MBN announces third quarter results



    TORONTO, Sept. 12 /CNW/ -

    MESSAGE TO SHAREHOLDERS

    During the third quarter, Middlefield Bancorp Limited ("MBN" or the
"Company") generated a net loss of $1.7 million, or $0.19 per share, bringing
the net loss to $7.1 million, or $0.77 per share, for the nine months ended
July 31, 2008. These losses, the majority of which were incurred in the second
quarter of 2008, reversed a long history of profitable special situation
investing. They stemmed from positions assumed by the Company largely during
the second quarter in financial services, S&P futures, crude oil and oil and
gas equities, which were not fully hedged. Positions closed out in the third
quarter of 2008 contributed to the loss in that quarter.
    As discussed in our second quarter report, the oil and gas positions were
undertaken based upon the forecast by our oil and gas consultant, Henry Groppe
of Houston-based Groppe Long and Littell, of a very substantial correction in
the price of crude oil during the second quarter. This forecasted decline
stemmed from the significant gap between the price at which crude oil should
trade based upon fundamental supply and demand factors and the price at which
it was trading based upon speculative activity in the futures market. As it
happens, there has been a material correction in the price of crude oil during
August but, in light of the historically high level of price volatility, MBN
eliminated its oil and gas positions as at the end of August.

    
    FINANCIAL SUMMARY
    -------------------------------------------------------------------------
    (all amounts
     in thousands,        Six Months       Three Months        Nine Months
     except per         Ended April 30    Ended July 31       Ended July 31
     share amounts)      2008     2007    2008      2007      2008      2007
    -------------------------------------------------------------------------

    Revenue (loss)    $ (3,538) $ 1,533   $ (945)  $ 476  $ (4,483)  $ 2,009
    Net income (loss)   (5,362)     372   (1,727)     (6)   (7,089)      366
    Diluted earnings
     (loss) per share    (0.58)    0.04    (0.19)      -     (0.77)     0.04
    -------------------------------------------------------------------------
    

    We are pleased to report that our special situation investing activities
have turned profitable thus far in the fourth quarter based upon a position in
BCE of 200,000 shares with a market value of about $8 million in anticipation
of the buyout's closing in December 2008 and a position in PBS Coals Corp. of
150,000 shares, which has agreed to be acquired by OAO Serverstal for $8.30
per share and is scheduled to close in October 2008, subject to shareholder
approval. At the end of August, MBN's mark-to-market profit in these and other
positions is approximately $0.7 million and, assuming both transactions close
as anticipated, will produce a profit in excess of $1 million to MBN before
the end of calendar 2008. In addition, Devon Canada Corporation has notified
2M Energy Corp., the oil and gas subsidiary of MBN, that due to currently high
oil prices, it plans to reactivate four wells that have been shut in for
several years. 2M owns a one-third working interest in these properties, of
which Devon is the operator.
    As at July 31, 2008, MBN's balance sheet remains strong with no debt and
net current assets of approximately $2.00 per share. As previously discussed,
MBN is now conducting a comprehensive review of its mandate including special
situation and strategic investing activities.

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    July 31, 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 $0.9 million
during the third quarter of 2008 compared to net investment income of
$0.5 million in the prior year comparable quarter. The Company's results
reflect its positions in financial service equities and crude oil and oil and
gas equities.
    General and administrative expenses in the third quarter of 2008
increased $0.1 million to $0.3 million relative to the third quarter of 2007,
primarily as a result of the Company's increased share of expenses of the
variable interest entities ("VIEs") in which it invested. Transaction costs,
such as brokerage commissions, of $0.05 million in the third quarter of 2008
more than doubled over the comparable quarter last year due to increased
trading activity in 2008. A foreign exchange loss of $0.1 million was recorded
in the third quarter of 2008 compared to a small gain last year. Depreciation,
depletion and accretion expenses in the third quarter of 2008 were nominal and
reflect accretion expenses in respect of 2M's asset retirement obligations
("AROs").
    An income tax recovery of $0.1 million was recorded in the 2008 third
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 $0.1 million income tax expense. Due to the Company's
consolidation of VIEs, revenue and expenses increased by $0.6 million and
$0.1 million respectively, in the third quarter of 2008 and by $0.3 million
and $0.1 million respectively, in the third 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 $0.77 per diluted share for the first nine
months of 2008 compared to net income of $0.04 per diluted share in the prior
year.

