10-K

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended: December 31, 2004

Commission File Number: 33-23094

Middlefield Banc Corp.

(Exact name of registrant as specified in its charter)

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

15985 East High Street, Middlefield, Ohio 44062-0035
(440) 632-1666
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

     Securities registered pursuant to section 12(b) of the Act: none

     Securities registered pursuant to section 12(g) of the Act: common stock, without par value

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

     The aggregate market value on June 30, 2004 of common stock held by non-affiliates of the registrant was approximately $38.7 million. As of March 22, 2005, there were 1,360,270 shares of common stock issued and outstanding.

Documents Incorporated by Reference

     Portions of the registrant’s definitive proxy statement for the 2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Portions of the Annual Report to Shareholders for the year ended December 31, 2004 are incorporated by reference into Part I, Part II and Part IV of this report.

Table of Contents

	Page
Part I
Item 1 Business		1
Item 2 Properties		23
Item 3 Legal Proceedings		23
Item 4 Submission of Matters to a Vote of Security Holders		24
Part II
Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters		24
Item 6 Selected Financial Data		24
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A Quantitative and Qualitative Disclosures About Market Risk		24
Item 8 Financial Statements and Supplementary Data		24
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		24
Item 9a Controls and Procedures		24
Part III
Item 10 Directors and Executive Officers of the Registrant		25
Item 11 Executive Compensation		25
Item 12 Security Ownership of Certain Beneficial Owners and Management		25
Item 13 Certain Relationships and Related Transactions		25
Item 14 Principal Accountant Fees and Services		25
EX-13 Annual Report
EX-23 Consent of S.R. Snodgrass, A.C. Independent Auditors
EX-31.1 Section 302 Certification - Principal Executive Officer
EX-31.2 Section 302 Certification - Principal Financial Officer
EX-32.1 906 Certification - PEO and PFO

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	Page
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K		25
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.14
Exhibit 10.15
Exhibit 10.16
Exhibit 10.17
Exhibit 10.18
Exhibit 10.19
Exhibit 10.20
Exhibit 10.21
Exhibit 13 Annual Report
Exhibit 23
Exhibit 31.1 302 Cert-Principal Executive Officer
Exhibit 31.2 302 Cert-Principal Financial Officer
Exhibit 32.1 906 Certifications

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Item 1 — Business

     Middlefield Banc Corp. Incorporated in 1988 under the Ohio General Corporation Law, Middlefield Banc Corp. (“Middlefield”) is a one-bank holding company registered under the Bank Holding Company Act of 1956. Its sole subsidiary is The Middlefield Banking Company (the “Bank”), an Ohio-chartered commercial bank that began operations in 1901. The bank engages in a general commercial banking business in northeastern Ohio. Our principal executive offices are located at 15985 East High Street, Middlefield, Ohio 44062-0035, and our telephone number is (440) 632-1666.

     Middlefield became the holding company for The Middlefield Banking Company in 1988. The principal source of Middlefield’s income and funds is earnings of and dividends paid by The Middlefield Banking Company. Middlefield’s business currently is limited to acting as holding company for the bank. Middlefield currently does not plan to engage in any nonbanking activities, although it may do so as opportunities arise.

     The Middlefield Banking Company. The Middlefield Banking Company was chartered under Ohio law in 1901. The bank offers its customers a broad range of banking services, including checking, savings, and negotiable order of withdrawal (NOW) accounts; money market accounts; time certificates of deposit, commercial loans, real estate loans, and various types of consumer loans; safe deposit facilities, and travelers’ checks. The bank offers online banking and bill payment services to individuals and online cash management services to business customers through its website at www.middlefieldbank.com.

     Engaged in a general commercial banking business in northeastern Ohio, the bank offers commercial banking services principally to small and medium-sized businesses, professionals and small business owners, and retail customers. The bank has developed and continues to monitor and update a marketing program to attract and retain consumer accounts, and to offer banking services and facilities compatible with the needs of its customers.

     The bank’s loan products include operational and working capital loans; loans to finance capital purchases; term business loans; residential construction loans; selected guaranteed or subsidized loan programs for small businesses; professional loans; residential mortgage and commercial mortgage loans, and consumer installment loans to purchase automobiles, boats, and for home improvement and other personal expenditures. Although the bank makes agricultural loans, it currently has no significant agricultural loans.

     Market Area. The Middlefield Banking Company’s market area consists principally of Geauga, Portage, Trumbull, and Ashtabula Counties. Benefiting from the area’s proximity both to Cleveland and Warren, population and income levels have maintained steady growth over the years.

     Competition. The banking industry has been changing for many reasons, including continued consolidation within the banking industry, legislative and regulatory changes, and advances in technology. To deliver banking products and services more effectively and efficiently, banking institutions are opening in-store branches, installing more automated teller machines (ATMs) and investing in technology to permit telephone, personal computer, and internet banking. While all banks are experiencing the effects of the changing competitive and technological environment, the manner in which banks choose to compete is increasing the gap between large national and super-regional banks, on one hand, and community banks on the other. Large institutions are committed to becoming national or regional “brand names,” providing a broad selection of products at low cost and with advanced technology, while community banks provide most of the same products but with a commitment to personal service and with local ties to the customers and communities they serve. The Middlefield Banking Company seeks to take competitive advantage of its local orientation and community banking profile. It competes for loans principally through responsiveness to customers and its ability to communicate effectively with them and understand and address their needs. The bank competes for deposits principally by offering customers personal attention, a variety of banking services, attractive rates, and strategically located banking facilities. The bank seeks to provide high quality banking service to professionals and small and mid-sized businesses, as well as individuals, emphasizing quick and flexible responses to customer demands.

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          Forward-looking Statements. This document contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) about Middlefield Banc Corp. and subsidiaries. Information incorporated in this document by reference, future filings by Middlefield Banc Corp. on Form 10-Q and Form 8-K, and future oral and written statements by Middlefield Banc Corp. and its management may also contain forward-looking statements. Forward-looking statements include statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates, and deposit growth. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” and similar expressions are intended to identify these forward-looking statements.

     Forward-looking statements are necessarily subject to many risks and uncertainties. A number of things could cause actual results to differ materially from those indicated by the forward-looking statements. These include the factors we discuss immediately below, those addressed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” other factors discussed elsewhere in this document or identified in our filings with the Securities and Exchange Commission, and those presented elsewhere by our management from time to time. Many of the risks and uncertainties are beyond our control. The following factors could cause our operating and financial performance to differ materially from the plans, objectives, assumptions, expectations, estimates, and intentions expressed in forward-looking statements:

     • the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than we expect, resulting in a deterioration in the credit quality of our loan assets, among other things

     • the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest-rate policies of the Federal Reserve Board

     • inflation, interest rate, market, and monetary fluctuations

     • the development and acceptance of new products and services of Middlefield Banc Corp. and subsidiaries and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors’ products and services

     • the willingness of users to substitute our products and services for those of competitors

     • the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance)

     • changes in consumer spending and saving habits

     Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions as of the date the statements are made. Investors should exercise caution because Middlefield Banc Corp. cannot give any assurance that its beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. Middlefield Banc Corp. disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

     Lending — Loan Portfolio Composition and Activity. The Middlefield Banking Company makes residential mortgage and commercial mortgage loans, home equity loans, secured and unsecured consumer installment loans, commercial and industrial loans, and real estate construction loans for owner-occupied and rental properties. The bank’s loan policy aspires to a loan composition mix consisting of approximately 60% to 70% residential real estate loans, 35% to 40% commercial loans, consumer loans of 5% to 15%, and credit card accounts of up to 5%.

     Although Ohio bank law imposes no material restrictions on the kinds of loans The Middlefield Banking Company may make, real estate-based lending has historically been the bank’s primary focus. For prudential reasons, the bank avoids lending on the security of real estate located in regions with which the bank is not familiar, and as a consequence almost all of the bank’s real-estate secured loans are secured by real property in northeastern

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Ohio. Ohio bank law does restrict the amount of loans an Ohio-chartered bank such as The Middlefield Banking Company may make, however, providing generally that loans and extensions of credit to any one borrower may not exceed 15% of capital. An additional margin of 10% of capital is allowed for loans fully secured by readily marketable collateral. This 15% legal lending limit has not been a material restriction on The Middlefield Banking Company’s lending. The Middlefield Banking Company can accommodate loan volumes exceeding the legal lending limit by selling loan participations to other banks. The Middlefield Banking Company’s internal policy is to maintain its credit exposure to any one borrower at less than $1.5 million, which is comfortably within the range of the bank’s legal lending limit. As of December 31, 2004, the bank’s 15%-of-capital limit on loans to a single borrower was approximately $4.1 million.

     The bank offers specialized loans for business and commercial customers, including equipment and inventory financing, real estate construction loans and Small Business Administration loans for qualified businesses. A substantial portion of the bank’s commercial loans are designated as real estate loans for regulatory reporting purposes because they are secured by mortgages on real property. Loans of that type may be made for purpose of financing commercial activities, such as accounts receivable, equipment purchases and leasing, but they are secured by real estate to provide the bank with an extra measure of security. Although these loans might be secured in whole or in part by real estate, they are treated in the discussions to follow as commercial and industrial loans. The bank’s consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvements, revolving credit lines, autos, boats, and recreational vehicles.

     The following table shows the composition of the loan portfolio in dollar amounts and in percentages at December 31, 2004, 2003, and 2002, along with a reconciliation to loans receivable, net.

	Loan Portfolio Composition at December 31,
	2004						2003						2002
(Dollars in thousands)	Amount			Percent			Amount			Percent			Amount			Percent
Type of loan:
Commercial and industrial	$	52,148	%		24.18	%	$	42,063			21.81		$	32,916			18.82	%
Real estate construction		3,144			1.46			3,434			1.78			3,207			1.83
Mortgage:
Residential		147,425			68.36			134,007			69.48			123,8447			70.79
Commercial		7,027			3.26			7,866			4.08			9,521			5.44
Consumer installment		5,909			2.74			5,510			2.85			5,455			3.12
Total loans		215,653			100.00	%		192,880			100.00	%		174,943			100.00	%
Less:
Allowance for loan losses		2,623						2,521						2,300
Net loans	$	213,030					$	190,359					$	172,643
Net loans as a percent of total assets		73.15	%					72.55	%					76.31	%

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     The following table presents maturity information for the loan portfolio at December 31, 2004. The table does not include prepayments or scheduled principal repayments. All loans are shown as maturing based on contractual maturities.

