MBN announces second quarter results



    
                                                         Second Quarter 2008
                                        For the quarter ended April 30, 2008
    

    MESSAGE TO SHAREHOLDERS

    TORONTO, June 16 /CNW/ - During the second quarter, Middlefield Bancorp
Limited ("MBN" or the "Company") generated a net loss of $6.1 million, or
$0.67 per share, more than offsetting net income of $0.8 million, or $0.09 per
share, during the first quarter and resulting in a net loss of $5.4 million,
or $0.58 per share, for the six months ended April 30, 2008. These losses,
which reversed a long history of profitable special situation investing, were
the result of positions largely assumed by the Company during the second
quarter in financial services, S&P futures, crude oil and oil and gas
equities, which were not fully hedged.
    The latter were undertaken based upon the forecast by our oil and gas
consultant, Henry Groppe of Houston-based Groppe Long and Littell ("GLL"), of
a very substantial correction in the price of crude oil during the second
quarter. Over many decades, GLL has correctly called major turning points in
the price of oil as the result of in-depth fundamental analysis and GLL
frequently finds itself at odds with conventional wisdom. In fact, the firm
was in a small minority that correctly forecasted the significant run-up in
the price of oil over the past decade. GLL's forecast of a precipitous price
decline in the second quarter was based upon the significant gap between the
price at which they believe crude oil should trade based upon fundamental
supply and demand factors in the "wet barrel" market and the price at which it
was trading based, in their judgment, upon speculative activity in the futures
market. Indeed, the United States Senate is currently looking into allegations
that the recent extraordinary run-up in prices across the commodities complex
is being driven by unhealthy speculative activity. In addition, U.S. federal
regulators are six months into a wide-ranging investigation of U.S. oil
markets, with a focus on possible price manipulation. In any event, in the
past, fundamentals have ultimately prevailed in crude oil pricing.

    
    FINANCIAL SUMMARY
    -------------------------------------------------------------------------
    (all amounts in
    thousands,        Three Months         Three Months         Six Months
    except per      Ended January 31      Ended April 30      Ended April 30
    share amounts)    2008      2007      2008      2007      2008      2007
    -------------------------------------------------------------------------
    Revenue
     (loss)       $  2,322  $    723  $ (5,860) $    810  $ (3,538) $  1,533
    Net income
     (loss)            785       157    (6,147)      215    (5,362)      372
    Diluted
     earnings
     (loss) per
     share            0.09      0.02     (0.67)     0.02     (0.58)     0.04
    -------------------------------------------------------------------------
    

    In spite of the disappointing results, MBN's balance sheet remains strong
with no debt and net liquid assets of approximately $3.00 per share as at
April 30, 2008. MBN is now conducting a comprehensive review of its mandate
including not only special situation investing but also its strategic
investing activities. With respect to the latter, the Company has made several
attempts to acquire businesses in its areas of expertise but thus far has not
been successful. MBN has decided to pay a special dividend of $1.00 per share
in July 2008, which will leave it with sufficient funds to capitalize on the
various strategic alternatives under consideration.

    MANAGEMENT'S DISCUSSION AND ANALYSIS
    April 30, 2008 and 2007 (unaudited)

    The following Management's Discussion and Analysis ("MD&A") should be
read in conjunction with the attached unaudited interim consolidated financial
statements that have been prepared by management and approved by the board of
directors. These statements have not been reviewed by MBN's external auditors.
Readers should also refer to the MD&A in MBN's 2007 Annual Report. Additional
information relating to MBN, including MBN's annual information form, is
available on SEDAR at www.sedar.com.

    The reader should be aware that historical results are not necessarily
indicative of future performance. This MD&A contains forward-looking
statements, including statements regarding expected future events, financial
results, objectives and opportunities of MBN, government actions and industry
performance, which are subject to substantial risks and uncertainties.
Forward-looking statements include statements that are predictive in nature,
that depend upon or refer to future events, results, expectations and
performance, or that include words such as "expects", "anticipates",
"intends", "will" or negative versions thereof and other similar wording. MBN
cautions that actual events, results, expectations or performance will be
affected by a number of factors (many of which are beyond its control) and may
differ materially from those based upon the forward-looking statements in the
MD&A, including as a result of: general economic, political, market and
business factors and conditions; commodity price fluctuations; interest and
foreign exchange rate fluctuations; statutory and regulatory developments;
unexpected judicial or regulatory proceedings; and catastrophic events.
Readers are cautioned that the foregoing list of factors is not exhaustive and
to avoid placing undue reliance on forward-looking statements due to the
inherent uncertainty of such statements. Forward-looking statements are based
on the estimates and opinions of MBN's management at the time the statements
were made. MBN does not undertake, and specifically disclaims, any obligation
to update or revise any forward-looking statements.

