MIDDLEFIELD BANC CORP - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20552

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Middlefield Banc Corp.

Ohio		34 - 1585111
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Small reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o     NO þ

State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicle date:

 

 

MIDDLEFIELD BANC CORP.

INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of September 30, 2008 and December 31, 2007			2
Consolidated Statement of Income (Unaudited) for the Three and Nine Months ended September 30, 2008 and 2007			3
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Nine Months ended September 30, 2008			4
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months ended September 30, 2008 and 2007			5
Notes to Unaudited Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosures About Market Risk			18
Item 4. Controls and Procedures			19
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			20
Item 1A. Risk Factors			20
Item 2. Unregistered sales of equity securities and use of proceeds			20
Item 3. Default Upon Senior Securities			20
Item 4. Submissions of Matters to a Vote of Security Holders			20
Item 5. Other Information			20
Item 6. Exhibits and Reports on Form 8 - K			21
SIGNATURES			22
Exhibit 31
Exhibit 31.1
Exhibit 32
Exhibit 99

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Unaudited)

		September 30,				December 31,
		2008				2007
ASSETS
Cash and due from banks		$	8,263,756			$	9,072,972
Federal funds sold			4,570,826				8,631,963
Interest-bearing deposits in other institutions			112,215				110,387
Cash and cash equivalents			12,946,797				17,815,322
Investment securities available for sale			96,371,351				85,967,764
Loans			320,151,943				309,445,922
Less allowance for loan losses			3,613,857				3,299,276
Net loans			316,538,086				306,146,646
Premises and equipment			8,018,503				7,044,685
Goodwill			4,371,205				4,371,206
Bank-owned life insurance			7,371,180				7,153,381
Accrued interest and other assets			8,450,812				5,774,052
TOTAL ASSETS		$	454,067,935			$	434,273,056
LIABILITIES
Deposits:
Noninterest-bearing demand		$	40,929,373			$	41,348,219
Interest-bearing demand			27,409,745				19,566,035
Money market			26,831,740				22,684,041
Savings			69,835,964				76,895,857
Time			214,957,328				202,423,848
Total deposits			379,964,150				362,918,000
Short-term borrowings			1,693,699				1,510,607
Other borrowings			36,687,924				32,395,319
Accrued interest and other liabilities			2,340,455				2,487,746
TOTAL LIABILITIES			420,686,228				399,311,672
STOCKHOLDERS’ EQUITY
Common stock, no par value; 10,000,000 shares authorized, 1,718,822 and 1,701,546 shares issued			27,159,602				26,650,123
Retained earnings			14,793,600				13,746,956
Accumulated other comprehensive loss			(1,837,888	)			(52,969	)
Treasury stock, at cost; 189,530 shares in 2008 and 151,745 shares in 2007			(6,733,607	)			(5,382,726	)
TOTAL STOCKHOLDERS’ EQUITY			33,381,707				34,961,384
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	454,067,935			$	434,273,056

See accompanying unaudited notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
INTEREST INCOME
Interest and fees on loans		$	5,425,266			$	5,604,206			$	16,273,630			$	15,449,822
Interest-bearing deposits in other institutions			1,949				22,159				10,790				127,772
Federal funds sold			22,181				122,029				124,467				383,464
Investment securities:
Taxable interest			622,184				323,806				1,793,645				844,454
Tax-exempt interest			449,351				468,552				1,360,226				1,310,932
Dividends on FHLB stock			29,514				32,426				88,526				84,193
Total interest income			6,550,445				6,573,178				19,651,284				18,200,637
INTEREST EXPENSE
Deposits			2,948,998				3,176,508				9,381,666				8,360,623
Short-term borrowings			17,610				35,750				34,793				75,420
Other borrowings			432,055				453,853				1,254,040				1,368,738
Total interest expense			3,398,663				3,666,111				10,670,499				9,804,781
NET INTEREST INCOME			3,151,782				2,907,067				8,980,785				8,395,856
Provision for loan losses			187,000				60,000				357,000				174,391
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			2,964,782				2,847,067				8,623,785				8,221,465
NONINTEREST INCOME
Service charges on deposit accounts			493,228				494,456				1,417,789				1,427,458
Investment securities gains, net			25,758				—				34,508				—
Earnings on bank-owned life insurance			75,336				69,909				217,798				210,162
Other income			85,925				89,445				284,820				286,061
Total noninterest income			680,247				653,810				1,954,915				1,923,681
NONINTEREST EXPENSE
Salaries and employee benefits			1,322,026				1,220,646				3,643,199				3,365,646
Occupancy expense			203,298				184,078				643,884				551,586
Equipment expense			150,334				139,197				435,770				393,411
Data processing costs			193,033				186,213				591,098				498,932
Ohio state franchise tax			117,000				109,673				351,000				313,873
Other expense			743,890				577,126				2,159,276				1,888,020
Total noninterest expense			2,729,581				2,416,933				7,824,227				7,011,468
Income before income taxes			915,448				1,083,944				2,754,473				3,133,678
Income taxes			211,000				223,000				530,000				621,128
NET INCOME		$	704,448			$	860,944			$	2,224,473			$	2,512,550
EARNINGS PER SHARE
Basic		$	0.46			$	0.54			$	1.45			$	1.61
Diluted			0.46				0.53				1.44				1.59
DIVIDENDS DECLARED PER SHARE		$	0.260			$	0.233			$	0.770			$	0.690

