occupancy and equipment expenses increased 8.0% or $55,000 as a result of added capital expenditures in prior years. As a result of increased transaction activity from operating a larger organization, data processing expenses increased $43,000 or 10.1% during 2003 as compared to 2002. In addition, all other expenses increased $239,000 or 15.2%. A large part of this increase of $104,000 was due to an enhanced marketing budget in 2003 to promote
the bank's new look and logo. Increases in other expense also included operating expenses that resulted from expanding into a larger organization.
2002 Compared to 2001. Noninterest expense increased 9.8% to $5.2 million for 2002 as compared to $4.7 million for 2001. Compensation and employee benefits increased $207,000, or 8.9%, primarily as a result of normal merit raises and a 17.0% increase in health insurance expenses for 2002. Occupancy and equipment expenses increased 16.8% or $98,000 as a result of added capital expenditures in prior years, in particular the Chardon branch that became operational in 2001. Offsetting these increases was a reduction in marketing costs that occurred in 2001 marking the 100th anniversary of the Bank.
PROVISION FOR INCOME TAXES. The provision for income taxes fluctuated in 2003, 2002, and 2001 in direct correlation to the changing level of pre-taxable income during these periods. The purchase Bank Owned Life Insurance did not materially alter the effective marginal tax rate.
FINANCIAL CONDITION
ASSETS AND LIABILITIES. Middlefield's total assets increased $36.1 million, or 16.0%, to $262.4 million at December 31, 2003 from $226.2 million at December 31, 2002. This increase primarily resulted from a $17.7 million, or 10.3%, increase in net loans receivable to $190.4 million at December 31, 2003 that was funded by a $32.5 million net increase in customer deposits and a series of borrowings with the Federal Home Loan Bank of approximately $5.0 million. The increase in net loans receivable resulted from the economic health of Middlefield's market area, the current interest rate environment, and the strategic, service-oriented marketing approach taken by management to meet the lending needs of the area. Although mortgage loans continue to comprise the largest portion of the loan portfolio, the majority of Middlefield's loan growth during 2003 was in the form of open-end, revolving home equity lines of credit and commercial loans. Commercial and commercial real estate loans increased in total by $7.3 million to $49.9 million, an increase of 15.0%. Home equity loans experienced an increase of $7.1 million, or 91.7%, to $14.7 million at December 31, 2003. Management attributes the loan increases to continued customer referrals and Middlefield's overall relationship with its customers.
Investment securities available for sale increased to $50.0 million at December 31, 2003 from $35.9 million at December 31, 2002. Meanwhile, investment securities held to maturity decreased to $1.9 million at December 31, 2003 from $6.2 million at December 31, 2002. The net increase in 2003 is primarily due to investment purchases of $33.0 million primarily in mortgage-backed securities, which was partially offset by investment calls and maturities of $22.5 million. Purchases of mortgage-backed securities, which have all been classified as available for sale, typically have maturities ranging from 15 to 30 years with yields between 4.5% and 5.5%. Approximately 57% of the entire investment securities portfolio is now comprised of mortgage-backed securities as compared to 50.0% at December 31, 2002. During the first quarter of 2003, Middlefield purchased $5,000,000 in bank-owned life insurance in order to generate nontaxable earnings that will offset the cost of certain employee benefit plans. Management was able to fund this growth with an influx of deposits coupled with the utilization of excess cash and cash equivalents of $2.8 million and the reinvestment of called and matured securities during the year. Furthermore, available for sale securities now comprise 96.4% of the investment securities portfolio as compared to 84.9% at December 31, 2002.
The company's primary source of funds is core deposits from retail and business customers. During 2003, total deposits increased $32.5 million, or 17.3%, to $219.8 million at December 31, 2003 from $187.4 million at December 31, 2002. Growth was primarily concentrated in savings and time deposits, which increased $19.4 and $5.1 million, respectively, and resulted from continual marketing efforts by management, as well as management's competitive pricing of such products. As noted previously, deposit growth also was driven by a general shift in customer preference away from the equity markets and into insured bank deposits. Time deposits at December 31, 2003 continue to account for just under half of the total deposit portfolio and remain a dominant resource for funds.
Other borrowings increased $2.0 million or 12.6% to $17.7 million at December 31, 2003 from $15.7 million at December 31, 2002. As noted previously, this primarily consisted of a series of Federal Home Loan Bank borrowings with staggered maturities to be repaid over a fifteen-year period. The Bank has a remaining borrowing capacity of approximately $113 million at December 31, 2003. The current borrowings are secured by 9% of the Bank's loan portfolio. The proceeds from these borrowings were used to supplement the funding of loan demand.