    RESULTS OF OPERATIONS

    MBN generated a net investment loss before expenses of $5.9 million
during the second quarter of 2008 compared to net investment income of
$0.8 million in the prior year comparable quarter. The Company's results
reflect its positions in financial services, S&P futures, crude oil and oil
and gas equities, which were not fully hedged.
    General and administrative expenses in the second quarter of 2008
decreased $0.15 million to $0.2 million relative to the second quarter of
2007, primarily as a result of reduced management fees. Transaction costs,
such as brokerage commissions, of $0.15 million in the second quarter of 2008
were up $0.1 million over the comparable quarter last year due to increased
trading activity in 2008. Depreciation, depletion and accretion expenses in
the second quarter of 2008 of $43,000 are comprised of non-recoverable capital
expenditures in respect of the oil and gas properties in which 2M Energy Corp.
has an interest and accretion expenses in respect of 2M's asset retirement
obligations ("AROs"). The 2007 expense is nominal reflecting only accretion
expenses.
    An income tax recovery of $0.8 million was recorded in the 2008 second
quarter as a result of losses incurred which can be carried back to prior
periods to recover previously paid income taxes. The comparable quarter in
2007 reflects a nominal income tax expense. Due to the Company's consolidation
of variable interest entities, revenue and expenses increased by $0.9 million
and $0.2 million respectively, in the second quarter of 2008 and by
$0.3 million and $0.2 million respectively, in the second quarter of last
year. These adjustments were offset by the deduction of the non-controlling
interest and thus, there was no impact on the net income of the Company.
    MBN recorded a net loss of $0.58 per diluted share in the first half of
2008 compared to net income of $0.04 per share on a diluted basis in the prior
year.

    
    -------------------------------------------------------------------------
                           2008                 2007                 2006
                         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3
    -------------------------------------------------------------------------
    Total Revenue    (5,860) 2,322    421    476    810    723    900    180
    Net Income (Loss):
      - Total        (6,147)   785   (343)    (6)   215    157  3,214    (47)
      - Per Common
         Share
        - Basic       (0.67)  0.09  (0.04)     -   0.02   0.02   0.36  (0.01)
        - Diluted     (0.67)  0.09  (0.04)     -   0.02   0.02   0.35  (0.01)
    -------------------------------------------------------------------------
    