See accompanying unaudited notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

										Accumulated
										Other								Total
		Common				Retained				Comprehensive				Treasury				Stockholders’				Comprehensive
		Stock				Earnings				Loss				Stock				Equity				Income (Loss)
Balance, December 31, 2007		$	26,650,123			$	13,746,956			$	(52,969	)		$	(5,382,726	)		$	34,961,384
Net income							2,224,473												2,224,473			$	2,224,473
Other comprehensive income:
Unrealized loss on available for sale securities net of tax benefit of $919,483											(1,784,919	)							(1,784,919	)			(1,784,919	)
Comprehensive income																						$	439,554
Stock based compensation expense recognized in earnings			11,286																11,286
Purchase of treasury stock (37,785 shares)															(1,350,881	)			(1,350,881	)
Dividend reinvestment and purchase plan			498,193																498,193
Cash dividends ($0.77 per share)							(1,177,829	)											(1,177,829	)
Balance, September 30, 2008		$	27,159,602			$	14,793,600			$	(1,837,888	)		$	(6,733,607	)		$	33,381,707

See accompanying unaudited notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

		Nine Months Ended
		September 30,
		2008				2007
OPERATING ACTIVITIES
Net income		$	2,224,473			$	2,512,550
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			357,000				174,391
Depreciation and amortization			393,883				378,749
Amortization of premium and discount on investment securities			158,650				168,622
Amortization of deferred loan fees, net			(104,138	)			(49,492	)
Earnings on bank-owned life insurance			(217,799	)			(210,163	)
Compensation for stock option expense			11,286				—
Increase in accrued interest receivable			(364,938	)			(827,231	)
Increase (decrease) in accrued interest payable			(223,246	)			410,189
Other, net			(123,615	)			(540,786	)
Net cash used for operating activities			2,077,047				2,016,829
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities			11,598,563				5,402,909
Proceeds from sale of securities			2,929,439				—
Purchases			(27,760,155	)			(24,059,580	)
Investment securities held to maturity:
Proceeds from repayments and maturities			—				5,954
Increase in loans, net			(11,751,849	)			(18,373,626	)
Acquisition of subsidiary bank			—				(1,828,301	)
Purchase of Federal Home Loan Bank stock			(85,200	)			(56,100	)
Purchase of premises and equipment			(1,367,701	)			(396,347	)
Deposit acquisition premium			—				(2,120,612	)
Net cash used for investing activities			(26,436,903	)			(41,425,703	)
FINANCING ACTIVITIES
Net increase in deposits			17,046,151				28,361,018
Increase in short-term borrowings, net			183,092				902,844
Repayment of other borrowings			(7,707,395	)			(8,260,732	)
Proceeds from other borrowings			12,000,000				—
Purchase of Treasury Stock			(1,350,881	)			(1,083,895	)
Proceeds from dividend reinvestment & purchase plan			498,193				462,825
Cash dividends			(1,177,829	)			(1,060,659	)
Net cash received from deposit acquisition			—				19,270,054
Net cash provided by financing activities			19,491,331				38,591,455
Increase (decrease) in cash and cash equivalents			(4,868,525	)			(817,419	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			17,815,322				13,639,602
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	12,946,797			$	12,822,183
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings		$	10,901,695			$	9,314,016
Income taxes			400,000				750,000
Summary of business acquisition:
Fair value of tangible assets acquired		$	—			$	42,657,925
Fair value of core deposit intangible acquired			—				103,781
Fair value of liabilities assumed			(38,408,610	)
Stock issued for the purchase of acquired company’s common stock			—				(3,662,750	)
Cash paid in the acquisition			—				(3,887,110	)
Goodwill recognized		$	—			$	(3,196,764	)

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial statements of Middlefield Banc Corp. (“Company”) includes its two subsidiaries The Middlefield Banking Company and Emerald Bank. All significant inter-company items have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows. The balance sheet at December 31, 2007, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U. S. generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company’s Form 10-K (File No. 33-23094). The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

Certain items contained in the 2007 financial statements have been reclassified to conform to the presentation for 2008. Such reclassifications had no effect on the net results of operations.