    
    -------------------------------------------------------------------------
    (all amounts
     in thousands,
     except per                 2008                     2007           2006
     share amounts)      Q3      Q2     Q1     Q4     Q3     Q2     Q1    Q4
    -------------------------------------------------------------------------
    Total Revenue      (945) (5,860) 2,322    421    476    810    723   900
    Net Income
     (Loss):
      - Total        (1,727) (6,147)   785   (343)    (6)   215    157 3,214
      - Per Common
         Share
        - Basic       (0.19)  (0.67)  0.09  (0.04)     -   0.02   0.02  0.36
        - Diluted     (0.19)  (0.67)  0.09  (0.04)     -   0.02   0.02  0.35
    -------------------------------------------------------------------------
    

    CAPITAL RE

SOURCES, LIQUIDITY AND CAPITAL EXPENDITURES Cash provided by operating activities, excluding changes in non-cash operating working capital, amounted to $0.1 million in both the 2008 and 2007 third quarters. Cash provided by investing activities amounted to $4.2 million in the third quarter of 2008, compared to $0.6 million in the comparable quarter in 2007. The Company sold some of its investments in the third quarter of 2008 to generate cash for the $9.0 million dividend that was paid, which is reflected under cash used in financing activities. FINANCIAL POSITION MBN's working capital position was $17.6 million at July 31, 2008, down $11.0 million from $28.6 million at April 30, 2008 due primarily to the dividend payment and secondarily to losses incurred in the third quarter of 2008. Short-term investments decreased 44% to $6.8 million at July 31, 2008 from April 30, 2008 and were comprised of investments in money-market securities. Marketable securities of $9.0 million at July 31, 2008 were down from $14.9 million at April 30, 2008. Deposits with brokers net of the liability associated with covering the positions amounted to $0.8 million at the end of the 2008 third quarter, up from $0.5 million at April 30, 2008. Receivables of $1.9 million at July 31, 2008 include a loan of $1.3 million that is due within one year and proceeds from the sale of securities. Income taxes recoverable of $0.8 million at July 31, 2008 relates to losses that will be carried back to offset taxes previously paid. This is down slightly from the recoverable amount of $0.9 million at April 30, 2008 due to the receipt of some refunds in the third quarter. Short-term future income tax assets in the amount of $0.1 million at July 31, 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 unchanged from April 30, 2008. The July 31, 2008 payables amounted to $2.4 million compared to $6.9 million at April 30, 2008. The decrease was due to reduced purchases of marketable securities for which settlement occurred after quarter end. Changes in respect of all other assets and liabilities during the quarter ended July 31, 2008 were minimal. The total number of common shares outstanding at July 31, 2008 and September 12, 2008 was 9.0 million. 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 MBN's balance sheet remains strong with no debt and net current assets of approximately $2.00 per share as at July 31, 2008. Middlefield Bancorp trades on the TSX under the symbol "MBN". September 12, 2008 MIDDLEFIELD BANCORP LIMITED CONSOLIDATED BALANCE SHEETS (UNAUDITED) July 31, October 31, (All amounts in thousands) 2008 2007 ------------------------------------------------------------------------- ASSETS Current assets Cash $ 772 $ 3,451 Short-term investments 6,829 21,549 Marketable securities 9,034 2,062 Deposits with brokers 1,373 18,142 Receivables 1,884 90 Prepaid expenses 65 51 Income taxes recoverable 820 90 Future income tax assets 124 186 ------------------------------------------------------------------------- 20,901 45,621 Property, plant and equipment, net 16 16 Future income tax assets 202 198 ------------------------------------------------------------------------- $ 21,119 $ 45,835 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Payables and accruals $ 2,383 $ 242 Asset retirement obligations 341 274 Investments sold short 606 10,893 ------------------------------------------------------------------------- 3,330 11,409 Asset retirement obligations 181 185 ------------------------------------------------------------------------- 3,511 11,594 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital (note 4) 12,037 12,269 Retained earnings 5,571 21,972 ------------------------------------------------------------------------- 17,608 34,241 ------------------------------------------------------------------------- $ 21,119 $ 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: 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 Nine Months Ended July 31 July 31 (All amounts in thousands, except per share amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- REVENUE Investment income (loss) (note 5) $ (945) $ 476 $ (4,483) $ 2,009 ------------------------------------------------------------------------- EXPENSES Production 10 10 33 40 General and administrative 291 210 1,018 857 Transaction costs 51 24 244 63 Foreign exchange loss (gain) 82 (21) 378 (18) Depreciation, depletion and accretion 3 4 114 14 ------------------------------------------------------------------------- 