	Loan Portfolio Maturity at December 31, 2004
	Commercial and		Real Estate		Mortgage				Consumer
(Dollars in thousands)	Industrial		Construction		Residential		Commercial		Installment		Total
Amount due:
In one year or less *	$	14,247	$	2,386	$	44,232	$	301	$	2,308	$	63,474
After one year through five years		24,223		220		73,601		2,273		3,070		103,387
After five years		13,678		538		29,592		4,453		531		48,792
Total amount due	$	52,148	$	3,144	$	147,425	$	7,027	$	5,909	$	215,653

*   Loans due on demand and overdrafts are included in the amount due in one year or less. The Middlefield Banking Company has no loans without a stated schedule of repayment or a stated maturity.

     The following table shows the dollar amount of all loans due after December 31, 2005 that have pre-determined interest rates and the dollar amount of all loans due after December 31, 2005 that have floating or adjustable rates

(Dollars in thousands)	Fixed Rates		Adjustable Rates		Total
Commercial and industrial	$	19,336	$	18,565	$	37,901
Real estate construction		538		220		757
Mortgage:
Residential		30,099		73,104		103,202
Commercial		5,236		1,490		6,726
Consumer installment		3,301		—		3,601
Total	$	58,810	$	93,379	$	152,187

     Residential Mortgage Loans. A significant portion of the bank’s lending consists of origination of conventional loans secured by 1-4 family real estate located in Geauga, Portage, Trumbull, and Ashtabula Counties. These loans approximated $147 million or 68.4% of the bank’s total loan portfolio at December 31, 2004.

     The bank makes loans of up to 80% of the value of the real estate and improvements securing a loan (the “loan-to-value” or “LTV” ratio) on 1-4 family real estate. The bank generally does not lend in excess of 80% of the appraised value or sales price (whichever is less) of the property unless additional collateral is obtained, thereby lowering the total LTV. The bank offers residential real estate loans with terms of up to 30 years.

     Before 1996, nearly all residential mortgage loans originated by the bank were written on a balloon-note basis. During 1996, the bank began to originate fixed-rate mortgage loans for maturities up to 20 years. In late 1998, the bank began originating adjustable-rate mortgage loans and de-emphasized balloon-note mortgages. Approximately 74.8% of the portfolio of conventional mortgage loans secured by 1-4 family real estate at December 31, 2004 was adjustable rate. The bank’s mortgage loans are ordinarily retained in the loan portfolio. The bank’s residential mortgage loans have not been originated with loan documentation that would permit their sale to Fannie Mae and Freddie Mac.

     The bank’s home equity loan policy generally allows for a loan of up to 85% of a property’s appraised value, less the principal balance of the outstanding first mortgage loan. The bank’s home equity loans generally have terms of 10 years.

     At December 31, 2004, residential mortgage loans of approximately $1,001,000 were over 90 days delinquent or nonaccruing on that date, representing .68% of the residential mortgage loan portfolio.

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     Commercial and Industrial Loans and Commercial Real Estate Loans. The bank’s commercial loan services include —

•   accounts receivable, inventory and working capital loans

•   renewable operating lines of credit

•   loans to finance capital equipment

•   term business loans

•   short-term notes

•   selected guaranteed or subsidized loan programs for small businesses

•   loans to professionals

•   commercial real estate loans

     Commercial real estate loans include commercial properties occupied by the proprietor of the business conducted on the premises, and income-producing or farm properties. Although the bank makes agricultural loans, it currently does not have a significant amount of agricultural loans. The primary risks of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Although commercial and commercial real estate loans generally bear somewhat more risk than single-family residential mortgage loans, commercial and commercial real estate loans tend to be higher yielding, tend to have shorter terms and commonly provide for interest-rate adjustments as prevailing rates change. Accordingly, commercial and commercial real estate loans enhance a lender’s interest rate risk management and, in management’s opinion, promote more rapid asset and income growth than a loan portfolio comprised strictly of residential real estate mortgage loans.

     Although a risk of nonpayment exists for all loans, certain specific types of risks are associated with various kinds of loans. One of the primary risks associated with commercial loans is the possibility that the commercial borrower will not generate income sufficient to repay the loan. The bank’s loan policy provides that commercial loan applications must be supported by documentation indicating that there will be cash flow sufficient for the borrower to service the proposed loan. Financial statements or tax returns for at least three years must be submitted, and annual reviews are undertaken for loans of $200,000 or more. The fair market value of collateral for collateralized commercial loans must exceed the bank’s loan exposure. For this purpose fair market value is determined by independent appraisal or by the loan officer’s estimate employing guidelines established by the loan policy. Term loans not secured by real estate generally have terms of five years or less, unless guaranteed by the U.S. Small Business Administration or other governmental agency, and terms loans secured by collateral having a useful life exceeding five years may have longer terms. The bank’s loan policy allows for terms of up to 15 years for loans secured by commercial real estate, and one year for business lines of credit. The maximum loan-to-value ratio for commercial real estate loans is 75% of the appraised value or cost, whichever is less.

     Real estate is commonly a material component of collateral for the bank’s loans, including commercial loans. Although the expected source of repayment of these loans is generally the operations of the borrower’s business or personal income, real estate collateral provides an additional measure of security. Risks associated with loans secured by real estate include fluctuating land values, changing local economic conditions, changes in tax policies, and a concentration of loans within a limited geographic area.

     At December 31, 2004, commercial and commercial real estate loans totaled $59.2 million, or 27.4% of the bank’s total loan portfolio. At December 31, 2004, commercial and commercial real estate loans of approximately $448,000 were over 90 days delinquent or nonaccruing on that date, and represented .76% of the commercial and commercial real estate loan portfolios.

     Real Estate Construction. The Middlefield Banking Company originates several different types of loans that it categorizes as construction loans, including —

•   residential construction loans to borrowers who will occupy the premises upon completion of construction,

•   residential construction loans to builders,

•   commercial construction loans, and

•   real estate acquisition and development loans.

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     Because of the complex nature of construction lending, these loans are generally recognized as having a higher degree of risk than other forms of real estate lending. The bank’s fixed-rate and adjustable-rate construction loans do not provide for the same interest rate terms on the construction loan and on the permanent mortgage loan that follows completion of the construction phase of the loan. It is the norm for the bank to make residential construction loans without an existing written commitment for permanent financing. The bank’s loan policy provides that the bank may make construction loans with terms of up to one year, with a maximum loan-to-value ratio for residential construction of 80%.

     At December 31, 2004, real estate construction loans totaled $3.1 million, or 1.5% of the bank’s total loan portfolio. There were no real estate construction loans with outstanding balances more than 90 days delinquent or nonaccruing.

     Consumer Installment Loans. The bank’s consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvement, revolving credit lines, autos, boats, and recreational vehicles. The bank does not currently do any indirect lending. Unsecured consumer loans carry significantly higher interest rates than secured loans. The bank maintains a higher loan loss allowance for consumer loans, while maintaining strict credit guidelines when considering consumer loan applications.

     According to the bank’s loan policy, consumer loans secured by collateral other than real estate generally may have terms of up to five years, and unsecured consumer loans may have terms up to two and one-half years. Real estate security generally is required for consumer loans having terms exceeding five years.

     At December 31, 2004, the bank had approximately $5.9 million in its consumer installment loan portfolio, representing 2.74% of total loans. Consumer installment loans of approximately $25,000 were over 90 days delinquent or nonaccruing on that date, representing .42% of the installment loan portfolio.

     Loan Solicitation and Processing. Loan originations are developed from a number of sources, including continuing business with depositors, other borrowers and real estate builders, solicitations by bank personnel and walk-in customers.

     When a loan request is made, the bank reviews the application, credit bureau reports, property appraisals or evaluations, financial information, verifications of income, and other documentation concerning the creditworthiness of the borrower, as applicable to each loan type. The bank’s underwriting guidelines are set by senior management and approved by the board. The loan policy specifies each individual officer’s loan approval authority, including residential mortgage loans up to $200,000 for the President, Executive Vice President and the Senior Retail Lender, and secured commercial loans up to $150,000 for the Executive Vice President and the Senior Commercial Lender. Loans exceeding an individual officer’s approval authority are submitted to a committee consisting of loan officers, which has authority to approve loans up to $250,000. The full board acts as a loan committee for loans exceeding that amount.

     Income from Lending Activities. The bank earns interest and fee income from its lending activities. Net of origination costs, loan origination fees are amortized over the life of a loan. The bank also receives loan fees related to existing loans, including late charges. Income from loan origination and commitment fees and discounts varies with the volume and type of loans and commitments made and with competitive and economic conditions. Note 1 to the Consolidated Financial Statements included herein contains a discussion of the manner in which loan fees and income are recognized for financial reporting purposes.

     Nonperforming Loans. Late charges on residential mortgages and consumer loans are assessed if a payment is not received by the due date plus a grace period. When an advanced stage of delinquency appears on a single-family loan and if repayment cannot be expected within a reasonable time or a repayment agreement is not entered into, a required notice of foreclosure or repossession proceedings may be prepared by the bank’s attorney

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and delivered to the borrower so that foreclosure proceedings may be initiated promptly, if necessary. The bank also collects late charges on commercial loans.

     When the bank acquires real estate through foreclosure, voluntary deed, or similar means, it is classified as “other real estate owned” until it is sold. When property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal balance at the date of acquisition) or fair value. Any subsequent write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed. “Other real estate owned” is appraised during the foreclosure process, before acquisition. Losses are recognized for the amount by which the book value of the related mortgage loan exceeds the estimated net realizable value of the property.

     The bank undertakes regular review of the loan portfolio to assess its risks, particularly the risks associated with the commercial loan portfolio. This includes annual review of every commercial loan representing credit exposure of $150,000 or more. An independent firm performs semi-annual loan reviews for the bank.

     Classified Assets. FDIC regulations governing classification of assets require nonmember commercial banks — including The Middlefield Banking Company — to classify their own assets and to establish appropriate general and specific allowances for losses, subject to FDIC review. The regulations are designed to encourage management to evaluate assets on a case-by-case basis, discouraging automatic classifications. Under this classification system, problem assets of insured institutions are classified as “substandard,” “doubtful,” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses make collection of principal in full — on the basis of currently existing facts, conditions, and values — highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the bank to risk sufficient to warrant classification in one of the above categories, but that possess some weakness, are required to be designated “special mention” by management.