Recent Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In December 2007, the FASB issued FAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, to require enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encourage. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2008, the FASB ratified EITF Issue No. 08-4, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios. This Issue provides transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios, that resulted from EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity. The conforming changes are effective for financial statements issued for fiscal years ending after December 15, 2008, with earlier application permitted. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement. This FSP provides guidance on the accounting for certain types of convertible debt instruments that may be settled in cash upon conversion. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This FSP concludes that a transferor and transferee should not separately account for a transfer of a financial asset and a related repurchase financing unless (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. The FSP is effective for financial statements issued for fiscal years beginning on or after November 15, 2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset. This FSP clarifies the application of FAS Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154, Accounting Changes and Error Corrections. The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

NOTE 2 — STOCK-BASED COMPENSATION

During the nine months ended September, 2008, the Company recorded $11,286 in compensation cost As of September 30, 2008 there was approximately $10,093 of unrecognized compensation cost related to the unvested share-based compensation awards granted. The cost is expected to be recognized in 2008. The Company had 4,487 unvested stock options outstanding as of September 30, 2008.

FAS 123R requires that the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) be classified as financing cash flows. Prior to the adoption of FAS 123R, such excess tax benefits were presented as operating cash flows. Accordingly, there have been no excess tax benefits that have been classified as a financing cash inflow for the nine months ended September 30, 2008 in the Consolidated Statements of Cash Flows.

The Company had 5,824 non-vested stock options outstanding on September 30, 2008.

Stock option activity during the nine months ended September 30, 2008 and 2007 is as follows:

						Weighted-								Weighted-
						average								average
						Exercise								Exercise
		2008				Price				2007				Price
Outstanding, January 1			88,211			$	28.04				77,287			$	26.23
Granted			1,337				36.25				10,357				37.73
Exercised			(992	)			19.80				(565	)			25.10
Forfeited			(1,591	)			23.48				—				—
Outstanding, September 30			86,965			$	28.34				87,079			$	27.60

NOTE 3 — EARNINGS PER SHARE

The Company provides dual presentation of Basic and Diluted earnings per share. Basic earnings per share utilizes net income as reported as the numerator and the actual average shares outstanding as the denominator. Diluted earnings per share includes any dilutive effects of options, warrants, and convertible securities.

There are no convertible securities that would affect the denominator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income (Unaudited) will be used as the numerator. The following tables set forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

		For the Three								For the Nine
		Months Ended								Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Weighted average common shares issued			1,712,574				1,703,114				1,707,720				1,660,903
Average treasury stock shares			(189,530	)			(112,275	)			(173,979	)			(101,842	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share			1,523,044				1,590,839				1,533,741				1,559,061
Additional common stock equivalents (stock options) used to calculate diluted earnings per share			2,329				19,468				12,659				21,354
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share			1,525,373				1,610,307				1,546,400				1,580,414

Options to purchase 27,234 shares of common stock at prices ranging from $36.25 to $40.24 were outstanding during the nine months ended September 30, 2008 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of September 30, 2008. Options to purchase 21,554 shares of common stock at prices ranging from $39.62 to $42.25 were outstanding during the three and nine months ended September 30, 2007 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of September 30, 2007.

NOTE 4 — COMPREHENSIVE INCOME

The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the nine months ended September 30, 2008, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited).

The following shows the components and activity of comprehensive income during the periods ended September 30, 2008 and 2007 (net of the income tax effect):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Unrealized holding gains (losses) arising during the period on securities held			(727,463	)			656,243				(1,807,694	)			(111,356	)
Reclassification adjustment for gains included in net income			17,000				—				22,775				—
Net change in unrealized gains (losses) during the period			(710,463	)			656,243				(1,784,919	)			(111,356	)
Unrealized holding losses, beginning of period			(1,127,425	)			(1,288,586	)			(52,969	)			(520,987	)
Unrealized holding losses, end of period			(1,837,888	)			(632,343	)			(1,837,888	)			(632,343	)
Net income			704,448				860,944				2,224,473				2,512,550
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the period			(710,463	)			656,243				(1,784,919	)			(111,356	)
Comprehensive income (losses)			(6,015	)			1,517,187				439,554				2,401,194

NOTE 5 — FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued FASB No. 157, Fair Value Measurements, to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities.