    CAPITAL RE

SOURCES, LIQUIDITY AND CAPITAL EXPENDITURES Cash provided by operating activities, excluding changes in non-cash operating working capital, amounted to $0.8 million in the 2008 second quarter compared to cash used of $0.1 million in the comparable 2007 period. Increased interest earnings served to increase cash in the quarter ended April 30, 2008. Cash used in investing activities amounted to $34.2 million in the second quarter of 2008, compared to $2.8 million in the comparable quarter in 2007. The Company purchased additional marketable securities in the second quarter of 2008 thus reducing its cash reserves. FINANCIAL POSITION MBN's working capital position was $28.6 million at April 30, 2008, down $6.4 million from $35.0 million at January 31, 2008 due to losses incurred in the second quarter of 2008. Short-term investments decreased 59% to $12.1 million at April 30, 2008 from January 31, 2008 and were comprised of investments in money-market securities. Marketable securities of $14.9 million at April 30, 2008 were up from $0.4 million at January 31, 2008. Deposits with brokers net of the liability associated with covering the positions amounted to $0.5 million at the end of the 2008 second quarter, down from $5.1 million at January 31, 2008. Receivables of $0.5 million at April 30, 2008 related to sales of securities that settled subsequent to the quarter. Income taxes recoverable of $0.9 million at April 30, 2008 relates to losses that will be carried back to offset taxes previously paid. At January 31, 2008 income taxes payable of $0.1 million related to investment gains realized in the first quarter. Short-term future income tax assets in the amount of $0.1 million at April 30, 2008 stem from the expected cash outflows related to AROs, which will be available for tax purposes to shelter future income. Long-term future income tax assets relate to tax shelter from resource pools and longer-term cash outflows in respect of AROs. Total future income tax assets of $0.3 million were down from $0.4 million at January 31, 2008 primarily due to unrealized gains on investments at the end of the second quarter. The April 30, 2008 payables amounted to $6.9 million compared to $0.8 million at January 31, 2008. The increase was due to purchases of marketable securities for which settlement occurred after quarter end. Changes in respect of all other assets and liabilities during the quarter ended April 30, 2008 were minimal. The total number of common shares outstanding at April 30, 2008 and June 16, 2008 was 9.1 million and 9.0 million, respectively. CRITICAL ACCOUNTING ESTIMATES AND CHANGES IN ACCOUNTING POLICIES Critical accounting estimates have been disclosed in the MD&A of the Company in its October 31, 2007 Annual Report. Effective November 1, 2007 the Company adopted three new presentation and disclosure standards in respect of managing capital, financial instruments and risks associated with financial instruments. RISK MANAGEMENT The risks and risk management procedures of the Company have been disclosed in its MD&A in the October 31, 2007 Annual Report. These risks and risk management procedures remain unchanged at present. OUTLOOK As stated in the Message to Shareholders, management is undertaking a comprehensive strategic review of the Company's options going forward. MBN has decided to pay a special dividend of $1.00 per share in July 2008, which will leave it with sufficient funds to capitalize on the various strategic alternatives under consideration. Middlefield Bancorp trades on the TSX under the symbol "MBN". For further information, visit our website at www.middlefield.com or contact W. Garth Jestley at 416-847-5346. June 16, 2008 MIDDLEFIELD BANCORP LIMITED CONSOLIDATED BALANCE SHEETS (UNAUDITED) April 30, October (All amounts in thousands) 2008 31, 2007 ------------------------------------------------------------------------- ASSETS Current assets Cash $ 6,776 $ 3,451 Short-term investments (note 2) 12,119 21,549 Marketable securities (note 2) 14,897 2,062 Deposits with brokers (note 2) 6,224 18,142 Receivables 522 90 Prepaid expenses 33 51 Income taxes recoverable 884 90 Future income tax assets 73 186 ------------------------------------------------------------------------- 41,528 45,621 Property, plant and equipment, net 16 16 Future income tax assets 198 198 ------------------------------------------------------------------------- $ 41,742 $ 45,835 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Payables and accruals $ 6,947 $ 242 Asset retirement obligations 346 274 Investments sold short (note 2) 5,677 10,893 ------------------------------------------------------------------------- 12,970 11,409 Asset retirement obligations 183 185 ------------------------------------------------------------------------- 13,153 11,594 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital (note 4) 12,127 12,269 Retained earnings 16,462 21,972 ------------------------------------------------------------------------- 28,589 34,241 ------------------------------------------------------------------------- $ 41,742 $ 45,835 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. It is recommended that readers refer to the accompanying Management's Discussion and Analysis which provides additional information regarding these consolidated financial statements. Approved on behalf of the Board: (signed) (signed) Director: Murray J. Brasseur Director: George S. Dembroski MIDDLEFIELD BANCORP LIMITED CONSOLIDATED STATEMENTS OF INCOME (LOSS), COMPREHENSIVE INCOME (LOSS) AND RETAINED