Company Overview
Middlefield Banc Corp. (MBCN) is a community bank holding company headquartered in Middlefield, Ohio, with total assets of $1.86 billion as of September 30, 2024. The company’s primary subsidiary, The Middlefield Banking Company, operates 21 full-service banking centers and an LPL Financial® brokerage office serving communities throughout Ohio.
Historical Background
Established in 1901, Middlefield Banc Corp. has a rich history of serving its local communities. The bank was founded by a group of local business leaders to meet the financial needs of the Middlefield area and quickly became an integral part of the community. Over the decades, the company has weathered economic cycles, industry disruptions, and various challenges, demonstrating its resilience and adaptability. In 2001, Middlefield Banc Corp. took a significant step by becoming a publicly traded company and listing its shares on the NASDAQ stock exchange, providing access to additional capital for expansion.
Recent Developments
A major milestone in the company’s history was the 2022 merger with Liberty National Bank, which expanded Middlefield Banc Corp.’s footprint and customer base, solidifying its position as a leading community bank in the region. However, the integration process presented challenges as the company worked to combine the operations and cultures of the two organizations. In April 2023, Middlefield Banc Corp. faced a cybersecurity incident that temporarily disrupted its computer systems and compromised some customer data. The company responded swiftly, investigating the incident, implementing enhanced security measures, and addressing the impact on its customers, demonstrating its resilience and commitment to its clientele. Two lawsuits have been filed against the bank related to this incident, one of which was voluntarily dismissed. The remaining lawsuit is ongoing, but MBCN believes its cyber insurance policy will cover any associated losses.
Financials
The company’s financial performance in recent years has been mixed, with some quarters showing stronger results than others. For the nine months ended September 30, 2024, Middlefield Banc Corp. reported net income of $10.7 million, down from $13.8 million in the same period of 2023. Earnings per diluted share were $1.32, compared to $1.70 a year earlier. This decline was largely attributable to a 9.4% decrease in net interest income, which fell from $49.8 million in the first nine months of 2023 to $45.1 million in the corresponding period of 2024.
The company’s net interest margin, a key metric that measures the difference between the interest income generated and the interest paid out, also declined from 4.09% in the first nine months of 2023 to 3.50% in the same period of 2024. This reduction was primarily due to a 103-basis point increase in the yield paid on interest-bearing deposits, which outpaced the 44-basis point rise in the yield earned on loans.
Looking at the most recent fiscal year (2023), Middlefield Banc Corp. reported revenue of $71.89 million, net income of $17.37 million, operating cash flow of $22.36 million, and free cash flow of $21.26 million. For the most recent quarter (Q3 2024), the company reported revenue of $16.816 million, net income of $2.340 million, operating cash flow of $6.016 million, and free cash flow of $5.834 million. The revenue and net income decreased by 5.4% and 39.0% year-over-year, respectively. The decrease in revenue was primarily due to a $110,000 decrease in gross rental income as the OREO property was sold, and a $34,000 decrease in gain on equity securities. The decrease in net income was driven by a $2.23 million provision for credit losses in Q3 2024 compared to $1.13 million in Q3 2023.
Despite these challenges, Middlefield Banc Corp. remained focused on growing its loan portfolio, which increased by 3.9% to a record $1.50 billion as of September 30, 2024, up from $1.45 billion a year earlier. The company’s deposit base also grew, rising by 3.8% to a new high of $1.51 billion at the end of the third quarter of 2024, compared to $1.46 billion at the same point in 2023.
One area of concern for the company has been the increase in its nonperforming assets, which rose from $10.9 million, or 0.60% of total assets, at the end of 2023, to $30.1 million, or 1.62% of total assets, as of September 30, 2024. This uptick was primarily driven by the addition of three commercial real estate loans totaling $20.2 million to the nonperforming category during the nine-month period. Management has indicated that these loans are adequately secured and are being closely monitored, but the increase in nonperforming assets remains a risk that requires careful attention.
Liquidity
In response to the higher level of nonperforming loans, Middlefield Banc Corp. increased its allowance for credit losses (ACL) to $22.5 million, or 1.50% of total loans, as of September 30, 2024, up from $21.7 million, or 1.47% of total loans, at the end of 2023. The ACL coverage ratio (ACL to nonperforming loans) declined from 199.4% at the end of 2023 to 74.9% as of September 30, 2024, reflecting the increase in nonperforming assets.