The following table presents the balance of certain assets reported at fair value as of September 30, 2008 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

		Quoted Prices in
		Active Markets for				Significant Other
		Assets Identical				Observable				Balance as of
		(Level 1)				Inputs (Level 2)				30-Sep-08
Assets measured at fair value on a recurring basis:
Securities available-for-sale		$	1,038,412			$	95,332,939			$	96,371,351
Assets measured at fair value on a non-recurring basis:
Collateral dependent impaired loans		$	—			$	1,493,013			$	1,493,013

As required by FASB No. 157, each financial asset and liability must be identified as having been valued according to specified level of input, 1, 2 or 3. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. As of September 30, 2008, all of the financial assets measured at fair value utilized the market approach.

NOTE 6 — ACQUISITIONS

On November 15, 2006 Middlefield Banc Corp. entered into an Agreement and Plan of Merger for the acquisition of Emerald Bank, an Ohio-chartered savings bank headquartered in Dublin, Ohio. Middlefield Banc Corp. organized an interim bank subsidiary under Ohio commercial bank law to carry out the merger with Emerald Bank. The Agreement and Plan of Merger was amended on January 3, 2007 to make the new interim bank subsidiary, known as EB Interim Bank, a party to the agreement. At the effective time of the merger Emerald Bank merged into the new interim subsidiary, which was the surviving corporation and which has thereafter operated under the name Emerald Bank as a wholly owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for Emerald Bank totaled $7,326,890 with one half of the merger consideration paid in cash and the other half in shares of Middlefield Banc Corp. common stock. The merger was approved by both bank regulators and Emerald Bank stockholders. The transaction was completed on April 19, 2007.

The following Unaudited pro forma condensed combined financial information presents the results of operations of the Company had the merger taken place at January 1, 2007.

		Nine Months Ended
		2008				2007
Interest Income		$	19,651,284			$	18,906,851
Interest Expense			10,670,499				10,230,811
Net Interest Income			8,980,785				8,676,040
Provision for loan losses			357,000				220,493
Net Interest Income after provision for loan losses			8,623,785				8,455,547
Non Interest Income			1,954,915				1,945,839
Non Interest Expense			7,824,227				7,531,965
Income before income taxes			2,754,473				2,869,421
Provision for income taxes			530,000				621,128
Net income		$	2,224,473			$	2,248,293
EARNINGS PER SHARE
Basic		$	1.45			$	1.44
Diluted			1.44				1.42

On June 12, 2008 Emerald Bank filed a Notice of Intent for a Bank to Acquire a Banking Office under the provisions of Section 1161.05 of the Ohio Revised Code. Emerald Bank, whose address is 6215 Perimeter Drive, Dublin, Franklin County, Ohio 43017, will purchase and assume certain assets and liabilities associated with the branch office of The Commercial Savings Bank, 118 South Sandusky Avenue, Upper Sandusky, Wyandot County, Ohio 43351 located at 17 N. State Street, Westerville, Franklin County, Ohio, 43081 (the “Westerville Branch”). As of May 12, 2008, total deposits at the Westerville Branch were approximately $6.4 million, and the combined purchase price for the real property and the furniture, fixtures, and equipment at net book value was approximately $440,373. Upon consummation of the proposed transaction, Emerald Bank will operate the Westerville Branch as a branch office. Emerald Bank and The Commercial Savings Bank desire to complete the transaction by or as soon after November 10, 2008, as is possible, but in any case no later than December 1, 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $19.8 million or 4.6% from December 31, 2007 to September 30, 2008 to a balance of $454.1 million. Loans receivable and investment securities increased $10.7 million and $10.4 million respectively. The increase in total assets reflects a corresponding increase in total liabilities of $21.4 million or 5.4% and a decline in stockholders’ equity of $1.8 million or -4.5%. The increase in total liabilities was primarily the result of deposit growth of $17.1 million. The decline in stockholders’ equity was the result of increases in accumulated other comprehensive loss and treasury stock of $1.8 million and $1.4 million respectively which was partially offset by increases in common stock and retained earnings of $509,000 and $1.1 million.

Cash on hand and due from banks. Cash on hand and due from banks represent cash equivalents. Cash equivalents declined a combined $4.9 million or 27.3% to $13.0 million at September 30, 2008 from $17.8 million at December 31, 2007. Deposits from customers into savings and checking accounts, loan and security repayments and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds. The decline for the first nine months can principally be attributed to a decrease in Federal Funds Sold which was used to fund the loan portfolio.