     When an insured institution classifies assets as either “substandard” or “doubtful,” it may establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies assets as “loss,” it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off that amount. An FDIC-insured institution’s determination about classification of its assets and the amount of its allowances is subject to review by the FDIC, which may order the establishment of additional loss allowances. Management also employs an independent third party to semi-annually review and validate the internal loan review process and loan classifications. As of December 31, 2004, 2003, and 2002 classified assets were as follows:

	Classified Assets at December 31,
	2004					2003					2002
			Percent of total					Percent of total					Percent of total
(Dollars in thousands)	Amount		loans			Amount		loans			Amount		loans
Classified loans:
Special mention	$	4,094	$	1.90	%	$	2,876	$	1.49	%	$	4,713		2.69	%
Substandard		3,097		1.44	%		1,920		1.00	%		1,285		0.74	%
Doubtful		163		0.08	%		199		0.10	%		280		0.16	%
Loss		—		—	%		—		—	%		—		—	%
Total	$	7,354	$	3.42	%	$	4,995	$	2.59	%	$	6,278		3.59	%

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     Investments. Investment securities provide a return on residual funds after lending activities. Investments may be in federal funds sold, corporate securities, U.S. Government and agency obligations, state and local government obligations and government-guaranteed, mortgage-backed securities. The bank generally does not invest in securities that are rated less than investment grade by a nationally recognized statistical rating organization. Ohio bank law prescribes the kinds of investments an Ohio-chartered bank may make. Permitted investments include local, state, and federal government securities, mortgage-backed securities, and securities of federal government agencies. An Ohio-chartered bank also may invest up to 10% of its assets in corporate debt and equity securities, or a higher percentage in certain circumstances. Similar to the legal lending limit on loans to any one borrower, Ohio bank law also limits to 15% of capital the amount an Ohio-chartered bank may invest in the securities of any one issuer, other than local, state, and federal government and federal government agency issuers and mortgage-backed securities issuers. These Ohio bank law provisions have not been a material constraint upon the bank’s investment activities.

     All securities-related activity is reported to the bank’s board of directors. General changes in investment strategy are required to be reviewed and approved by the board. Senior management can purchase and sell securities in accordance with the bank’s stated investment policy.

     Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the bank has the ability at the time of purchase to hold a security until maturity or on a long-term basis, the security is classified as held-to-maturity and is reflected on the balance sheet at historical cost. Securities to be held for indefinite periods and not intended to be held to maturity or on a long-term basis are classified as available-for-sale. Available-for-sale securities are reflected on the balance sheet at their market value.

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     The following table sets forth the amortized cost and estimated market value of the bank’s investment portfolio at the dates indicated.

	Investment Portfolio Amortized Cost and Estimated Value at December 31,
	2004									2003									2002
			Gross		Gross			Estimated				Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		unrealized		unrealized			market		Amortized		unrealized		unrealized			market		Amortized		unrealized		unrealized			market
(Dollars in thousands)	cost		gains		losses			value		cost		gains		losses			value		cost		gains		losses			value
Available for Sale:
U.S. Government agency securities	$	5,273	$	71	$	(18	)	$	5,326	$	6,062	$	133	$	(18	)	$	6,177	$	3,737	$	162	$	—		$	3,899
Obligations of states and political subdivisions:
Taxable		748		—		(11	)		737		210		6		—			216		1,161		21		—			1,182
Tax-exempt		21,239		303		(66	)		21,477		14,564		325		(48	)		14,841		10,114		290		(28	)		10,376
Corporate securities		—		—		—			—		350		9		—			359		350		24		—			374
Mortgage-backed securities		29,625		81		(403	)		29,302		28,591		112		(329	)		28,374		19,835		264		(13	)		20,086
Equity securities		399		—		—			399
Total	$	57,284	$	455	$	(498	)	$	57,241	$	49,777	$	585	$	(395	)	$	44,967	$	35,197	$	761	$	(41	)	$	35,917
Held to Maturity:
U.S. Government agency securities	$	—	$	—	$	—		$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—		$	—
Obligations of states and political subdivisions:
Taxable		—		—		—			—		945		18		—			963		1,370		51		—			1,421
Tax-exempt		221		22		—			244		914		38		—			952		3,368		95		—			3,463
Corporate securities		—		—		—			—		—		—		—			—		1,504		18		—			1,522
Mortgage-backed securities		—		—		—			—		—		—		—			—		—		—		—			—
Total	$	221	$	22	$	—		$	244	$	1,859	$	56	$	—		$	1,915	$	6,242	$	164	$	—		$	6,406
Total Investment Securities	$	57,505	$	477	$	(498	)	$	57,485	$	51,636	$	641	$	(395	)	$	51,882	$	41,439	$	925	$	(41	)	$	42,323

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     The contractual maturity of investment securities at December 31, 2004 is shown below. Expected maturities of investment securities could differ from contractual maturities because the borrower, or issuer, could have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2004
																					Total investment securities and mortgage-backed
	One year or less					More than one to five years					More than five to ten years					More than ten years					securities
						Amortized					Amortized
	Amortized cost		Average yield			cost		Average yield			cost		Average yield			Amortized cost		Average yield			Amortized cost		Average yield			Market value
U.S. Government agency securities	$	—				$	1,285		5.73	%	$	3,988		4.52	%					%	$	5,273		4.81	%	$	5,326
Obligations of states and political subdivisions:
Taxable		—		—			249		3.21			499		4.16			—		—			748		3.84			737
Tax-exempt		3,265		3.79			6,586		3.31			5,329		4.15			6,280		4.67			21460		3.76			21,722
Corporate securities		—		—			—		—			—		—			—		—			—		—
Mortgage-backed securities		—		—			294		4.88			1,776		4.97			27,555		4.35			29,625		4.63			29,302
Total	$	3,265		3.79	%	$	8,414		3.73	%	$	11,592		4.40	%	$	33,835		4.57	%	$	57,106		4.63	%	$	57,087

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     As of December 31, 2004, the bank also held 13,510 shares of $100 par value Federal Home Loan Bank of Cincinnati stock, which are restricted securities. FHLB stock represents an equity interest in the FHLB, but it does not have a readily determinable market value. The stock can be sold at its par value only, and only to the FHLB or to another member institution. Member institutions are required to maintain a minimum stock investment in the FHLB, based on total assets, total mortgages, and total mortgage-backed securities. The bank’s minimum investment in FHLB stock at December 31, 2004 was approximately $1,351,000.

     Sources of Funds — Deposit Accounts. Deposit accounts are a major source of funds for the bank. The bank offers a number of deposit products to attract both commercial and regular consumer checking and savings customers, including regular and money market savings accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities ranging from seven days to 60 months. These accounts earn interest at rates established by management based on competitive market factors and management’s desire to increase certain types or maturities of deposit liabilities. The bank also provides travelers’ checks, official checks, money orders, ATM services, and IRA accounts.

     The following table shows the amount of time deposits of $100,000 or more as of December 31, 2004, including certificates of deposit, by time remaining until maturity.

	Maturity of Time Deposits of
	$100,000 or More at December
(Dollars in thousands)	31, 2004
Time Remaining to Maturity	Amount		Percent of Total
Three months or less	$	1,941		8.85	%
Beyond three but within six months		1,095		5.00
Beyond six but within 12 months		6,120		27.92
Over 12 months		12,765		58.23
Total	$	21,921		100	%

     Borrowings. Deposits and repayment of loan principal are the bank’s primary sources of funds for lending activities and other general business purposes. However, when the supply of lendable funds or funds available for general business purposes cannot satisfy the demand for loans or general business purposes, the bank can obtain funds from the FHLB of Cincinnati. Interest and principal are payable monthly, and the line of credit is secured by a blanket pledge collateral agreement. At December 31, 2004, the bank had $23.7 million of FHLB borrowings outstanding. Middlefield also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.

     The outstanding balances and related information about short-term borrowings, which includes securities sold under agreements to repurchase are summarized as follows:

	2004			2003			2002
Balance at year end	$	1,871,763		$	444,819		$	785,778
Average balance outstanding		298,500			726,874			977,343
Maximum month-end balance		2,057,054			2,327,544			1,176,829
Weighted-average rate at year end		3.80	%		0.23	%		0.33	%
Weighted average rate during the year		0.73	%		0.56	%		0.73	%

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Personnel.

     As of December 31, 2004 Middlefield and the bank had 73 full-time equivalent employees. None of the employees is represented by a collective bargaining group. Management considers its relations with employees to be excellent.

Supervision and Regulation

     The following discussion of bank supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of Middlefield and the bank.

     Recent Legislation to Curtail Corporate Accounting Irregularities. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”). The Securities and Exchange Commission (the “SEC”) has promulgated certain regulations pursuant to the Act and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company’s expenses.

     Middlefield is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, Middlefield is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System, acting primarily through the Federal Reserve Bank of Cleveland. Middlefield is required to file annual reports and other information with the Federal Reserve. The Middlefield Banking Company is an Ohio-chartered commercial bank. As a state-chartered, nonmember bank, the bank is primarily regulated by the FDIC and by the Ohio Division of Financial Institutions.

     Middlefield and the bank are subject to federal banking laws, and the bank is subject also to Ohio bank law. These federal and state laws are intended to protect depositors, not stockholders. Federal and state laws applicable to holding companies and their financial institution subsidiaries regulate the range of permissible business activities, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, establishment of branches, mergers, dividends, and a variety of other important matters. The bank is subject to detailed, complex, and sometimes overlapping federal and state statutes and regulations affecting routine banking operations. These statutes and regulations include but are not limited to state usury and consumer credit laws, the Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, and the Community Reinvestment Act. The bank must comply with Federal Reserve Board regulations requiring depository institutions to maintain reserves against their transaction accounts (principally NOW and regular checking accounts). Because required reserves are commonly maintained in the form of vault cash or in a noninterest-bearing account (or pass-through account) at a Federal Reserve Bank, the effect of the reserve requirement is to reduce an institution’s earning assets.

     The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded significantly the authority of federal agencies to regulate the activities of federally chartered and state-chartered financial institutions and their holding companies. The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.

     Regulation of Bank Holding Companies — Bank and Bank Holding Company Acquisitions. The Bank Holding Company Act requires every bank holding company to obtain approval of the Federal Reserve before —

•   directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring company would own or control more than

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	5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of the shares),
•	acquiring all or substantially all of the assets of another bank, or
•	merging or consolidating with another bank holding company.

     The Federal Reserve will not approve an acquisition, merger, or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in satisfying the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in its review of acquisitions and mergers.

     Additionally, the Bank Holding Company Act, the Change in Bank Control Act and the Federal Reserve Board’s Regulation Y require advance approval of the Federal Reserve to acquire “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of a class of voting securities of the bank holding company. If the holding company has securities registered under Section 12 of the Securities Exchange Act of 1934, as Middlefield does, or if no other person owns a greater percentage of the class of voting securities, control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities. Approval of the Ohio Division of Financial Institutions is also necessary to acquire control of an Ohio-chartered bank.