As of September 30, 2024, Middlefield Banc Corp. reported a debt-to-equity ratio of 0.558, cash and cash equivalents of $73.87 million, and an available credit line from the Federal Home Loan Bank (FHLB) of $428.4 million. The company’s current ratio and quick ratio both stood at 0.212, indicating a relatively tight liquidity position.
Business Segments
Middlefield Banc Corp.’s primary business segments are Commercial Real Estate (CRE), Residential Real Estate (RRE), and Commercial and Industrial (C&I) loans.
The CRE segment comprises 45.8% of the total loan portfolio and includes owner-occupied, non-owner occupied, and multifamily real estate loans. As of September 30, 2024, the CRE portfolio had a weighted average loan-to-value ratio of 59%. The owner-occupied CRE loans, which make up 12.5% of the total loan portfolio, had a weighted average loan-to-value of 55%. The non-owner occupied CRE loans, which comprise 27% of the total loan portfolio, had a weighted average loan-to-value of 69.3%. The multifamily real estate loans, which make up 6.3% of the total loan portfolio, had a weighted average loan-to-value of 59%.
The RRE segment represents 23% of the total loan portfolio and consists of loans used to finance personal residences. As of September 30, 2024, the RRE portfolio had $345.75 million in outstanding loans, an increase of $16.89 million, or 5.14%, from December 31, 2023. The allowance for credit losses on the RRE segment was $5.11 million, representing an allowance to loans ratio of 1.48%.
The C&I segment accounts for 14.2% of the total loan portfolio and includes loans to commercial customers and certain agricultural loans. As of September 30, 2024, the C&I portfolio had $213.17 million in outstanding loans, a decrease of $8.34 million, or 3.76%, from December 31, 2023. The allowance for credit losses on the C&I segment was $2.41 million, representing an allowance to loans ratio of 1.13%.
Overall, Middlefield Banc Corp.’s total loan portfolio increased by $26.4 million, or 1.79%, to $1.5 billion as of September 30, 2024, compared to $1.48 billion as of December 31, 2023. The allowance for credit losses increased by $833,000, or 3.84%, to $22.53 million as of September 30, 2024, compared to $21.69 million as of December 31, 2023, representing an allowance to total loans ratio of 1.50%.
Geographic Performance
MBCN primarily operates in Ohio, with approximately 99% of its residential real estate loans concentrated in the state. This geographic concentration allows the bank to leverage its deep understanding of local markets but also exposes it to regional economic risks.
Future Outlook
Looking ahead, Middlefield Banc Corp. faces a challenging operating environment, with economic uncertainty, rising interest rates, and heightened competition in its regional markets. The company remains focused on prudent risk management, diversifying its revenue streams, and leveraging its strong community relationships to drive growth and profitability.
One potential bright spot for the company is its Mortgage Banking operation, which generated $135,000 in gains on the sale of loans during the first nine months of 2024, up from $74,000 in the same period of the prior year. This division could provide a source of fee income to help offset the pressure on net interest margins.
In addition, Middlefield Banc Corp. has been proactive in managing its balance sheet and capital position. As of September 30, 2024, the company’s Tier 1 risk-based capital ratio stood at 12.10%, well above the 8.50% regulatory threshold for being considered “adequately capitalized.” This strong capital base should provide the bank with the flexibility to weather any future economic storms and continue supporting its customers and communities.
Industry Trends
The banking industry has seen a compound annual growth rate (CAGR) of around 4-5% in revenue over the past 5 years. While Middlefield Banc Corp.’s recent performance has lagged behind this industry trend, the company’s focus on its core community banking model and strategic initiatives may help it align more closely with industry growth rates in the future.
Conclusion
Despite the challenges it has faced, including the recent cybersecurity incident and the resulting legal issues, Middlefield Banc Corp. remains committed to its mission of being a trusted financial partner in the communities it serves. The company’s experienced management team, prudent risk management practices, and community-focused approach have been instrumental in navigating the evolving financial landscape. As Middlefield Banc Corp. celebrates the 10th anniversary of its Nasdaq listing, the company will need to continue adapting and innovating to ensure its long-term success in the years ahead. By addressing its current challenges, such as the increase in nonperforming assets and the ongoing cybersecurity lawsuit, while capitalizing on opportunities in its various business segments, MBCN can work towards improving its financial performance and aligning more closely with industry growth trends.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.