Investment securities. Investment securities available for sale ended the September 30, 2008 quarter at $96.4 million an increase of $10.4 million or 12.1% from $86.0 million at December 31, 2007. During this period the Company recorded purchases of available for sale securities of $27.8 million, consisting of purchases of mortgage-backed securities. Offsetting the purchases of securities were repayments and maturities of securities of $14.5 million during the nine months ended September 30, 2008. In addition, the securities portfolio decreased approximately $2.7 million due to a decline in the market value. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. If securities are held to their respective maturity dates, no fair value gain or loss will be realized.

Loans receivable. The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable increased $10.4 million or 3.4% to $316.5 million at September 30, 2008 from $306.1 million at December 31, 2007. Included in this increase were growth in commercial real estate mortgage loans of $9.7 million or 26.3% and real estate construction loans of $818,000 or 12.2%, as well as an increase in commercial and industrial loans of $219,000 during the nine months ended September 30, 2008.

The Company’s lending philosophy is to focus on the commercial loans and to attempt to grow the portfolio. To attract and build the commercial loan portfolio, the Corporation has taken a proactive approach in contacting new and current clients to ensure that the Company is servicing its client’s needs. These lending relationships generally offer more attractive returns than residential loans and also offer opportunities for attracting larger balance deposit relationships. However, the shift in loan portfolio mix from residential real estate to commercial oriented loans may increase credit risk.

Non-performing loans. Non-performing loans include non-accrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans, and repossessed assets. A loan is classified, as non-accrual when, in the opinion of management, there are serious doubts about collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower. The ratio of non-performing loans to total loans stood at 2.1% at September 30, 2008. This was an increase from the 1.4% reported as of September 30, 2007. Loans classified as non-accrual at September 30, 2008, were $3.4 million, which was up from the $2.2 million reported at September 30, 2007. Loans past due 90 days and still accruing interest, as of September 30, 2008, were $3.3 million which is $1.1 million above the prior year figure. Additionally, the Company held $1.1 million in other real estate owned most of which came from its Emerald Bank affiliate.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds totaling $380.0 million or 90.8% of the Company’s total funding sources at September 30, 2008. Total deposits increased $17.1 million or 4.7% to $380.0 million at September 30, 2008 from $362.9 million at December 31, 2007. The increase in deposits is primarily related to the growth of certificates of deposits that totaled $215.0 million at September 30, 2008 an increase of $12.5 million or 6.2% for the year. Interest-bearing demand and money market accounts increased $7.8 and $4.1 while savings and noninterest demand accounts declined by $7.1 million and $418,000 respectively, during the nine months ended September 30, 2008.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt and repurchase agreements. Borrowed funds increased $4.5 million or 13.2% to $38.4 million at September 30, 2008 from $33.9 million at December 31, 2007. The majority of the increase came from FHLB borrowings which increased $4.2 million or 17.4%. The increase in FHLB advances was the result of additional borrowings by both banks in order to take advantage of lower rates currently being offered by the FHLB.

Stockholders’ equity. Stockholders’ equity declined $1.6 million or 4.5% to $33.4 million at September 30, 2008 from $35.0 million at December 31, 2007. The decrease in stockholders’ equity was the result of increases in common stock and retained earnings of $509,000 and $1.1 million, respectively, offset by increases in accumulated other comprehensive loss and treasury stock of $1.8 million and $1.4 million respectively.

The increase of accumulated other comprehensive loss was the result of a reduction in the mark to market value of the Company’s securities available for sale portfolio. The decrease in treasury stock was the result of the purchase of 37,785 shares of the Company’s common stock at an average price of $35.75 since December 31, 2007. The increase in common stock was due to stock purchased through the dividend reinvestment plan and stock based compensation expense recognized in earnings of $498,193 and $11,286 respectively. The increase in retained earnings was the result of $2.2 million in net income for the nine months which was partially offset by $1.2 million in cash dividends.

RESULTS OF OPERATIONS

General. Net income for the third quarter of 2008 totaled $704,448, or 18.2 percent less than the $860,944 reported for the same period in 2007. Diluted earnings per share for the third quarter of 2008 were $0.46, a 13.2% decrease from 2007’s third quarter diluted earnings per share of $0.53. These third quarter results include the operations of Emerald Bank of Dublin, Ohio, which became a subsidiary of the Company on April 19, 2007.

Results from the nine months of 2008 reflect a net income of $2,224,473 an 11.5% decrease compared to $2,512,550 for the first three quarters of 2007. Diluted earnings per share for the nine months of 2008 were $1.44, or 9.4% less than diluted earnings per share of $1.59 for the first nine months of 2007. These figures include Emerald Bank’s operations from April 19, 2007 through September 30, 2007.