EARNINGS (unaudited) Three Months Ended Six Months Ended (All amounts in thousands, April 30 April 30 except per share amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- REVENUE Investment income (loss) (note 5) $ (5,860) $ 810 $ (3,538) $ 1,533 ------------------------------------------------------------------------- EXPENSES Production 11 15 23 30 General and administrative 212 359 727 647 Transaction costs 150 28 193 39 Foreign exchange loss (gain) (30) 4 296 3 Depreciation, depletion and accretion 43 5 111 10 ------------------------------------------------------------------------- 386 411 1,350 729 ------------------------------------------------------------------------- Income (loss) before income taxes and non-controlling interest (6,246) 399 (4,888) 804 Income tax expense (recovery) (809) 16 (659) 7 ------------------------------------------------------------------------- Income (loss) before non-controlling interest (5,437) 383 (4,229) 797 Non-controlling interest 710 168 1,133 425 ------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss)(1) (6,147) 215 (5,362) 372 Retained earnings, beginning of period, as previously reported 22,728 22,242 21,972 22,143 Transition adjustment - financial instruments(2) - - - 10 ------------------------------------------------------------------------- Retained earnings, beginning of period, as adjusted 22,728 22,242 21,972 22,153 Repurchase of shares (119) (55) (148) (123) ------------------------------------------------------------------------- Retained earnings, end of period $ 16,462 $ 22,402 $ 16,462 $ 22,402 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings (loss) per share (note 6) $ (0.67) $ 0.02 $ (0.58) $ 0.04 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings (loss) per share (note 6) $ (0.67) $ 0.02 $ (0.58) $ 0.04 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The Company has no other comprehensive income (loss) and as a result net income (loss) and comprehensive income (loss) are the same. (2) The transition adjustment relates to the implementation of the new financial instruments accounting standards. Refer to the consolidated financial statements in the 2007 Annual Report. The accompanying notes are an integral part of these consolidated financial statements. It is recommended that readers refer to the accompanying Management's Discussion and Analysis which provides additional information regarding these consolidated financial statements. MIDDLEFIELD BANCORP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended Six Months Ended April 30 April 30 (All amounts in thousands) 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING Net income (loss) $ (6,147) $ 215 $ (5,362) $ 372 Items not involving cash: Loss (gain) on sale of investments 6,985 (259) 5,331 (397) Unrealized gain on investments (255) (48) (31) (110) Depreciation, depletion and accretion 43 5 111 10 Future income tax expense 140 8 113 23 Stock-based compensation - - - 1 ------------------------------------------------------------------------- 766 (79) 162 (101) Net change in non-cash operating working capital 39,493 (1,266) 17,415 (745) ------------------------------------------------------------------------- 40,259 (1,345) 17,577 (846) ------------------------------------------------------------------------- INVESTING Proceeds from sale of investments 198,290 35,111 281,129 82,961 Purchase of investments (232,431) (37,933) (295,050) (84,444) Purchase of property, plant and equipment (41) (23) (41) (28) ------------------------------------------------------------------------- (34,182) (2,845) (13,962) (1,511) ------------------------------------------------------------------------- FINANCING Issue of shares - 356 - 356 Repurchase of shares (237) (100) (290) (229) ------------------------------------------------------------------------- (237) 256 (290) 127 ------------------------------------------------------------------------- Net increase (decrease) in cash 5,840 (3,934) 3,325 (2,230) Cash, beginning of period 936 4,495 3,451 2,791 ------------------------------------------------------------------------- Cash, end of period $ 6,776 $ 561 $ 6,776 $ 561 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary disclosure of cash flow information: Income taxes paid $ - $ - $ - $ 759 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. It is recommended that readers refer to the accompanying Management's Discussion and Analysis which provides additional information regarding these consolidated financial statements. MIDDLEFIELD BANCORP LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES These unaudited interim consolidated financial statements include the accounts of Middlefield Bancorp Limited ("MBN"), its wholly owned subsidiary, 2M Energy Corp. ("2M") and all variable interest entities for which it is the primary beneficiary (collectively, the "Company"). The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). They follow the same accounting policies and methods of application as the Company's consolidated financial statements for the year ended October 31, 2007 except for the changes in accounting policies described below. The Company's interim consolidated financial statements do not include all disclosures required by GAAP for annual financial statements and accordingly, should be read in conjunction with the consolidated financial statements for the year ended October 31, 2007 as set out on pages 8 to 17 of the Company's 2007 Annual Report. Significant Accounting Changes Capital Disclosures and Financial Instruments - Disclosures