     Nonbanking Activities. With some exceptions, the Bank Holding Company Act has for many years also prohibited a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve non-bank activities that, by statute or by Federal Reserve Board regulation or order, are held to be closely related to the business of banking or of managing or controlling banks. In making its determination that a particular activity is closely related to the business of banking, the Federal Reserve considers whether the performance of the activities by a bank holding company can be expected to produce benefits to the public — such as greater convenience, increased competition, or gains in efficiency in resources — that will outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest, or unsound banking practices. Some of the activities determined by Federal Reserve Board regulation to be closely related to the business of banking are: making or servicing loans or leases; engaging in insurance and discount brokerage activities; owning thrift institutions; performing data processing services; acting as a fiduciary or investment or financial advisor; and making investments in corporations or projects designed primarily to promote community welfare.

     Financial Holding Companies. On November 12, 1999 the Gramm-Leach-Bliley Act became law, repealing much of the 1933 Glass-Steagall Act’s separation of the commercial and investment banking industries. The Gramm-Leach-Bliley Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a “financial holding company.” Financial holding companies may engage in any activity that is —

•   financial in nature or incidental to that financial activity, or

•   complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

     Activities that are financial in nature include —

•   acting as principal, agent, or broker for insurance,

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•   underwriting, dealing in, or making a market in securities, and

•   providing financial and investment advice.

     The Federal Reserve Board and the Secretary of the Treasury have authority to decide that other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services, and so on. A bank holding company cannot be a financial holding company unless it satisfies the following criteria:

1)	all of the depository institution subsidiaries must be well capitalized and well managed,
2)	the holding company must file with the Federal Reserve a declaration that it elects to be a financial holding company to engage in activities that would not have been permissible before the Gramm-Leach-Bliley Act, and
3)	all of the depository institution subsidiaries must have a Community Reinvestment Act rating of “satisfactory” or better.

     Middlefield is engaged solely in activities that were permissible for a bank holding company before enactment of the Gramm-Leach-Bliley Act. Although Middlefield has become a financial holding company, Middlefield has no immediate plans to use the expanded authority to engage in activities other than those in which it is currently engaged.

     Holding Company Capital and Source of Strength. The Federal Reserve considers the adequacy of a bank holding company’s capital on essentially the same risk-adjusted basis as capital adequacy is determined by the FDIC at the bank subsidiary level. In general, bank holding companies are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and Tier 1 capital — consisting principally of stockholders’ equity — of at least 4%. Bank holding companies are also subject to a leverage ratio requirement. The minimum required leverage ratio for the very highest rated companies is 3%, but as a practical matter the minimum required leverage ratio for most bank holding companies is 4% or higher. It is also Federal Reserve Board policy that bank holding companies serve as a source of strength for their subsidiary banking institutions.

     Under Bank Holding Company Act section 5(e), the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the Federal Reserve Board determines that the activity or control constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank. And with the Federal Deposit Insurance Corporation Improvement Act of 1991’s addition of the prompt corrective action provisions to the Federal Deposit Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal bank regulatory authority may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the bank’s financial condition and prospects.

     Federal Deposit Insurance. The FDIC insures deposits of banks, savings banks, and savings associations, and it safeguards the safety and soundness of the banking industry. Two separate insurance funds are maintained and administered by the FDIC. In general, bank deposits are insured through the Bank Insurance Fund. Deposits in savings associations are insured through the Savings Association Insurance Fund.

     As an FDIC member institution, deposits in the bank are insured to a maximum of $100,000 per depositor. The banks are required to pay semiannual deposit insurance premium assessments to the FDIC. In general terms, each institution is assessed insurance premiums according to how much risk to the insurance fund the institution represents. Well-capitalized institutions with few supervisory concerns are assessed lower premiums than other institutions. The premium range is currently from $0.00 for the highest-rated institutions to $0.27 per $100 of domestic deposits.

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     The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC also may suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.

     Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act eased restrictions on interstate banking. The Riegle-Neal Act allows the Federal Reserve to approve an application by an adequately capitalized and adequately managed bank holding company to acquire a bank located in a state other than the acquiring company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve acquisition of a bank that has not been in existence for the minimum time period (up to five years) specified by the statutory law of the acquired, or “target,” bank’s state. The Riegle-Neal Act also prohibits the Federal Reserve from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank or bank holding company if the limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% statewide concentration limit contained in the Riegle-Neal Act.

     Branching between states may be accomplished by merging commonly controlled banks located in different states into one legal entity. Branching may also be accomplished by establishing de novo branches or acquiring branches in another state. Under section 24(j) of the Federal Deposit Insurance Act, a branch of a bank operating out-of-state — in a “host state” — is subject to the law of the host state regarding community reinvestment, fair lending, consumer protection, and establishment of branches. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by state-chartered banks solely in states that specifically allow it. Ohio bank law allows de novo branching in Ohio by an out-of-state bank. The FDIC has adopted regulations under the Riegle-Neal Act to prohibit an out-of-state bank from using the new interstate branching authority primarily for the purpose of deposit production. These regulations include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to satisfy the credit needs of the communities served by the out-of-state bank.

     Capital — Risk-Based Capital Requirements. The Federal Reserve Board and the FDIC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and financial institutions. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. Failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of “brokered deposits.”

     In the calculation of risk-based capital, assets and off-balance sheet items are assigned to broad risk categories, each with an assigned weighting (0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% risk-weight. Off-balance sheet items are also taken into account in the calculation of risk-based capital, with each class of off-balance sheet item being converted to a balance sheet equivalent according to established “conversion factors.” From these computations, the total of risk-weighted assets is derived. Risk-based capital ratios therefore state capital as a percentage of total risk-weighted assets and off-balance sheet items. The ratios established by guideline are minimums only.

     Current risk-based capital guidelines require bank holding companies and banks to maintain a minimum risk-based total capital ratio equal to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage servicing rights are generally deducted from capital. Tier 1 capital includes stockholders’ equity, qualifying perpetual preferred stock (within limits and subject to conditions, particularly if the preferred stock is cumulative

15

preferred stock), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, identified losses, investments in securities subsidiaries, and certain other assets. Tier 2 capital includes —

•   the allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets,

•   any qualifying perpetual preferred stock exceeding the amount includable in Tier 1 capital,

•   mandatory convertible securities, and

•   subordinated debt and intermediate term preferred stock, up to 50% of Tier 1 capital.

     The FDIC also employs a market risk component in its calculation of capital requirements for nonmember banks. The market risk component could require additional capital for general or specific market risk of trading portfolios of debt and equity securities and other investments or assets. The FDIC’s evaluation of an institution’s capital adequacy takes account of a variety of other factors as well, including interest rate risks to which the institution is subject, the level and quality of an institution’s earnings, loan and investment portfolio characteristics and risks, risks arising from the conduct of nontraditional activities, and a variety of other factors.

     Accordingly, the FDIC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios discussed above. This is particularly true for institutions contemplating significant expansion plans and institutions that are subject to high or inordinate levels of risk. Moreover, although the FDIC does not impose explicit capital requirements on holding companies of institutions regulated by the FDIC, the FDIC can take account of the degree of leverage and risks at the holding company level. If the FDIC determines that the holding company (or another affiliate of the institution regulated by the FDIC) has an excessive degree of leverage or is subject to inordinate risks, the FDIC may require the subsidiary institution(s) to maintain additional capital or the FDIC may impose limitations on the subsidiary institution’s ability to support its weaker affiliates or holding company.

     The banking agencies have also established a minimum leverage ratio of 3%, which represents Tier 1 capital as a percentage of total assets, less intangibles. However, for bank holding companies and financial institutions seeking to expand and for all but the most highly rated banks and bank holding companies, the banking agencies expect an additional cushion of at least 100 to 200 basis points. At December 31, 2004, the bank was in compliance with all regulatory capital requirements.

     Prompt Corrective Action. To resolve the problems of undercapitalized institutions and to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system known as “prompt corrective action.” Under the prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories, depending on its total risk-based capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio, and subjective factors. The categories are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A financial institution’s operations can be significantly affected by its capital classification. For example, an institution that is not “well capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized institution must guarantee, in part, aspects of the institution’s capital plan. Financial institution regulatory agencies generally are required to appoint a receiver or conservator shortly after an institution enters the category of weakest capitalization. The Federal Deposit Insurance Corporation Improvement Act of 1991 also authorizes the regulatory agencies to reclassify an institution from one category into a lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance funds.

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     The following table illustrates the capital and prompt corrective action guidelines applicable to the bank, as well as its total risk-based capital ratio, Tier 1 capital ratio and leverage ratio as of December 31, 2004.

				Minimum Necessary
				to be Well			Minimum Necessary to be
	At December 31, 2004			Capitalized			Adequately Capitalized
Total Risk-Based Capital Ratio		14.28	%		10.00	%		8.00	%
Tier 1 Risk-Based Capital Ratio		13.04	%		6.00	%		4.00	%
Leverage Ratio		8.51	%		5.00	%		4.00	%

     Limits on Dividends and Other Payments. Middlefield’s ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid to it by the bank. Under Ohio bank law, an Ohio-chartered bank may not pay a cash dividend if the amount of the dividend exceeds “undivided profits,” which is defined in Ohio bank law to mean the cumulative undistributed amount of the bank’s net income. But with the approval of two thirds of the outstanding shares and approval of the superintendent of the Division of Financial Institutions, an Ohio-chartered bank may pay cash dividends from surplus. Lastly, approval of the superintendent is also required if the total of all dividends and distributions declared on the bank’s shares in any year exceeds the total of the bank’s net income for the year plus retained net income for the two preceding years.

     State-chartered banks’ ability to pay dividends may be affected by capital maintenance requirements of their primary federal bank regulatory agency as well. Moreover, regulatory authorities may prohibit banks and bank holding companies from paying dividends if payment of dividends would constitute an unsafe and unsound banking practice.

     A 1985 policy statement of the Federal Reserve Board declares that a bank holding company should not pay cash dividends on common stock unless the organization’s net income for the past year is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition.

     Recent Legislation. On July 30, 2002 the Sarbanes-Oxley Act of 2002 became law. The goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures made under the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently.

     The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934. The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC, securities exchanges, and Nasdaq to adopt extensive additional disclosure, corporate governance, and other related rules. The final scope of all of these new requirements is not yet clear. Some of the changes are effective already, but others will become effective in the future.