437 227 1,787 956 ------------------------------------------------------------------------- Income (loss) before income taxes and non-controlling interest (1,382) 249 (6,270) 1,053 Income tax expense (recovery) (103) 76 (762) 83 ------------------------------------------------------------------------- Income (loss) before non-controlling interest (1,279) 173 (5,508) 970 Non-controlling interest 448 179 1,581 604 ------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss)(1) (1,727) (6) (7,089) 366 Retained earnings, beginning of period, as adjusted(2) 16,462 22,402 21,972 22,153 Repurchase of shares (114) (34) (262) (157) Dividends paid (9,050) - (9,050) - ------------------------------------------------------------------------- Retained earnings, end of period $ 5,571 $ 22,362 $ 5,571 $ 22,362 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per share (note 6) $ (0.19) $ - $ (0.77) $ 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) For the nine months ended July 31, 2007, opening retained earnings includes a $10,000 transition adjustment related to the implementation of 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 Nine Months Ended July 31 July 31 (All amounts in thousands) 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING Net income (loss) $ (1,727) $ (6) $ (7,089) $ 366 Items not involving cash: Loss (gain) on sale of investments 1,814 (70) 7,145 (467) Unrealized loss on investments 43 184 12 74 Depreciation, depletion and accretion 3 4 114 14 Future income tax expense (benefit) (55) 14 58 37 Stock-based compensation - - - 1 ------------------------------------------------------------------------- 78 126 240 25 Net change in non-cash operating working capital (1,043) (1) 16,372 (746) ------------------------------------------------------------------------- (965) 125 16,612 (721) ------------------------------------------------------------------------- INVESTING Proceeds from sale of investments 103,243 27,621 384,372 110,582 Purchase of investments (99,018) (26,966) (394,068) (111,410) Purchase of property, plant and equipment (11) (36) (52) (64) ------------------------------------------------------------------------- 4,214 619 (9,748) (892) ------------------------------------------------------------------------- FINANCING Issue of shares 28 - 28 356 Repurchase of shares (231) (60) (521) (289) Dividends paid (9,050) - (9,050) - ------------------------------------------------------------------------- (9,253) (60) (9,543) 67 ------------------------------------------------------------------------- Net increase (decrease) in cash (6,004) 684 (2,679) (1,546) Cash, beginning of period 6,776 561 3,451 2,791 ------------------------------------------------------------------------- Cash, end of period $ 772 $ 1,245 $ 772 $ 1,245 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary disclosure of cash flow information: Income taxes paid $ - $ 33 $ - $ 792 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 the Company disclose information that enables users of its financial statements to evaluate its 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 Company manages those risks. The adoption of these standards did not have any impact on the classification and measurement of the Company's financial instruments. Future Accounting Changes In 2006, Canada's Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP being converged with International Financial Reporting Standards ("IFRS") over a transitional period currently expected to be until 2011. The impact this transition will have on the Company's financial statements will be determined when the IFRS transition plan has been developed by the Company. 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 July 31, 2008 and October 31, 2007: (all amounts Carrying Value in thousands) ----------------------------------------- Financial instruments classified as ----------------------------------------- Held-for- Loans and Other Total fair As at July 31, 2008 trading(1) receivables liabilities value ------------------------------------------------------------------------- Financial assets Cash $ 772 $ - $ - $ 772 Short-term investments 6,829 - - 6,829 Marketable securities 9,034 - - 9,034 Deposits with brokers - 1,373 - 1,373 Receivables - 1,884 - 1,884 Financial liabilities Payables and accruals - - 2,383 2,383 Investments sold short 606 - - 606 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MIDDLEFIELD BANCORP LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 2. CARRYING VALUE AND FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) (all amounts Carrying Value in thousands) ----------------------------------------- Financial instruments classified as ----------------------------------------- As at Held-for- Loans and Other Total fair October 31, 2008 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 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 prices 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: MIDDLEFIELD BANCORP LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 3. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS (continued) July 31, October 31, (all amounts in thousands) 2008 2007 ------------------------------------------------------------------------- Short-term investments $ 362 $ 21,549 Marketable securities 9,034 2,062 Investments sold short (606) (10,893) ------------------------------------------------------------------------- Net exposure $ 8,790 $ 12,718 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Based on the above exposures at July 31, 2008, a 10% change in the prices of the Company's publicly traded investments would result in an annualized change of $879,000 in net income and comprehensive income. b. Interest rate risk Interest rate risk describes the Company's exposure to changes in the general level of interest rates. The Company's exposure to interest rate risk relates to its investments in interest-bearing financial assets such as cash and short-term investments in money market instruments. 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 seeks to mitigate this risk through active management which involves analysis of economic indicators to forecast Canadian and global interest rates. The Company is exposed to interest rate risk through the following financial assets: July 31, October 31, (all amounts in thousands) 2008 2007 ------------------------------------------------------------------------- Cash $ 772 $ 3,451 Short-term investments 6,467 - ------------------------------------------------------------------------- Total exposure $ 7,239 $ 3,451 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Based on the above exposures at July 31, 2008, a 1% change in market interest rates would result in an annualized change of $72,000 in net income and comprehensive income. c. 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. All transactions executed by the Company in securities are settled upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase only once the broker has received the securities. The trade will fail if either party fails to meet its obligations. The Company also has credit risk attributable to its deposits with brokers, which arises because a lender of securities may go bankrupt and the Company may lose the collateral it has deposited with the lender. As at July 31, 2008 the Company had made collateral cash deposits amounting to $1.4 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 an entity under common control with the managers of the Company. The Company's credit risk attributable to its loan receivable of $1.3 million is mitigated by a general security agreement and third party guarantee. There is no significant credit risk related to the Company's short-term investments and other receivables. 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. MIDDLEFIELD BANCORP LIMITED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 4. SHARE CAPITAL As at September 12, 2008 the Company had 9,038,548 common shares issued and outstanding and stock options outstanding for 165,000 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 income. Three Months Ended Nine Months Ended July 31 July 31 (all amounts in thousands) 2008 2007 2008 2007 ------------------------------------------------------------------------- Held-for-trading financial instruments Net gains (losses) on investments $ (1,814) $ 70 $ (7,145) $ 467 Decrease in fair values (43) (184) (12) (74) Interest income 538 526 2,236 1,486 Dividends and distributions 64 63 74 129 ------------------------------------------------------------------------- (1,255) 475 (4,847) 2,008 Financial instruments measured at amortized cost Financing fee 300 - 300 - Interest income 10 1 64 1 ------------------------------------------------------------------------- $ (945) $ 476 $ (4,483) $ 2,009 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 6. EARNINGS (LOSS) PER SHARE Three Months Ended Nine Months Ended (all amounts in thousands) July 31 July 31 except per share amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) $ (1,727) $ (6) $ (7,089) $ 366 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average common shares outstanding for basic earnings (loss) per share 9,053 9,277 9,150 9,180 Add: Dilutive effect of stock options outstanding - 19 3 85 ------------------------------------------------------------------------- Weighted average common shares outstanding for diluted earnings (loss) per share 9,053 9,296 9,153 9,265 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per share $ (0.19) $ - $ (0.77) $ 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 April 30, 2008. 8. RECLASSIFICATIONS Certain prior period balances have been reclassified to conform with the current year presentation. 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 Thomas I.A. Allen, Q.C.(2) LEGAL COUNSEL Counsel, Ogilvy Renault Ogilvy Renault Murray J. Brasseur AUDITORS Chairman and Director Deloitte & Touche LLP Middlefield Bancorp Limited George S. Dembroski(1,2) BANKER Corporate Director Bank of Nova Scotia H. Roger Garland(1) STOCK EXCHANGE LISTING Corporate Director Toronto Stock Exchange Symbol: MBN W. Garth Jestley HEAD OFFICE President and Director One First Canadian Place Middlefield Bancorp Limited 58th Floor P.O. Box 192 Toronto, Ontario M5X 1A6 Charles B. Young(1,2) Corporate Director 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 at (416) 847-5346

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MIDDLEFIELD BANCORP LIMITED

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