and Presentation On November 1, 2007, the Company adopted three new presentation and disclosure standards that were issued by the Canadian Institute of Chartered Accountants ("CICA"): Handbook section 1535, "Capital Disclosures", Handbook section 3862, "Financial Instruments - Disclosures" and Handbook section 3863, "Financial Instruments - Presentation". Section 1535 requires that an entity disclose information that enables users of its financial statements to evaluate an entity's objectives, policies and processes for managing capital. Sections 3862 and 3863 replaced Handbook section 3861, "Financial Instruments - Disclosure and Presentation", revised and enhanced its disclosure requirements, and continued its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. The adoption of these standards did not have any impact on the classification and measurement of the Company's financial instruments. 2. CARRYING VALUE AND FAIR VALUE OF FINANCIAL INSTRUMENTS The following table provides a comparison of carrying and fair values of the Company's financial instruments as at April 30, 2008 and October 31, 2007: (all amounts in thousands) Carrying Value ----------------------------------- Financial instruments classified as ----------------------------------- Total Held-for- Loans and Other fair As at April 30, 2008 trading(1) receivables liabilities value ------------------------------------------------------------------------- Financial assets Cash $ 6,776 $ - $ - $ 6,776 Short-term investments 12,119 - - 12,119 Marketable securities 14,897 - - 14,897 Deposits with brokers - 6,224 - 6,224 Receivables - 522 - 522 Financial liabilities Payables and accruals - - 6,947 6,947 Investments sold short 5,677 - - 5,677 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (all amounts in thousands) Carrying Value ----------------------------------- Financial instruments classified as ----------------------------------- Total Held-for- Loans and Other fair As at October 31, 2007 trading(1) receivables liabilities value ------------------------------------------------------------------------- Financial assets Cash $ 3,451 $ - $ - $ 3,451 Short-term investments 21,549 - - 21,549 Marketable securities 2,062 - - 2,062 Deposits with brokers - 18,142 - 18,142 Receivables - 90 - 90 Financial liabilities Payables and accruals - - 242 242 Investments sold short 10,893 - - 10,893 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Cash is designated as held-for-trading. All other financial assets and liabilities classified as held-for-trading are required to be so classified. The fair value of financial assets and liabilities "held-for-trading", other than cash, which include: short-term investments, marketable securities and investments sold short, is determined as follows: (i) short-term investments represent investments in mutual funds which are valued based on the fund's reported net asset value, and (ii) marketable securities and investments sold short with quoted prices in an active market are valued at their bid and ask price, respectively at the balance sheet date. Securities with no available bid/ask price are valued at their closing price at the balance sheet date. The fair values of all other financial instruments, which include: deposits with brokers, receivables and payables and accruals, approximate their respective carrying values due to their short terms to maturity, and are measured at amortized cost. 3. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS The Company is exposed to the following risks as a result of holding financial instruments: price risk, interest rate risk, foreign exchange rate risk and credit risk. The Company's primary risk management objective is to protect earnings and cash flow and, ultimately, shareholder value. Risk management strategies, as discussed below, are designed and implemented to ensure the Company's risks and related exposure are consistent with its business objectives and risk tolerance. Most of the Company's risks are derived from investments in financial instruments classified as held-for-trading. The investments are made in accordance with the Company's risk management policies. The policies govern the responsibilities of the Company's investment committee as well as establish investment objectives, strategies, criteria and restrictions. The objectives of these policies are to identify and mitigate investment risk through a disciplined investment process and the appropriate structuring of each transaction. a. Price risk Price risk is the risk that changes in the market values of the Company's publicly traded investments will affect the Company's income or the value of its financial instruments. The Company's price risk is driven primarily by volatility in commodity and equity prices. With respect to long positions, rising commodity and equity prices may increase the value of an investment while declining commodity and equity prices may have the opposite effect. The Company's short selling activities are also affected by commodity and equity prices. There is no assurance that securities will decrease in value during the period of a short sale enough to make a profit for the Company, and securities sold short may instead increase in value. The Company mitigates price risk by making investing decisions based upon various factors, including comprehensive fundamental analysis prepared by industry experts to forecast future commodity and equity price movements, and by limiting the exposure to short sales. The Company also mitigates price risk of its publicly traded