Total stockholders' equity increased to $23.5 million at December 31, 2003 due to net income of $2.8 million that was offset partially by dividend payments of $967,000 and a decrease in accumulated other comprehensive income of $350,000. Accumulated other comprehensive income increased as a result of changes in the net unrealized gain on investment securities available for sale due to fluctuations in interest rates. Because of interest rate volatility, accumulated other comprehensive income could materially fluctuate for each interim period and year-end period depending on economic and interest rate conditions. Middlefield declared a 5.0% stock dividend during the period that resulted in a transfer between retained earnings and common stock of approximately $1.8 million. In 2003, Middlefield completed its first full year of dividend reinvestment plan operation to promote long-term ownership by investors with the proceeds from such purchases being used for general corporate purposes. Shareholders' dividends of approximately $167,000 were used for reinvestment purposes in 2003, resulting in new equity issued in a like amount in 2003. Middlefield will continue to repurchase shares of common stock for both stock option and restricted stock purposes. In addition, the Board of Directors in light of the earnings and financial condition of Middlefield, including applicable governmental regulations and policies, will determine future dividend policies.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses represents the amount management estimates is adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. At December 31, 2003, Middlefield's allowance for loan losses increased to $2.5 million from $2.3 million at December 31, 2002, and now represents 1.30% of the gross loan portfolio as compared to 1.31% for the previous period. The allowance for loan losses is established through a provision for loan losses, which is charged to operations. The provision is based on management's periodic evaluation of the adequacy of the allowance for loan losses, taking into account the overall risk characteristics of the various portfolio segments, the bank's loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a formula allowance, and an unallocated allowance.
The specific allowance incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards ("FAS") No. 114, Accounting by Creditors for Impairment of a Loan, and FAS 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 determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio, and consideration of historical loss experience.
The unallocated allowance is determined based upon 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 considers risk factors that may not be reflected in the historical loss factors.
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, 2003, 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 a 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 following table sets forth information concerning the Middlefield's allowance for loan losses at the dates and for the periods presented.
For the Years Ended
December 31,
-------------------------------------------
2003 2002 2001
----------- ------------- -------------
(Dollars in thousands)
Allowance balance at beginning of period $ 2,300 $ 2,062 $ 2,037
Loans charged off:
Commercial and industrial (75) (67) (74)
Real estate-construction
Real estate-mortgage:
Residential (32) - (29)
Commercial - - (92)
Consumer installment (37) (52) (71)
----------- ------------- -------------
Total loans charged off (144) (119) (266)
----------- ------------- -------------
Recoveries of loans previously charged-off:
Commercial and industrial 28 24 4
Real estate-construction - - -
Real estate-mortgage: - - -
Residential - - -
Commercial - - 95
Consumer installment 22 33 22
----------- ------------- -------------
Total recoveries 50 57 121
----------- ------------- -------------
Net loans recovered (charged off) (94) (62) (145)
Provision for loan losses 315 300 170
----------- ------------- -------------
Allowance balance at end of period $ 2,521 $ 2,300 $ 2,062
=========== ============= =============
Loans outstanding:
Average $ 183,683 $ 163,828 $ 143,560
End of period 192,880 174,943 152,828
Ratio of allowance for loan losses to loans outstanding at end of period 1.31% 1.31% 1.35
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Net recoveries (charge offs) to average loans (0.05) (0.04) (0.10) |
The following table illustrates the allocation of Middlefield's allowance for probable loan losses for each category of loan for each reported period. 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.
At December 31,
---------------------------------------------------------------------
2003 2002 2001
----------------------- ------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Type of Loans:
Commercial and industrial $ 568 21.81% $ 611 18.82% $ 722 18.53%
Real estate construction 32 1.78 38 1.83 37 2.09
Mortgage:
Residential 844 69.48 888 70.79 781 73.97
Commercial 228 4.08 230 5.44 161 2.22
Consumer installment 120 2.85 124 3.12 111 3.19
Unallocated 435 - 409 - 250 -
--------- ----- ------ ----- ------ -----
Total $ 2,227 100.00% $2,300 100.00% $2,062 100.00%
========= ====== ====== ====== ====== ======
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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. Payments received on nonaccrual loans are recorded as income or applied against principal according to management's judgment as to the collectibility of 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. Management evaluates all loans identified as impaired individually. 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 loan repayment is expected to come from the sale or operation of the collateral.
Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until that time, an allowance for loan losses is maintained for estimated losses.