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the Company’s interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest earning assets and interest bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest earning assets and liabilities affect the Company’s net interest income. Historically from an interest rate risk perspective, it has been management’s perception that differing interest rate environments can cause sensitivity to the Company’s net interest income, these being extended low long-term interest rates or rapidly rising short-term interest rates.

Net interest income totaled $3.2 million for the third quarter of 2008, an increase of 8.4% from the $2.9 million reported for the comparable period of 2007. The net interest margin of 3.20% for the third quarter of 2008 showed improvement over the 3.15% reported for the same quarter of 2007. The increase in the net interest margin is primarily attributable to higher loan volume along with a 21 basis point increase in the investment portfolio yield during a substantial decline in the interest rate environment.

Net interest income increased $585,000, or 7.0%, for the nine months ended September 30, 2008 compared to the same period in the prior year. This increase in net interest income can be attributed to an increase in interest income of $1.5 million, partially offset by an increase in interest expense of $866,000. The net interest margin was 3.08% for the first three quarters 2008, down from the 3.29% reported for the same period of 2007. The declining margin for the first nine months of the year is primarily attributable to the changing interest rate environment in which the market experienced a 325 basis point decline in the prime rate.

Interest income. Interest income declined $23,000, or .3%, for the three months ended September 30, 2008, compared to the same period in the prior year. This decrease can be attributed to a 39 basis point drop in the yield on interest-earning assets for the quarter. The largest factor in this decline was the 57 basis point loan yield reduction due to the falling prime rate for the period. This decline was partly offset by a 21 basis point increase in the investment portfolio. Interest income increased $1.5 million, or 8.0%, for the nine months ended September 30, 2008, compared to the same period in the prior year. This increase can be attributed to increases in interest earned on loans receivable and investment securities of $824,000 and $998,000 respectively.

Interest earned on loans declined 179,000, or 3.2%, for the three months ended September 30, 2008, compared to the same period in the prior year. This decline was the result of both an increase in income due to a higher average balance in the loan portfolio which was more than offset by a reduction of interest income due to the lower rate environment.

For the nine months ended September 30, 2008, interest earned on loans receivable increased $824,000, or 5.3%, , compared to the same period in the prior year. This increase was attributable to an increase in the average balance of loans outstanding of $33.9 million, or 12.0%, to $316.0 million for the nine months ended September 30, 2008 compared to $282.2 million for the same period in the prior year. Loan interest income was reduced by a decline in the yield on the loans to 6.86% for the nine months ended September 30, 2008 from 7.32% for the same period in the prior year.

Interest earned on securities increased $281,000, or 35.5%, for the three months ended September 30, 2008, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $16.6 million, or 21.4%, to $94.5 million at September 30, 2008 from $77.9 million for the same period in the prior year. Interest earned on securities was enhanced by an increase in the yield on the investments to 5.48 for the three months ended September 30, 2008 from 5.27% for the same period in the prior year.

Interest earned on securities increased $1.0 million, or 46.9%, for the nine months ended September 30, 2008, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $23.4 million, or 32.6%, to $95.4 million at September 30, 2008 from $72.0 million for the same period in the prior year. Interest earned on securities was enhanced by an increase in the yield on the investments to 5.40% for the nine months ended September 30, 2008 from 5.26% for the same period in the prior year.

Interest expense. Interest expense declined $267,000, or 7.3%, for the three months ended September 30, 2008, compared to the same period in the prior year. The decrease in interest expense can be attributed to a combination of two factors:

	1.		A volume increase in the balance of interest-bearing liabilities of $32.5 million resulting in $377,000 of additional interest cost.
	2.		The interest rate on interest-bearing liabilities declining by 86 basis points from 4.28% for the third quarter of 2007 to 3.62% for the same period in 2008.

Interest expense increased $866,000, or 8.8%, for the nine months ended September 30, 2008, compared to the same period in the prior year. The increase in interest expense can be attributed to a combination of two factors:

	1.		A volume increase in the balance of interest-bearing liabilities of $57.8 million resulting in $1.8 million of additional interest cost.
	2.		The interest rate on interest-bearing liabilities declining by 36 basis points from 4.21% for the first three quarters of 2007 to 3.85% for the same period in 2008.

Interest incurred on deposits, the largest component of the Company’s interest-bearing liabilities, decreased $228,000, or 7.2%, for the three months ended September 30, 2008, compared to the same period in the prior year. This reduced cost was primarily attributable to the average balance of interest-bearing deposits which increased by $32.8 million, or 10.1%, to $334.4 million for the three months ended September 30, 2008, compared to $301.5 million for the same period in the prior year. Interest expense was positively affected by a reduction in the cost of interest-bearing deposits to 3.50% from 4.18% for the quarters ended September 30, 2008 and 2007, respectively. The Company diligently monitors the interest rates on its products as well as the rates being offered by its competition and utilize rate surveys to keep its total interest expense costs down.