investments by regularly conducting financial reviews of publicly available information related to its publicly traded investments to ensure that any risks are within established levels of risk tolerance. The Company is exposed to price risk through the following financial instruments: April 30, October (all amounts in thousands) 2008 31, 2007 ------------------------------------------------------------------------- Short-term investments $ 4,064 $ 21,549 Marketable securities 14,897 2,062 Investments sold short (5,677) (10,893) ------------------------------------------------------------------------- Net exposure $ 13,284 $ 12,718 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Based on the above exposures at April 30, 2008, a 10% change in the market value of the Company's publicly traded investments would result in a $1.1 million change in net income and comprehensive income for both the three and six months ended April 30, 2008. b. Interest rate risk Interest rate risk describes the Company's exposure to changes in the general level of interest rates. The earnings of the Company are positively correlated to interest rates. Rising interest rates serve to increase the Company's earnings while the reverse is true in a declining interest rate environment. The Company's exposure to interest rate risk relates primarily to its investments in short-term investments such as money market instruments. The Company seeks to mitigate this risk through active management which involves investing in a variety of money market instruments for different periods of time and at different interest rates. The Company is exposed to interest rate risk through the following financial assets: April 30, October (all amounts in thousands) 2008 31, 2007 ------------------------------------------------------------------------- Cash $ 6,776 $ 3,451 Short-term investments 8,055 - ------------------------------------------------------------------------- Total exposure $ 14,831 $ 3,451 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Based on the above exposures at April 30, 2008, a 1% change in market interest rates would result in a $28,000 and $98,000 change in net income and comprehensive income for the three and six months ended April 30, 2008, respectively. c. Foreign exchange rate risk Foreign exchange rate risk describes the impact on the underlying value of financial instruments due to foreign exchange rate movements. Foreign investments, commodities, receivables and payables denominated in foreign currencies are affected by changes in the value of the Canadian dollar compared to foreign currencies. As a result, such financial assets and liabilities may depreciate/appreciate respectively in the short-term due to the strengthening/weakening of the Canadian dollar against other currencies. The majority of the Company's cash flows and financial instruments are denominated in Canadian dollars which is its functional and reporting currency. The Company's exposure to foreign exchange risk relates primarily to outstanding balances in respect of its short positions which are denominated in U.S. dollars ("USD"). The Company has not hedged its exposure to currency fluctuations, however, both the receivable and payable balances in respect of the short positions are denominated in USD and therefore any currency fluctuations are largely offset. The Company monitors these balances on a regular basis. The Company is exposed to foreign exchange rate risk through the following financial instruments denominated in USD: April 30, October (all amounts in USD thousands) 2008 31, 2007 ------------------------------------------------------------------------- Deposits with brokers $ 6,128 $ - Investments sold short (5,637) - ------------------------------------------------------------------------- Net exposure $ 491 $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Based on the above exposures at April 30, 2008, a 10% change in the Canadian dollar against the USD would result in a $33,000 change in net income and comprehensive income for both the three and six months ended April 30, 2008. d. Credit risk Credit risk represents the financial loss that the Company would experience if a counterparty to a financial instrument failed to meet its obligations to the Company. The carrying amounts of financial assets represent the maximum credit exposure. The Company's credit risk is primarily attributable to its deposits with brokers. There is no significant credit risk related to the Company's short-term investments. The credit risk related to the Company's deposits with brokers arises because a lender of securities may go bankrupt and the Company may lose the collateral it has deposited with the lender. As at April 30, 2008 the Company had made collateral cash deposits amounting to $6.2 million with one counterparty in respect of the short positions that the Company held. The credit risk of these deposits is concentrated with this counterparty, which is a large Canadian financial institution. The Company has established various internal controls to help mitigate credit risk, including prior approval of all investments by an investment committee whose mandate includes conducting financial and other assessments of these investments on a regular basis. The Company has also implemented policies which ensure that investments can only be made with counterparties that have a minimum acceptable credit rating. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but instead mitigates this risk by dealing only with financially sound counterparties and, accordingly, does not anticipate losses due to non-performance. 