Unless otherwise required by the loan terms, cash receipts on impaired loans are applied first to accrued interest receivable, 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.
Nonperforming loans as a percentage of total net loans at December 31, 2003 decreased to 0.27% from 0.31% for 2002. The bank had nonaccrual loans of $372,000 and $357,000 at December 31, 2003 and 2002, respectively. Interest income recognized on nonaccrual loans during all of the periods was insignificant. Management does not believe the nonaccrual loans or any amounts classified as nonperforming had a significant effect on operations or liquidity in 2003. Furthermore, management is not aware of any trends or uncertainties related to any loans classified as doubtful or substandard that might have a material effect on earnings, liquidity, or capital resources. Management is not aware of any information pertaining to material credits that would cause it to doubt the ability of borrowers to comply with repayment terms.
The following table summarizes nonperforming assets by category.
At December 31,
--------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial $ - $ - $ 48
Real estate-construction - - -
Real estate-mortgage: - -
Residential 372 357 -
Commercial - - -
Consumer installment - - -
---- ---- ----
Total nonaccrual loans 372 357 48
---- ---- ----
Accruing loans which are contractually past
due 90 days or more:
Commercial and industrial 4 30 9
Real estate-construction - - -
Real estate-mortgage: - - -
Residential 114 144 216
Commercial - - -
Consumer installment 19 7 20
---- ---- ----
Total accruing loans which are contractually past
due 90 days or more 137 181 245
---- ---- ----
Total non - performing loans 509 538 293
Real estate owned - - -
Other non-performing assets - - -
Total non-performing assets $509 $538 $293
==== ==== ====
Total non-performing loans to total loans 0.26% 0.31% 0.19%
==== ==== ====
Total non-performing loans to total assets 0.19% 0.24% 0.15%
==== ==== ====
Total non-performing assets to total assets 0.19% 0.24% 0.15%
==== ==== ====
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(1) Represents accruing loans delinquent greater than 90 days that are considered by management to be well secured and that are in the process of collection.
LIQUIDITY. Liquidity management for Middlefield is measured and monitored on both a short- and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to Middlefield. Both short- and long-term liquidity needs are addressed by maturities and sales of investments securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides the core ingredients for satisfying depositor, borrower, and creditor needs.
Middlefield's liquid assets consist of cash and cash equivalents, which include investments in very short-term investments (i.e. federal funds sold), and investment securities classified as available for sale. The level of these assets is dependent on Middlefield's operating, investing, and financing activities during any given period. At December 31, 2003, cash and cash equivalents totaled $4.9 million or 1.9% of total assets while investment securities classified as available for sale totaled $50.0 million or 19.0% of total assets. Management believes that the liquidity needs of Middlefield are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable Middlefield to meet cash obligations and off-balance sheet commitments as they come due.
Operating activities provided net cash of $3.5 million, $3.2 million, and $2.7 million for 2003, 2002, and 2001, respectively, generated principally from net income of $2.8 million, $2.5 million, and $2.3 million in each of these respective periods.
Investing activities consist primarily of loan originations and repayments and investment purchases and maturities. These cash usages primarily consisted of loan originations of $17.9 million, as well as investment purchases of $33.0 million. During the first quarter, Middlefield purchased $5,000,000 in bank-owned life insurance in order to generate nontaxable earnings that will offset the cost of certain employee benefit plans. Partially offsetting the usage of investment activities is $22.5 million of proceeds from investment security maturities and repayments. For the same period ended 2002, investing activities used $32.6 million in funds, principally for the net origination of loans and the purchase of investment securities of $22.1 million and $25.1 million, respectively.
Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, treasury stock activity, and the payment of dividends. During 2003, net cash provided by financing activities totaled $33.4 million, principally derived from an increase in deposit accounts in general, and savings and time deposits specifically. Also contributing to this influx of cash was proceeds from other borrowings of $5.0 million. During 2002, net cash provided by financing activities totaled $25.6 million, principally derived from an increase in deposit accounts. During the same period ended 2001, net cash provided by financing activities was $19 million.
The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments.
CONTRACTUAL OBLIGATIONS:
Payments Due In
--------------------------------------------------
One Year or One to Three Three to Over Five
(In thousands) Less Years Five Years Years Total
-----------------------------------------------------------
Deposits without a stated maturity 122,073 - - - 122,073
Certificates of Deposit 46,193 30,539 21,035 - 97,767
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Borrowed funds 3,173 3,951 7,538 3,448 18,110 |
The following table presents, as of December 31, 2003, significant contractual obligations to third parties by payment date. Discussion of the obligations can be found in the notes to the consolidated financial statements.