For the nine months ended September 30, 2008 interest incurred on deposits increased $1.0 million, or 12.2%, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of interest-bearing deposits of $60.5 million, or 22.1%, to $333.8 million for the nine months ended September 30, 2008, compared to $273.4 million for the same period in the prior year. Interest expense was positively affected by a reduction in the cost of interest-bearing deposits to 3.74% from 4.09% for the nine months September 30, 2008 and 2007, respectively.

Interest incurred on borrowed funds, declined by $40,000 or 8.2%, for the three months ended September 30, 2008, compared to the same period in the prior year. This decline was due to both a decrease in the average balance of borrowing and a reduction in the rate paid. The rate of the borrowings declined to 4.5% from 4.90% for the quarters ended September 30, 2008 and 2007, respectively. Adding to the reduction in the cost of these funds was a decline in the average balance of borrowed funds of $584,000, or 1.5%, to $38.1 million for the three months ended September 30, 2008, compared to $38.7 million for the same period in the prior year. This decline is reflected in the quarterly rate volume report presented below which compares the decrease to the costs associated with the interest-bearing liabilities.

For the nine months ended September 30, 2008, interest incurred on borrowed funds decreased by $155,000, or 10.7%, compared to the same period in the prior year. As with the third quarter results this decline was due to both a decrease in the average balance of borrowing and a reduction in the rate paid. The average balance of borrowed funds declined by $2.7 million, or 7.0%, to $35.7 million for the nine months ended September 30, 2008, compared to $38.4 million for the nine months ended September 30, 2007.

Provision for loan losses. The provision is maintained at a level to absorb management’s estimate of probable inherent credit losses within the Company’s loan portfolio. At September 30, 2008, the allowance for loan losses as a percentage of total loans was 1.13%, which represented an 11.9% increase over the 1.01% reported at September 30, 2007. The ratio of non-performing loans to total loans stood at 2.11% at September 30, 2008. This was an increase from the 1.24% reported as of September 30, 2007. Loans classified as non-accrual at September 30, 2008, were $3.4 million, which was $1.3 million increase over the total reported at September 30, 2007. Loans past due 90 days and still accruing interest, as of September 30, 2008, were $3.3 million, or $1.6 million more than the prior year figure. The majority of the increase in this category was in residential secured real estate loans.

Non-interest income. Non-interest income increased $26,400 for the third quarter of 2008 over the comparable 2007 period. This increase of 4.0% was primarily the result of a gain realized on investment securities. Service charges on deposit accounts decreased $1,200, with other non-interest income being $3,500 lower. Earnings on bank-owned life insurance were $5,400 higher during the third quarter of 2008 than the same period of 2007.

For the nine months ended September 30, 2008, non-interest income increased by $31,000 or 1.6% to $2.0 million. This increase was the result of investment security gains taken in the first three quarters of 2008 of $35,000.

Non-interest expense. Non-interest expense for the third quarter of 2008 was 12.9%, or $312,600, higher than the third quarter of 2007. Increases in salary and employee benefits of $101,400 were largely attributable to increased staffing, including the opening of the Cortland banking office, normal wage adjustments, and an additional payroll in the third quarter of 2008 that did not exist in 2007. Other expense items contributing to the overall increase were costs associated with compliance with Section 404 of the Sarbanes-Oxley Act, primarily centered in audit and legal functions, higher fees associated with the increased level of ATM/Debit card usage, amortization of the core deposit intangible associated with acquisitions made by the company, and higher postage. Significantly increasing were FDIC premiums, with further increases anticipated as that agency works to meet statutory minimums.

For the nine months ended September 30, 2008 non-interest expense increased $813,000 or 11.6% from the same period in the prior year.

Provision for income taxes. The Company recognized $530,000 in income tax expense, which reflected an effective tax rate of 17.35% for the nine months, ended September 30, 2008, as compared to $621,000 with an effective tax rate of 19.24% for the respective 2007 period.

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2008, have remained unchanged from December 31, 2007.