     The Sarbanes-Oxley Act has an impact on a wide variety of corporate governance and disclosure issues, including the composition of audit committees, certification of financial statements by the chief executive officer and the chief financial officer, forfeiture of bonuses and profits made by directors and senior officers in the 12-month period covered by restated financial statements, a prohibition on insider trading during pension plan black-out periods, disclosure of off-balance sheet transactions, a prohibition on personal loans to directors and officers (excluding Federally insured financial institutions), expedited filing requirements for stock transaction reports by officers and directors, the formation of a public accounting oversight board, auditor independence, and various increased criminal penalties for violations of securities laws.

     Transactions with Affiliates. Although the bank is not a member bank of the Federal Reserve System, it is required by the Federal Deposit Insurance Act to comply with section 23A and section 23B of the Federal Reserve Act — pertaining to transactions with affiliates — as if it were a member bank. These statutes are intended to protect

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banks from abuse in financial transactions with affiliates, preventing federally insured deposits from being diverted to support the activities of unregulated entities engaged in nonbanking businesses. An affiliate of a bank includes any company or entity that controls or is under common control with the bank. Generally, section 23A and section 23B of the Federal Reserve Act —

•   limit the extent to which a bank or its subsidiaries may lend to or engage in various other kinds of transactions with any one affiliate to an amount equal to 10% of the institution’s capital and surplus, limiting the aggregate of covered transactions with all affiliates to 20% of capital and surplus,

•   impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company,

•   impose restrictions on the use of a holding company’s stock as collateral for loans by the subsidiary bank, and

•   require that affiliate transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate.

     The bank’s authority to extend credit to insiders — meaning executive officers, directors and greater than 10% stockholders — or to entities those persons control, is subject to section 22(g) and section 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these laws require insider loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans a bank may make to insiders based in part on the bank’s capital position, and require that specified approval procedures be followed. Loans to an individual insider may not exceed the legal limit on loans to any one borrower, which in general terms is 15% of capital but can be higher in some circumstances. And the aggregate of all loans to all insiders may not exceed the bank’s unimpaired capital and surplus. Insider loans exceeding the greater of 5% of capital or $25,000 must be approved in advance by a majority of the board, with any “interested” director not participating in the voting. Lastly, loans to executive officers are subject to special limitations. Executive officers may borrow in unlimited amounts to finance their children’s education or to finance the purchase or improvement of their residence, and they may borrow no more than $100,000 for most other purposes. Loans to executive officers exceeding $100,000 may be allowed if the loan is fully secured by government securities or a segregated deposit account. A violation of these restrictions could result in the assessment of substantial civil monetary penalties, the imposition of a cease-and-desist order or other regulatory sanctions.

     Community Reinvestment Act. Under the Community Reinvestment Act of 1977 and implementing regulations of the banking agencies, a financial institution has a continuing and affirmative obligation — consistent with safe and sound operation — to address the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services it believes are best suited to its particular community. The CRA requires that bank regulatory agencies conduct regular CRA examinations and provide written evaluations of institutions’ CRA performance. The CRA also requires that an institution’s CRA performance rating be made public. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance.

     Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions, and applications to open branches. Over the 25 years that the CRA has existed, and particularly in the last decade, institutions have faced increasingly difficult regulatory obstacles and public interest group objections in connection with their regulatory applications, including institutions that have received the highest possible CRA ratings.

     A bank holding company cannot elect to be a “financial holding company” — with the expanded securities, insurance and other powers that designation entails — unless all of the depository institutions owned by the holding

18

company have a CRA rating of satisfactory or better. The Gramm-Leach-Bliley Act also provides that a financial institution with total assets of $250 million or less will be subject to CRA examinations no more frequently than every 5 years if its most recent CRA rating was “outstanding,” or every 4 years if its rating was “satisfactory.” Following a CRA examination as of August 10, 1999, the bank received a rating of “Outstanding.” Lastly, the Gramm-Leach-Bliley Act requires public disclosure of private CRA agreements entered into between banking organizations and other parties, and annual reporting by banking organizations of actions taken under the private CRA agreements. This last provision of the Gramm-Leach-Bliley Act addresses the increasingly common practice whereby a bank or holding company undertaking acquisition of another bank or holding company enters into an agreement with parties who might otherwise file with bank regulators a CRA protest of the acquisition. The details of these agreements have not been universally disclosed by acquiring institutions in the past.

     Federal Home Loan Banks. The Federal Home Loan Banks serve as credit sources for their members. As a member of the FHLB of Cincinnati, The Middlefield Banking Company is required to maintain an investment in the capital stock of the FHLB of Cincinnati in an amount calculated by reference to its and the amount of loans, or “advances,” from the FHLB. The bank is in compliance with this requirement, with an investment in FHLB stock of $1,351,000 at December 31, 2004.

     Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the Community Reinvestment Act and its record of lending to first-time home buyers.

     State Banking Regulation. As an Ohio-chartered bank, the bank is subject to regular examination by the Ohio Division of Financial Institutions. State banking regulation affects the internal organization of the bank as well as its savings, lending, investment, and other activities. State banking regulation may contain limitations on an institution’s activities that are in addition to limitations imposed under federal banking law. The Ohio Division of Financial Institutions may initiate supervisory measures or formal enforcement actions, and if the grounds provided by law exist it may take possession and control of an Ohio-chartered bank.

     Monetary Policy. The earnings of financial institutions are affected by the policies of regulatory authorities, including monetary policy of the Federal Reserve Board. An important function of the Federal Reserve System is regulation of aggregate national credit and money supply. The Federal Reserve Board accomplishes these goals with measures such as open market transactions in securities, establishment of the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of financial institutions’ loans, investments and deposits, and they also affect interest rates charged on loans or paid on deposits. Monetary policy is influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance, and fiscal policies of the United States government. Federal Reserve Board monetary policy has had a significant effect on the operating results of financial institutions in the past, and it can be expected to influence operating results in the future.

Risk Factors

     Our market is very competitive. We face competition both in making loans and in attracting deposits. Competition is based on interest rates and other credit and service charges, the quality of services rendered, the convenience of banking facilities, the range and type of products offered and, in the case of loans to larger commercial borrowers, lending limits, among other factors. Competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, insurance companies, and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and savings and loan associations. We face additional competition for deposits from non-depository institutions such as mutual funds, securities and brokerage firms, and insurance companies.

     Competition among financial institutions and other financial service organizations is increasing with the continuing consolidation of the financial services industry. Additionally, legislative and regulatory changes could

19

affect competition. Congress’ elimination in 1994 of many restrictions on interstate branching could increase competition from large banks headquartered outside of northeastern Ohio. Congress’ repeal in late 1999 of much of the Glass-Steagall Act (which had separated the commercial and investment banking industries) and elimination of the barriers between the banking and insurance industries might make competition even more intense. Because of our smaller size, we may have less opportunity to take advantage of the flexibility offered by that new legislation.

     The bank does not have the financial and other resources that larger competitors have; this could affect its ability to compete for large commercial loan originations and its ability to offer products and services competitors provide to customers. The northeastern Ohio market in which The Middlefield Banking Company operates has a high concentration of financial institutions. Many of the financial institutions operating in our market are branches of significantly larger institutions headquartered in Cleveland or in other major metropolitan areas, with significantly greater financial resources and higher lending limits. More geographically diversified than The Middlefield Banking Company, they are therefore less vulnerable to adverse changes in our local economy. And many of these institutions offer services that we do not or cannot provide. For example, the larger competitors’ greater resources offer advantages such as the ability to price services at lower, more attractive levels, and the ability to provide larger credit facilities than The Middlefield Banking Company can provide. Likewise, some of the competitors are not subject to the same kind and amount of regulatory restrictions and supervision to which The Middlefield Banking Company is subject. Because The Middlefield Banking Company is smaller than many commercial lenders in its market, it is on occasion prevented from making commercial loans in amounts competitors can offer. The Middlefield Banking Company accommodates loan volumes in excess of its lending limits from time to time through the sale of loan participations to other banks.

     The business of banking is changing rapidly with changes in technology, which poses financial and technological challenges to small and mid-sized institutions. With frequent introductions of new technology-driven products and services, the banking industry is undergoing rapid technological changes. In addition to enhancing customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Financial institutions’ success is increasingly dependent upon use of technology to provide products and services that satisfy customer demands and to create additional operating efficiencies. Many of The Middlefield Banking Company’s competitors have substantially greater resources to invest in technological improvements, which could enable them to perform various banking functions at lower costs than The Middlefield Banking Company, or to provide products and services that The Middlefield Banking Company is not able to provide economically. We cannot assure you that we will be able to develop and implement new technology-driven products or services or that we will be successful in marketing these products or services to customers.

     Because of the demand for technology-driven products, banks rely increasingly on unaffiliated vendors to provide data processing services and other core banking functions. The use of technology-related products, services, delivery channels, and processes exposes banks to various risks, particularly transaction, strategic, reputation, and compliance risk. We cannot assure you that we will be able to successfully manage the risks associated with our dependence on technology.

     The banking industry is heavily regulated; the compliance burden to the industry is considerable; the principal beneficiary of federal and state regulation is the public at large and depositors, not stockholders. Middlefield Banc Corp. and The Middlefield Banking Company are and will remain subject to extensive state and federal government supervision and regulation. Affecting many aspects of the banking business, including permissible activities, lending, investments, payment of dividends, the geographic locations in which our services can be offered, and numerous other matters, state and federal supervision and regulation are intended principally to protect depositors, the public, and the deposit insurance funds administered by the FDIC. Protection of stockholders is not a goal of banking regulation.

     Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies have undergone significant changes, some retroactively applied, and could change significantly again. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or Middlefield and The Middlefield Banking Company in particular. The burdens of federal and state banking regulation could place banks

20

in general at a competitive disadvantage compared to less regulated competitors. We give you no assurance that we will be able to adapt successfully to industry changes caused by governmental actions.

     Federal and state banking agencies require banks and bank holding companies to maintain capital. Failure to maintain adequate capital or to comply with applicable laws, regulations, and supervisory agreements could subject a bank or bank holding company to federal or state enforcement actions, including termination of deposit insurance, imposition of fines and civil penalties, and, in the most severe cases, appointment of a conservator or receiver for a depositary institution.