4. SHARE CAPITAL As at June 16, 2008 the Company had 9,040,448 common shares issued and outstanding and stock options outstanding for 175,000 common shares. 5. REVENUE FROM TRADING AND NON-TRADING FINANCIAL INSTRUMENTS Investment income includes both trading related revenue such as interest income, dividends, net gains on investments and changes in fair values as well as non-trading related interest income. Three Months Ended Six Months Ended (all amounts in thousands) April 30 April 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Held-for-trading financial instruments Net gains (losses) on investments $ (6,985) $ 259 $ (5,331) $ 397 Increase in fair values 255 48 31 110 Interest income 842 483 1,698 960 Dividends 10 20 10 29 Other - - - 37 ------------------------------------------------------------------------- (5,878) 810 (3,592) 1,533 Financial instruments measured at amortized cost Interest income 18 - 54 - ------------------------------------------------------------------------- $ (5,860) $ 810 $ (3,538) $ 1,533 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 6. EARNINGS (LOSS) PER SHARE (all amounts in thousands, Three Months Ended Six Months Ended except per share amounts) April 30 April 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) $ (6,147) $ 215 $ (5,362) $ 372 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average common shares outstanding for basic earnings (loss) per share 9,176 9,208 9,199 9,130 Add: Dilutive effect of stock options outstanding 4 69 5 119 ------------------------------------------------------------------------- Weighted average common shares outstanding for diluted earnings (loss) per share 9,180 9,277 9,204 9,249 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings (loss) per share $ (0.67) $ 0.02 $ (0.58) $ 0.04 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings (loss) per share $ (0.67) $ 0.02 $ (0.58) $ 0.04 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. CAPITAL MANAGEMENT The Company defines capital that it manages as the aggregate of its shareholders' equity, which is comprised of issued share capital and retained earnings. The Company's objective when managing capital is to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders, maximize shareholder value and maintain financial strength. The Company manages and adjusts its capital in response to general economic conditions, the risk characteristics of the underlying assets and working capital requirements. In order to maintain or adjust its capital structure, the Company may issue long-term debt, issue shares, repurchase shares through a normal course issuer bid, adjust amounts paid to shareholders or undertake other activities deemed appropriate under the specific circumstances. The Board of Directors review and approve any material transactions not in the ordinary course of business, including proposals in respect of acquisitions or other major investments or divestitures. The Company is not subject to any externally imposed capital requirements. The Company's overall strategy with respect to capital risk management remains unchanged from the quarter ended January 31, 2008. 8. RECLASSIFICATIONS Certain prior period balances have been reclassified to conform with the current year presentation. On May 8, 2008 MBN received approval from the Toronto Stock Exchange to renew its normal course issuer bid (the "Bid"). The notice of intention (the "Notice") provides for the renewed Bid to commence on May 12, 2008 and enables the Company to purchase up to 5% of the common shares outstanding, during the next 12 month period. MBN believes that the current market price does not reflect the underlying value of its common shares. Shareholders may obtain a copy of the Notice, without charge, by contacting the Company. CORPORATE INFORMATION Middlefield Bancorp Limited is a Canadian merchant bank managed by Middlefield Group. The Company's principal objective is to create long term shareholder value through a twofold strategy of strategic investing in businesses with strong management and exceptional prospects for longer term earnings growth and special situation investing where there is excellent potential for significant capital appreciation. Our aim is to produce a steady stream of growing earnings from strategic investments supplemented by earnings from special situation activities. The Company's board of directors and management include experienced and successful individuals who have committed their own capital to the Company. DIRECTORS LEGAL COUNSEL Thomas I.A. Allen, Q.C.(2) Ogilvy Renault Counsel, Ogilvy Renault AUDITORS Murray J. Brasseur Deloitte & Touche LLP Chairman and Director Middlefield Bancorp Limited BANKER Bank of Nova Scotia George S. Dembroski(1),(2) Corporate Director STOCK EXCHANGE LISTING Toronto Stock Exchange H. Roger Garland(1) Symbol: MBN Corporate Director HEAD OFFICE W. Garth Jestley One First Canadian Place President and Director 58th Floor Middlefield Bancorp Limited P.O. Box 192 Toronto, Ontario Charles B. Young(1),(2) M5X 1A6 Chairman, Ascend Capital Management Web Site: www.middlefield.com Email: invest@middlefield.com (1) Audit Committee Member (2) Corporate Governance Committee Member

For further information:

For further information: visit our website at www.middlefield.com or
contact: W. Garth Jestley, President, (416) 847-5346

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MIDDLEFIELD BANCORP LIMITED

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