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, between the three and nine month periods ended September 30, 2008 and 2008, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

		For the Three Months Ended September 30,
		2008												2007
										(4)												(4)
		Average								Average				Average								Average
		Balance				Interest (1)				Yield/Cost				Balance				Interest (1)				Yield/Cost
		(Dollars in thousands)												(Dollars in thousands)
Interest-earning assets:
Loans receivable			318,761			$	5,425				6.75	%			303,872			$	5,604				7.32	%
Investments securities			94,532				1,073				5.48	%			77,861				792				5.27	%
Interest-bearing deposits with other banks			5,897				52				3.48	%			15,187				177				4.62	%
Total interest-earning assets			419,191				6,550				6.42	%			396,920				6,573				6.81	%
Noninterest-earning assets			29,782												20,392
Total assets			448,973											$	417,312
Interest-bearing liabilities:
Interest — bearing demand deposits			25,962				78				1.19	%		$	17,025				91				2.12	%
Money market deposits			25,789				197				3.02	%			26,090				257				3.91	%
Savings deposits			70,001				318				1.80	%			77,539				573				2.93	%
Certificates of deposit			212,605				2,357				4.40	%			180,867				2,255				4.95	%
Borrowings			38,111				450				4.68	%			38,695				490				5.02	%
Total interest-bearing liabilities			372,468				3,399				3.62	%			340,216				3,666				4.28	%
Noninterest-bearing liabilities
Other liabilities			44,376												42,867
Stockholders’ equity			32,129												34,228
Total liabilities and stockholders’ equity		$	448,973											$	417,311
Net interest income						$	3,152											$	2,907
Interest rate spread (2)											2.80	%											2.54	%
Net yield on interest-earning assets (3)											3.20	%											3.15	%
Ratio of average interest-earning assets to average interest-bearing liabilities											112.54	%											116.67	%

		2008 versus 2007
		Increase (decrease) due to
		Volume				Rate				Total
		(Dollars in thousands)
Interest-earning assets:
Loans receivable			275				-453				-179
Investments securities			221				60				281
Interest-bearing deposits with other banks			-108				-17				-125
Total interest-earning assets			388				-410				-23
Interest-bearing liabilities:
Interest — bearing demand deposits			48				-61				-13
Money market deposits			-3				-57				-60
Savings deposits			-56				-200				-255
Certificates of deposit			396				-293				102
Borrowings			-7				-33				-40
Total interest-bearing liabilities			377				-645				-267
Net interest income		$	10			$	235			$	245

		For the Nine Months Ended September 30,
		2008												2007
										(4)												(4)
		Average								Average				Average								Average
		Balance				Interest (1)				Yield/Cost				Balance				Interest (1)				Yield/Cost
		(Dollars in thousands)												(Dollars in thousands)
Interest-earning assets:
Loans receivable			316,032			$	16,274				6.86	%			282,169			$	15,450				7.32	%
Investments securities			95,419				3,165				5.40	%			71,969				2,155				5.26	%
Interest-bearing deposits with other banks			6,803				213				4.17	%			14,730				596				5.41	%
Total interest-earning assets			418,255				19,651				6.48	%			368,868				18,201				6.84	%
Noninterest-earning assets			28,141												18,285
Total assets		$	446,396											$	387,153
Interest-bearing liabilities:
Interest — bearing demand deposits			23,310				220				1.26	%		$	14,201				265				2.49	%
Money market deposits			24,418				588				3.21	%			25,557				801				4.19	%
Savings deposits			71,834				1,100				2.04	%			66,403				1,187				2.39	%
Certificates of deposit			214,270				7,474				4.65	%			167,217				6,108				4.88	%
Borrowings			35,677				1,289				4.81	%			38,352				1,444				5.03	%
Total interest-bearing liabilities			369,509				10,670				3.85	%			311,730				9,805				4.21	%
Noninterest-bearing liabilities
Other liabilities			43,114												42,445
Stockholders’ equity			33,773												32,979
Total liabilities and stockholders’ equity			446,396											$	387,154
Net interest income						$	8,981											$	8,396
Interest rate spread (2)											2.64	%											2.64	%
Net yield on interest-earning assets (3)											3.08	%											3.29	%
Ratio of average interest-earning assets to average interest-bearing liabilities											113.19	%											118.33	%

		2008 versus 2007
		Increase (decrease) due to
		Volume				Rate				Total
		(Dollars in thousands)
Interest-earning assets:
Loans receivable			1,854				-1,031				824
Investments securities			922				87				1,010
Interest-bearing deposits with other banks			-321				-62				-383
Total interest-earning assets			2,456				-1,005				1,450
Interest-bearing liabilities:
Interest — bearing demand deposits			170				-215				-45
Money market deposits			-36				-177				-213
Savings deposits			97				-184				-87
Certificates of deposit			1,719				-353				1,366
Borrowings			-101				-54				-155
Total interest-bearing liabilities			1,849				-984				865
Net interest income		$	606			$	(22	)		$	585