     Success in the banking industry requires disciplined management of lending risks. There are many risks in the business of lending, including risks associated with the duration over which loans may be repaid, risks resulting from changes in economic conditions, risks inherent in dealing with individual borrowers, and risks resulting from changes in the value of loan collateral. We maintain an allowance for loan losses based on historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality, among other things. Our judgment about the adequacy of the loan loss allowance is based on assumptions that we believe are reasonable but that might nevertheless prove to be incorrect. We can give you no assurance that the allowance will be sufficient to absorb future charge-offs. Additions to the loan loss allowance could occur, which would decrease net income and capital.

     Changing interest rates have a direct and immediate impact on financial institutions. The risk of nonpayment of loans — or credit risk — is not the only lending risk. Lenders are subject also to interest rate risk. Fluctuating rates of interest prevailing in the market affect a bank’s net interest income, which is the difference between interest earned from loans and investments, on one hand, and interest paid on deposits and borrowings, on the other. In the early 1990s, many banking organizations experienced historically high interest rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings. Since then, however, interest rate spreads have generally narrowed due to changing market conditions and competitive pricing pressures. It has become increasingly difficult for depository institutions to maintain deposit growth at the same rate as loan growth. Under these circumstances, to maintain deposit growth an institution might have to offer more attractive deposit terms, further narrowing the institution’s interest rate spread. Middlefield cannot assure you that interest rate spreads will not narrow even more or that higher interest rate spreads will return.

     Banks manage interest rate risk exposure by closely monitoring assets and liabilities, altering from time to time the mix and maturity of loans, investments, and funding sources. Changes in interest rates could result in an increase in higher-cost deposit products within a bank’s existing portfolio, as well as a flow of funds away from bank accounts into direct investments (such as U.S. Government and corporate securities, and other investment instruments such as mutual funds) if the bank does not pay competitive interest rates. The percentage of household financial assets held in the form of deposits is shrinking. Banking customers are investing a growing portion of their financial assets in stocks, bonds, mutual funds, and retirement accounts. Changes in interest rates also affect the volume of loans originated, as well as the value of loans and other interest-earning assets, including investment securities.

     An economic downturn in our market area would adversely affect our loan portfolio and our growth prospects. Our lending market area is concentrated in northeastern Ohio, particularly Geauga, Portage, Trumbull and Ashtabula Counties. A high percentage of our loan portfolio is secured by real estate collateral, primarily residential mortgage loans. Commercial and industrial loans to small and medium-sized businesses also represent a significant percentage of our loan portfolio. The asset quality of our loan portfolio is largely dependent upon the area’s economy and real estate markets. A downturn in the economy in our primary lending area would adversely affect our operations and limit our future growth potential.

     Middlefield common stock is very thinly traded, and it is therefore susceptible to wide price swings. Middlefield’s common stock is not traded or authorized for quotation on any exchanges or on Nasdaq. However, bid prices for Middlefield common stock appear from time to time in the pink sheets under the symbol “MBCN.” The “pink sheets” is a static paper quotation service for over-the-counter securities that is printed weekly and distributed by the National Quotation Bureau, LLC to broker-dealers. Thinly traded, illiquid stocks are more susceptible to

21

significant and sudden price changes than stocks that are widely followed by the investment community and actively traded on an exchange or Nasdaq. The liquidity of the common stock depends upon the presence in the marketplace of willing buyers and sellers. We cannot assure you that you will be able to find a buyer for your shares. Two regional broker/dealers facilitate trades of Middlefield common stock, matching interested buyers and sellers.

     We currently do not intend to seek listing of the common stock on a securities exchange and we do not intend to seek authorization for trading of the shares on Nasdaq. Even if we successfully list the common stock on a securities exchange or obtain Nasdaq trading authorization, we nevertheless could not assure you that an organized public market for the securities will develop or that there will be any private demand for the common stock. We could also fail subsequently to satisfy the standards for continued exchange listing or Nasdaq trading, such as standards having to do with the minimum number of public shareholders or the aggregate market value of publicly held shares.

     A stock that is not listed on a securities exchange or authorized for Nasdaq trading might not be accepted as collateral for loans. If accepted as collateral, the stock’s value could nevertheless be substantially discounted. Consequently, investors should regard the common stock as a long-term investment and should be prepared to bear the economic risk of an investment in the common stock for an indefinite period. Investors who need or desire to dispose of all or a part of their investments in the common stock might not be able to do so except by private, direct negotiations with third parties.

     Government regulation could restrict our ability to pay cash dividends. Dividends from the bank are the only significant source of cash for Middlefield. Statutory and regulatory limits could prevent the bank from paying dividends or transferring funds to Middlefield. As of December 31, 2004 the bank could have declared dividends of approximately $3.4 million to Middlefield without having to obtain advance regulatory approval. We cannot assure you that the bank’s profitability will continue to allow it to pay dividends to Middlefield, and we therefore cannot assure you that Middlefield will be able to continue paying regular, quarterly cash dividends.

     We could incur liabilities under federal and state environmental laws if we foreclose on commercial properties. A high percentage of the bank’s loans are secured by real estate. Although the vast majority of these loans are residential mortgage loans with little associated environmental risk, some are commercial loans secured by property on which manufacturing and other commercial enterprises are carried on. The bank currently does not own any property acquired by foreclosure. However, the bank has in the past and could again acquire property by foreclosing on loans in default. Under federal and state environmental laws, the bank could face liability for some or all of the costs of removing hazardous substances, contaminants, or pollutants from properties acquired in this fashion. Although other persons might be primarily responsible for these costs, they might not be financially solvent or they might be unable to bear the full cost of clean up. Regardless of whether it forecloses on property, it is also possible that a lender exercising unusual influence over a borrower’s commercial activities could be required to bear a portion of the clean-up costs under federal or state environmental laws.

     Middlefield does not have acquisition experience. Many financial institutions and holding companies achieve growth through mergers and acquisitions. Although Middlefield has never undertaken acquisition of another institution, from time to time Middlefield explores potential acquisitions. Management holds informal discussions about possible acquisitions of other institutions with some frequency, as it believes management of many institutions do. In the vast majority of cases, however, those discussions never progress beyond the most preliminary or exploratory stages. Sometimes preliminary discussions do progress beyond that point, but for one reason or another they nevertheless do not progress to the point of negotiating terms of an acquisition. Discussions of this sort have become routine among financial institutions both large and small. Investors may generally assume that these discussions have occurred and will occur again, but Middlefield cautions investors not to assume that discussions will actually lead to an acquisition by Middlefield, although that could occur.

22

     There are risks associated with assessing the values, strengths, weaknesses, and profitability of acquisition candidates, including adverse short-term effects of acquisitions on operating results, diversion of management’s attention, dependence on retaining key personnel, and risks associated with unanticipated problems. An acquisition’s success depends in part on the acquiror’s ability to integrate the operations of the acquired institution or assets and capitalize on synergies for cost savings. Without experience integrating acquired companies, Middlefield therefore would face greater risk that acquisition costs will exceed projections and that the benefits will be less than projected or harder to attain.

Item 2 — Properties

     The bank’s offices are:

Location	County	Owned/Leased	Other Information
Main Office:
15985 East High Street Middlefield, Ohio 44062-1666	Geauga	owned
Branches:
West Branch 15545 West High Street Middlefield, Ohio	Geauga	owned
Garrettsville Branch 8058 State Street Garrettsville, Ohio	Portage	owned
Mantua Branch 10519 South Main Street Mantua, Ohio	Portage	leased	three-year lease renewed in November 2004, with option to renew for six additional consecutive three-year terms
Chardon Branch 348 Center Street Chardon, Ohio	Geauga	Owned	opened in September, 2001
Orwell Branch 30 South Maple Avenue Orwell, Ohio	Ashtabula	Owned	opened in April, 2003

     At December 31, 2004 the net book value of the bank’s investment in premises and equipment totaled $6.6 million.

     The bank’s electronic data processing functions are performed under contract with an electronic data processing services firm that performs services for financial institutions throughout the Midwest.

Item 3 — Legal Proceedings

     From time to time Middlefield and the bank are involved in various legal proceedings that are incidental to its business. In the opinion of management, no current legal proceedings are material to the financial condition of Middlefield or the bank, either individually or in the aggregate.

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Item 4 — Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of Middlefield Banc Corp.’s security holders during the fourth quarter of 2004.

Part II

Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters

     Information relating to the market for Middlefield’s common equity and related shareholder matters appears under “Market for Middlefield’s Common Equity and Related Stockholder Matters” in Middlefield’s 2004 Annual Report to Shareholders on page 21 and is incorporated herein by reference. Information relating to dividend restrictions for Registrant’s common stock appears under “ Supervision and Regulation.”

Item 6 — Selected Financial Data

     The above-captioned information appears under “Selected Financial Data” in Middlefield’s 2004 Annual Report to Shareholders and is incorporated herein by reference.

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Middlefield’s 2004 Annual Report to Shareholders and is incorporated herein by reference .

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

     The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section “ Interest Rate Sensitivity Simulation Analysis in Middlefield’s 2004 Annual Report to Shareholders and is incorporated herein by reference .

Item 8 — Financial Statements and Supplementary Data

     The Consolidated Financial Statements of Middlefield Banc Corp. and its subsidiary, together with the report thereon by S.R. Snodgrass, A.C. appears in the Middlefield’s 2004 Annual Report to Shareholders and are incorporated herein by reference.

Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None

Item 9a — Controls and Procedures

     Middlefield’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2004, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Middlefield’s disclosure controls and procedures. Based

24

upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Middlefield’s disclosure controls and procedures as of December 31, 2004 were effective in ensuring that material information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported on a timely basis. Additionally, there were no changes in Middlefield’s internal control over financial reporting that occurred during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, Middlefield’s internal control over financial reporting.

     Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States of America.

     There have been no significant changes in Middlefield’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2004.

Item 9b — Other Information

None

Part III

Item 10 — Directors and Executive Officers of the Registrant

     Incorporated by reference to the definitive proxy statement for the 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2004.

Item 11 — Executive Compensation

     Incorporated by reference to the definitive proxy statement for the 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2004.

Item 12 — Security Ownership of Certain Beneficial Owners and Management

     Incorporated by reference to the definitive proxy statement for the 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2004.

Item 13 — Certain Relationships and Related Transactions

     Incorporated by reference to the definitive proxy statement for the 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2004.

Item 14 — Principal Accountant Fees and Services

     Incorporated by reference to the definitive proxy statement for the 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2004.