One Year or One to Three Three to Over Five
(In thousands) Less Years Five Years Years Total
------ ----- ---------- ----- -----
Commitments to extend credit:
Commercial 4,816 - - - 4,816
Residential real estate 3,175 - - - 3,175
Revolving home equity and credit card lines 21,358 - - - 21,358
Standby letters of credit 68 - - - 68
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Commitments to extend credit, include loan commitments, standby letters of credit and do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.
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 Middlefield's commitment to make loans, as well as management's assessment of Middlefield's ability to generate funds. Middlefield anticipates that it will have sufficient liquidity to satisfy estimated short-term and long-term funding needs.
CAPITAL RESOURCES. Middlefield's primary source of capital has been retained earnings. Historically, Middlefield has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to not only ensure compliance with regulations, but also to ensure capital adequacy for future expansion.
Middlefield is subject to federal regulations imposing minimum capital requirements. Management monitors both Middlefield's and the Bank's Total risk-based, Tier I risk-based and Tier I leverage capital ratios to assess compliance with regulatory guidelines. At December 31, 2003, both Middlefield and the Bank exceeded the minimum risk-based and leverage capital ratio requirements. Middlefield's Total risk-based, Tier I risk-based and Tier I leverage ratios were 15.79%, 14.54%, and 8.89%, and the Bank's were 16.72%, 15.47%, and 9.42%, respectively, at December 31, 2002.
IMPACT OF INFLATION AND CHANGING PRICES
Middlefield's consolidated financial statements and related data herein have been prepared in accordance with accounting principles generally accepted in the United States of America, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other financial institutions, the Bank is subject to interest rate risk. The Bank's interest-earning assets could mature or reprice more rapidly than or on a different basis from its interest-bearing liabilities (primarily borrowings and deposits with short- and medium-term maturities) in a period of declining interest rates. Although having assets that mature or reprice more frequently on average than liabilities will be beneficial in times of rising interest rates, that asset/liability structure will result in lower net interest income in periods of declining interest rates.
Interest rate sensitivity, or interest rate risk, relates to the effect of changing interest rates on net interest income. Interest-earning assets with interest rates tied to the prime rate for example, or that mature in relatively short periods of time, are considered interest-rate sensitive. Interest-bearing liabilities with interest rates that can be repriced in a discretionary manner, or that mature in relatively short periods of time, are also considered interest-rate sensitive. The differences between interest-sensitive assets and interest-sensitive liabilities over various time horizons are commonly referred to as sensitivity gaps. As interest rates change, a sensitivity gap will have either a favorable effect or an adverse effect on net interest income. A negative gap -- with liabilities repricing more rapidly than assets -- generally should have a favorable effect when interest rates are falling, and an adverse effect when rates are rising. A positive gap -- with assets repricing more rapidly than liabilities -- generally should have the opposite effect: an adverse effect when rates are falling and a favorable effect when rates are rising.
Middlefield and the Bank have no financial instruments entered into for trading purposes. Interest rates change daily on federal funds purchased and sold. Federal funds are therefore the most sensitive to the market and have the most stable fair values. Loans and deposits tied to indices such as the prime rate or federal discount rate are also market sensitive, with stable fair values. The least sensitive instruments include long-term, fixed-rate loans and securities and fixed-rate savings deposits, which have the least stable fair value. Management of maturity distributions of assets and liabilities between these extremes is as important as the balances maintained. Management of maturity distributions involves matching interest rate maturities as well as principal maturities, and it influences net interest income significantly. In periods of rapidly changing interest rates, a negative or positive gap can cause major fluctuations in net interest income and earnings. Managing asset and liability sensitivities to enhance growth regardless of changes in market conditions is one of the objectives of the Bank's asset/liability management strategy.
Evaluating the Bank's exposure to changes in interest rates is the responsibility of the Asset/Liability Committee, a committee of Bank directors and officers. The Asset/Liability Committee assesses both the adequacy of the management process used to control interest rate risk and the quantitative level of exposure, ensuring that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at appropriate levels. Evaluating the quantitative level of interest rate risk exposure requires assessment of existing and potential effects of changes in interest rates on the bank's financial condition, including capital adequacy, earnings, liquidity, and asset quality.
The Bank uses a static gap analysis to evaluate the risk associated with changes in interest rates. The table below illustrates the maturities or repricing of the Bank's assets and liabilities at December 31, 2003, 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.