25

	Page No.
Index to Consolidated Financial Statements:
Consolidated Financial Statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004:
Report of Independent Registered Public Accounting firm	31
Consolidated Balance Sheets	32
Consolidated Statements of Income	33
Consolidated Statements of Changes in Stockholders’ Equity	34
Consolidated Statements of Cash Flows	35
Notes to Consolidated Financial Statements	36

(a)(2) Financial Statement Schedules

     Financial Statement Schedules have been omitted because they are not applicable or the required information is shown elsewhere in the document in the Financial Statements or Notes thereto, or in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(a)(3) Exhibits

     See the list of exhibits below

(b) Reports on Form 8-K Filed During the Quarter ended December 31, 2004

     None.

(c) Exhibits Required by Item 601 of Regulation S-K

Exhibit
Number	Description	Location
3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp.	Incorporated by reference to the identically numbered exhibit to the registration statement on Form 10 (File No. 033-23094) filed on April 17, 2001
3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to the identically numbered exhibit to the registration statement on Form 10 (File No. 033-23094) filed on April 17, 2001
4	Specimen Stock Certificate	Incorporated by reference to the identically numbered exhibit to the registration statement on Form 10 (File No. 033-23094) filed on April 17, 2001
10.1 *	1999 Stock Option Plan of Middlefield Banc Corp.	Incorporated by reference to the identically numbered exhibit to the registration statement on Form 10 (File No. 033-23094) filed on April 17, 2001
10.2 *	Severance Agreement of President and Chief Executive Officer	Incorporated by reference to the identically numbered exhibit to the December 31,2004 Form 10 filed on March 30, 2004
10.3 *	Severance Agreement of Executive Vice President	Incorporated by reference to the identically numbered exhibit to the December 31,2004 Form 10 filed on March 30, 2004
10.4 *	Severance Agreement of Vice President	Incorporated by reference to the identically numbered exhibit to the December 31,2004 Form 10 filed on March 30, 2004
10.5	Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000	Incorporated by reference to the identically numbered exhibit to the registration statement on Form 10 (File No. 033-23094) filed on April 17, 2001

26

Exhibit
Number	Description	Location
10.6 *	Reserved	Reserved
10.7 *	Director Retirement Agreement with Richard T. Coyne	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.8 *	Director Retirement Agreement with Frances H. Frank	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.9 *	Director Retirement Agreement with Thomas C. Halstead	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.10 *	Director Retirement Agreement with George F. Hasman	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.11 *	Director Retirement Agreement with Donald D. Hunter	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.12 *	Director Retirement Agreement with Martin S. Paul	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.13 *	Director Retirement Agreement with Donald E. Villers	Incorporated by reference to the identically numbered exhibit to the December 31, 2001 Form 10-K filed with the SEC on March 28, 2002
10.14 *	DBO Agreement with Donald L. Stacy	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.15 *	DBO Agreement with Jay P. Giles	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.16 *	DBO Agreement with Alfred F. Thompson, Jr.	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.17 *	DBO Agreement with Nancy C. Snow	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.18 *	DBO Agreement with Teresa M. Hetrick	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.19 *	DBO Agreement with Jack L. Lester	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.20 *	DBO Agreement with James R. Heslop, II	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
10.21 *	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to the identically numbered exhibit to the December 31, 2003 Form 10-K filed with the SEC on March 30, 2004
13	Annual Report

27

Exhibit
Number	Description	Location
23	Consent of S.R. Snodgrass, A.C., independent auditors of Middlefield Banc Corp.	filed herewith
31.1	Section 302 Certification	filed herewith
31.2	Section 302 Certification	filed herewith
32	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	filed herewith
99.1 *	Form of Indemnification Agreement with directors of Middlefield Banc Corp. and executive officers of Middlefield Banc Corp. and The Middlefield Banking Company	Incorporated by reference to the identically numbered exhibit to Amendment No. 1 of the registration statement on Form 10 (File No. 033-23094) filed on June 14, 2001

* Management contract or compensatory plan or arrangement

28

Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Middlefield Banc Corp.
By:	/s/ Thomas G. Caldwell
	Thomas G. Caldwell
	President and Chief Executive Officer
	March 22, 2005

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Thomas G. Caldwell	March 22, 2005
Thomas G. Caldwell
President, Chief Executive Officer, and Director
/s/ Donald L. Stacy	March 22, 2005
Donald L. Stacy, Treasurer and Chief Financial Officer
(Principal accounting and financial officer)
/s/ Richard T. Coyne	March 22, 2005
Richard T. Coyne, Director
/s/ Frances H. Frank	March 22, 2005
Frances H. Frank, Director
/s/ Thomas C. Halstead	March 22, 2005
Thomas C. Halstead, Director
/s/ George F. Hasman	March 22, 2005
George F. Hasman, Director
/s/ James R. Heslop, II	March 22, 2005
James R. Heslop, II, Executive Vice President, Chief Operating Officer, and Director
/s/ Donald D. Hunter	March 22, 2005
Donald D. Hunter, Chairman of the Board and Director
/s/ Martin S. Paul	March 22, 2005
Martin S. Paul, Director
/s/ Donald E. Villers	March 22, 2005
Donald E. Villers, Director

29

EX-13

Exhibit 13

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Registration Statement of Middlefield Banc Corp. on Form S-8 of our report dated January 14, 2005, appearing in the Annual Report on Form 10-K of Middlefield Banc Corp. for the year ended December 31, 2004.

Wexford, PA
March 28, 2005

31

MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET

	December 31,
	2004			2003
ASSETS
Cash and due from banks	$	5,311,776		$	3,956,453
Federal funds sold		—			930,000
Cash and cash equivalents		5,311,776			4,886,453
Interest-bearing deposits in other institutions		614,506			539,147
Investment securities available for sale		57,240,965			49,966,511
Investment securities held to maturity (estimated market value of $243,810 and $1,915,366)		221,412			1,858,904
Loans		215,653,283			192,880,153
Less allowance for loan losses		2,623,431			2,521,270
Net loans		213,029,852			190,358,883
Premises and equipment		6,617,594			6,807,930
Bank-owned life insurance		5,424,304			5,202,385
Accrued interest and other assets		2,753,577			2,749,235
TOTAL ASSETS	$	291,213,986		$	262,369,448
LIABILITIES
Deposits:
Noninterest-bearing demand	$	36,331,809		$	29,423,027
Interest-bearing demand		8,817,873			7,369,754
Money market		15,666,730			15,708,932
Savings		75,280,343			69,570,895
Time		103,788,696			97,767,302
Total deposits		239,885,451			219,839,910
Short-term borrowings		1,871,763			444,819
Other borrowings		23,683,324			17,665,661
Accrued interest and other liabilities		951,424			914,744
TOTAL LIABILITIES		266,391,962			238,865,134
STOCKHOLDERS’ EQUITY
Common stock, no par value; 5,000,000 shares authorized, 1,355,488 and 1,279,128 shares issued		12,815,927			10,038,156
Retained earnings		15,004,552			15,085,868
Accumulated other comprehensive income (loss)		(28,682	)		125,199
Treasury stock, at cost (89,333 and 55,309 shares)		(2,969,773	)		(1,744,909	)
TOTAL STOCKHOLDERS’ EQUITY		24,822,024			23,504,314
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	291,213,986		$	262,369,448

See accompanying notes to consolidated financial statements.

32

MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME

	Year Ended December 31,
	2004			2003		2002
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	13,617,560		$	12,846,525	$	12,340,920
Interest-bearing deposits in other institutions		5,641			17,188		48,293
Federal funds sold		50,608			48,947		64,994
Investment securities:
Taxable		1,400,063			1,196,221		1,190,508
Tax-exempt		604,399			486,485		424,357
Other dividend income		54,265			51,797		50,891
Total interest and dividend income		15,732,536			14,647,163		14,119,963
INTEREST EXPENSE
Deposits		4,905,899			4,905,826		5,478,030
Short-term borrowings		2,180			4,048		7,175
Other borrowings		860,819			815,033		662,881
Total interest expense		5,768,898			5,724,907		6,148,086
NET INTEREST INCOME		9,963,638			8,922,256		7,971,877
Provision for loan losses		174,000			315,000		300,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		9,789,638			8,607,256		7,671,877
NONINTEREST INCOME
Service charges on deposit accounts		1,402,027			1,033,928		955,121
Investment securities gains (losses), net		(98,375	)		542		—
Earnings on bank-owned life insurance		221,919			202,385		—
Other income		253,660			191,289		188,096
Total noninterest income		1,779,231			1,428,144		1,143,217
NONINTEREST EXPENSE
Salaries and employee benefits		3,442,262			3,085,451		2,523,433
Occupancy		494,759			403,591		357,500
Equipment		356,346			333,163		324,659
Data processing costs		538,349			470,393		427,164
Professional fees		252,731			218,838		246,285
Ohio state franchise tax		285,050			265,050		250,050
Advertising		253,858			168,849		65,263
Postage and freight		178,717			161,632		140,628
Other expense		1,163,634			998,483		871,357
Total noninterest expense		6,965,706			6,105,450		5,206,339
Income before income taxes		4,603,163			3,929,950		3,608,755
Income taxes		1,330,000			1,131,330		1,107,806
NET INCOME	$	3,273,163		$	2,798,620	$	2,500,949
EARNINGS PER SHARE
Basic	$	2.54		$	2.19	$	1.95
Diluted		2.51			2.18		1.95

See accompanying notes to consolidated financial statements.

33

MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders’			Comprehensive
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity			Income
Balance, December 31, 2001		1,148,676	$	6,287,011	$	14,842,519		$	133,717		$	(1,476,440	)	$	19,786,807
Net income						2,500,949									2,500,949		$	2,500,949
Other comprehensive income:
Unrealized gain on available-for-sale securities net of taxes of $176,033									341,711						341,711			341,711
Comprehensive income																	$	2,842,660
Exercise of stock options		988		23,509											23,509
Sale of treasury stock				795								17,225			18,020
Purchase of treasury stock												(204,070	)		(204,070	)
Five percent stock dividend (including cash paid for fractional shares)		54,997		1,429,662		(1,434,607	)								(4,945	)
Dividend reinvestment plan		4,462		142,178											142,178
Cash dividends ($.64 per share)						(857,751	)								(857,751	)
Balance, December 31, 2002		1,209,123		7,883,155		15,051,110			475,428			(1,663,285	)		21,746,408
Net income						2,798,620									2,798,620		$	2,798,620
Other comprehensive loss:
Unrealized loss on available-for-sale securities net of tax benefit of $180,421									(350,229	)					(350,229	)		(350,229	)
Comprehensive income																	$	2,448,391
Exercise of stock options		847		19,916											19,916
Common stock issued		5,612		170,513											170,513
Purchase of treasury stock												(81,624	)		(81,624	)
Five percent stock dividend (including cash paid for fractional shares)		57,972		1,797,165		(1,801,961	)								(4,796	)
Dividend reinvestment plan		5,574		167,407											167,407
Cash dividends ($.75 per share)						(961,901	)								(961,901	)
Balance, December 31, 2003		1,279,128		10,038,156		15,085,868			125,199			(1,744,909	)		23,504,314
Net income						3,273,163									3,273,163		$	3,273,163
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of tax benefit of $79,272									(153,881	)					(153,881	)		(153,881	)
Comprehensive income																	$	3,119,282
Exercise of stock options		521		14,198											14,198
Common stock issued		8,154		277,171											277,171
Purchase of treasury stock												(1,224,864	)		(1,224,864	)
Five percent stock dividend (including cash paid for fractional shares)		61,387		2,271,282		(2,283,646	)								(12,364	)
Dividend reinvestment plan		6,298		215,120											215,120
Cash dividends ($.83 per share)						(1,070,833	)								(1,070,833	)
Balance, December 31, 2004		1,355,488	$	12,815,927	$	15,004,552		$	(28,682	)	$	(2,969,773	)	$	24,822,024

	2004			2003			2002
Components of comprehensive income (loss):
Change in net unrealized gain (loss) on investments available for sale	$	(218,808	)	$	(349,871	)	$	341,711
Realized (gains) losses included in net income, net of taxes of $33,448, $184, and $0		64,927			(358	)		—
Total	$	(153,881	)	$	(350,229	)	$	341,711

See accompanying notes to consolidated financial statements.