Within 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
-------- ------- ------ -------- --------
Interest-earning assets:
Interest-bearing deposits in
other institutions $ 1,469 $ - $ - $ - $ 1,469
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Investment securities 8,067 21,289 12,264 10,016 51,636
Commercial and industrial 11,044 11,712 13,528 5,779 42,063
Real estate construction loans 850 1,487 617 480 3,434
Real estate-mortgage loans 33,569 34,435 65,975 7,894 141,873
Consumer installment 697 1,401 2,412 1,000 5,510
-------- ------- ------ -------- --------
Total interest-earning assets 55,696 70,324 94,796 25,169 245,985
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand 590 1,843 4,938 - 7,370
Money market 6,308 4,736 4,665 - 15,709
Savings 15,028 17,638 14,981 21,924 69,571
Time 8,777 35,794 53,196 - 97,767
Short term borrowings 445 - - - 445
Other borrowings 209 9,155 4,196 4,106 17,666
-------- ------- ------ -------- --------
Total interest-bearing liabilities 31,357 69,165 81,976 26,030 208,528
-------- ------- ------- -------- --------
Interest sensitivity gap $ 24,339 $ 1,159 $ 12,820 $ (861) $ 37,457
======== ======= ====== ======== ========
Cumulative interest sensitivity gap $ 24,339 $ 25,498 $ 38,318 $ 37,457
Cumulative interest sensitivity gap
as a percent of total assets 10.76% 11.27% 16.94% 16.56%
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/(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, 2003, with a positive one-year gap of 11.27%. The cumulative gap at December 31, 2003 is due principally to fixed-rate securities and loans in the "over one year to five years" category to maximize yield on assets.
One way to minimize interest rate risk is to maintain a balanced or matched interest-rate sensitivity position. However, matched funding does not always maximize profits. 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 might 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. Matching maturities or repricing more closely mitigates risk. 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, 2003 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.
MARKET FOR MIDDLEFIELD'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Middlefield had approximately 780 stockholders of record as of February 5, 2004. There is no established market for Middlefield common stock. The stock is traded very infrequently. Bid prices are quoted from time to time on the National Quotation Bureau's "pink sheets" under the symbol "MBCN." The following table shows the high and low bid prices of and cash dividends paid on Middlefield common stock in 2003 and 2002, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or commissions, and does not necessarily represent actual transactions.
Cash dividends
High bid Low bid per share
-------- -------- --------------
2003:
First Quarter................ $ 29.048 $ 26.190 $ 0.191
Second Quarter............... $ 29.524 $ 27.619 $ 0.191
Third Quarter................ $ 30.048 $ 28.581 $ 0.200
Fourth Quarter............... $ 31.000 $ 29.025 $ 0.210
2002:
First Quarter................ $ 23.467 $ 21.769 $ 0.163
Second Quarter............... $ 25.714 $ 22.458 $ 0.171
Third Quarter................ $ 32.381 $ 24.905 $ 0.181
Fourth Quarter............... $ 32.381 $ 25.048 $ 0.191
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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.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement of
Middlefield Banc Corp. on Form S-8 of our report dated January 16, 2004
appearing in the Annual Report on Form 10K of Middlefield Banc Corp. for the
year ended December 31, 2003.
Wexford, Pennsylvania
/s/ S.R.Snodgrass, A.C.
S.R. Snodgrass, A.C.
March 26, 2004
Exhibit 31.1
302
I, Thomas G. Caldwell, certify that:
1. I have reviewed this Form 10-K for the year ended December 31, 2003 of Middlefield Banc Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [intentionally omitted]
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: 3/29/04
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/s/ Thomas G. Caldwell | |
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Thomas G. Caldwell. | |
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President |
Exhibit 31.2
302
I, Donald L. Stacy, certify that:
1. I have reviewed this Form 10-K for the year ended December 31, 2003 of Middlefield Banc Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [intentionally omitted]
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date:
3/30/04
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/s/ Donald L. Stacy | |
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Donald L. Stacy | |
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Principal Financial and Accounting Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
In connection with the Annual Report of Middlefield Banc Corp. (the “Company”)
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), we,
Thomas G. Caldwell, President ,and Donald L. Stacy, Chief Financial Officer,
certify, pursuant to 18 U.S.C. ‘ 1350, as adopted pursuant to ‘ 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
March 30, 2004
A signed original of this written statement required by Section 906 has been
provided to Middlefield Banc Corp. and will be retained by Middlefield Banc
Corp. and furnished to the Securities and Exchange Commission or its staff upon
request
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
/s/ Donald L. Stacy
Donald L. Stacy
Principal Financial and Accounting Officer