34

MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS

	Year Ended December 31,
	2004			2003			2002
OPERATING ACTIVITIES
Net income	$	3,273,163		$	2,798,620		$	2,500,949
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		174,000			315,000			300,000
Depreciation and amortization		403,916			377,547			354,550
Amortization of premium and discount on investment securities		260,198			259,890			159,047
Amortization of net deferred loan costs (fees)		(134,758	)		(117,524	)		(76,684	)
Investment securities (gains) losses, net		98,375			(542	)		—
Earnings on bank-owned life insurance		(221,919	)		(202,385	)		—
Deferred income taxes		(33,704	)		(69,934	)		(72,302	)
Decrease (increase) in accrued interest receivable		(75,303	)		(11,796	)		34,337
Decrease in accrued interest payable		(25,617	)		(77,862	)		(121,258	)
Other, net		299,533			184,433			124,129
Net cash provided by operating activities		4,017,884			3,455,447			3,202,768
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in other institutions, net		(75,359	)		32,822			668,238
Investment securities available for sale:
Proceeds from repayments and maturities		14,857,656			16,167,324			10,006,949
Purchases		(27,638,162	)		(32,985,572	)		(24,359,041	)
Proceeds from sales		4,912,619			1,991,917			—
Investment securities held to maturity:
Proceeds from repayments and maturities		1,639,200			4,370,070			3,960,491
Increase in loans, net		(22,710,211	)		(17,913,713	)		(22,099,859	)
Purchase of Federal Home Loan Bank stock		(53,300	)		(52,000	)		(189,700	)
Purchase of bank-owned life insurance		—			(5,000,000	)		—
Purchase of premises and equipment		(213,580	)		(704,746	)		(590,483	)
Net cash used for investing activities		(29,281,137	)		(34,093,898	)		(32,603,405	)
FINANCING ACTIVITIES
Net increase in deposits		20,045,541			32,455,416			20,001,766
Increase (decrease) in short-term borrowings, net		1,426,944			(340,959	)		125,100
Proceeds from other borrowings		9,000,000			5,000,000			7,000,000
Repayment of other borrowings		(2,982,337	)		(3,024,392	)		(611,281	)
Purchase of treasury stock		(1,224,864	)		(81,624	)		(204,070	)
Sale of treasury stock		—			—			18,020
Exercise of stock options		14,198			19,916			23,509
Common stock issued		277,171			170,513			—
Proceeds from dividend reinvestment plan		215,120			167,407			142,178
Cash dividends		(1,083,197	)		(966,697	)		(862,696	)
Net cash provided by financing activities		25,688,576			33,399,580			25,632,526
Increase (decrease) in cash and cash equivalents		425,323			2,761,129			(3,768,111	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		4,886,453			2,125,324			5,893,435
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	5,311,776		$	4,886,453		$	2,125,324
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	5,794,515		$	5,802,769		$	6,269,344
Income taxes		1,280,000			1,295,000			1,054,000

See accompanying notes to consolidated financial statements.

MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:

Nature of Operations and Basis of Presentation

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (the “Bank”). The Bank is a state-chartered bank located in Ohio. The Company and its subsidiary derive substantially all of their income from banking and bank-related services which includes interest earnings on residential real estate, commercial mortgage, commercial and consumer financings, as well as interest earnings on investment securities and deposit services to its customers through five locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions.

The consolidated financial statements of the Company include its wholly owned subsidiary, the Bank. Significant intercompany items have been eliminated in preparing the consolidated financial statements.

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates.

Investment Securities

Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using a level yield method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.

Common stock of the Federal Home Loan Bank (“FHLB”) represents ownership in an institution that is wholly owned by other financial institutions. This equity security is accounted for at cost and classified with other assets.

Loans

Loans are reported at their principal amount net of the allowance for loan losses. Interest income is recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest received on nonaccrual loans is recorded as income against principal according to management’s judgment as to the collectibility of such principal.

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans (Continued)

Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans.

Allowance for Loan Losses

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable loan losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan losses, which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term.

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the payment related to interest is recognized as income.

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.

Premises and Equipment

Premises and equipment are stated at cost net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years for furniture, fixtures, and equipment and 3 to 40 years for buildings and leasehold improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

Bank-Owned Life Insurance (BOLI)

The Company purchased life insurance policies on certain key employees. BOLI is recorded at its cash surrender value or the amount that can be realized.

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Earnings Per Share

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator.

Stock Options

The Company maintains a stock option plan for key officers, employees, and nonemployee directors. Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of FAS No. 123, Accounting for Stock-Based Compensation, net income applicable to common stock, basic, and diluted net income per common share for the year ended December 31 would have been as follows:

	2004		2003		2002
Net income as reported:	$	3,273,163	$	2,798,620	$	2,500,949
Less pro forma expense related to option		57,308		52,459		52,434
Pro forma net income	$	3,215,855	$	2,746,161	$	2,448,515
Basic net income per common share:
As reported	$	2.54	$	2.19	$	1.95
Pro forma		2.49		2.14		1.91
Diluted net income per common share:
As reported	$	2.51	$	2.18	$	1.95
Pro forma		2.47		2.14		1.91

For purposes of computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions:

	Expected
Grant	Dividend			Risk-Free			Expected			Expected
Year	Yield			Interest Rate			Volatility			Life (in years)
2000		2.50	%		5.29	%		5.00	%		9.95
2002		2.72			4.19			27.04			9.94
2003		2.72			4.25			14.00			9.94
2004		2.39			4.00			8.79			9.94

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash Flow Information

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions “Cash and due from banks” and “Federal funds sold.”

Advertising Costs

Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to $253,858, $168,849, and $65,263 for 2004, 2003, and 2002, respectively.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 123 (Revised 2004), Share-Based Payment. The statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on July 1, 2005, and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In October 2003, the American Institute of Certified Public Accountants issued SOP 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan that is acquired where it is probable, at acquisition, that a transferee will be unable to collect all contractually required payments receivable. SOP 03-3 requires the recognition, as accretable yield, of the excess of all cash flows expected at acquisition over the investor’s initial investment in the loan as interest income on a level-yield basis over the life of the loan. The amount by which the loan’s contractually required payments exceed the amount of its expected cash flows at acquisition may not be recognized as an adjustment to yield, a loss accrual, or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected to have a material impact on the consolidated financial statements.

Reclassification of Comparative Amounts

Certain items previously reported have been reclassified to conform to the current year’s format. Such reclassifications did not affect net income or stockholders’ equity.

2.   EARNINGS PER SHARE

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

	2004			2003			2002
Weighted-average common shares outstanding		1,346,482			1,335,283			1,328,683
Average treasury stock shares		(55,588	)		(54,833	)		(47,786	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		1,290,894			1,280,450			1,280,897
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		11,734			3,520			2,094
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		1,302,628			1,283,970			1,282,991

Options to purchase 10,552 shares of common stock at prices from $26.78 to $27.43 per share were outstanding during 2002 but were not included in the computation of diluted earnings per share because to do so would have been antidilutive. In 2004 and 2003, there were no options to purchase shares of common stock that were anti-dilutive.

3.   STOCK DIVIDEND

The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 1, 2004, payable December 15, 2004. As a result of the dividend, 61,387 additional shares of the Company’s common stock were issued, common stock was increased by $2,271,282, and retained earnings decreased by $2,283,646.

The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 3, 2003, payable December 12, 2003. As a result of the dividend, 57,972 additional shares of the Company’s common stock were issued, common stock was increased by $1,797,165, and retained earnings decreased by $1,801,961.

The Board of Directors approved a 5 percent stock dividend to stockholders of record as of June 1, 2002, payable June 14, 2002. As a result of the dividend, 54,997 additional shares of the Company’s common stock were issued; common stock was increased by $1,429,662, and retained earnings decreased by $1,434,607.

Fractional shares paid were paid in cash. All average shares outstanding and all per share amounts included in the financial statements are based on the increased number of shares after giving retroactive effects to the stock dividend.

4.   INVESTMENT SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated market values of securities available for sale are as follows:

	2004
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
U.S. government agency securities	$	5,273,091	$	70,704	$	(17,637	)	$	5,326,158
Obligations of states and political subdivisions:
Taxable		748,196		—		(11,129	)		737,067
Tax-exempt		21,239,335		303,433		(65,776	)		21,476,992
Mortgage-backed securities		29,625,481		80,530		(403,583	)		29,302,428
Total debt securities		56,886,103		454,667		(498,125	)		56,842,645
Equity securities		398,320		—		—			398,320
Total	$	57,284,423	$	454,667	$	(498,125	)	$	57,240,965

	2003
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
U.S. government agency securities	$	6,061,807	$	132,978	$	(17,744	)	$	6,177,041
Obligations of states and political subdivisions:
Taxable		209,534		6,195		—			215,729
Tax-exempt		14,564,866		324,412		(48,570	)		14,840,708
Corporate securities		349,910		9,059		—			358,969
Mortgage-backed securities		28,590,695		112,244		(328,875	)		28,374,064
Total	$	49,776,812	$	584,888	$	(395,189	)	$	49,966,511

The amortized cost and estimated market value of debt securities at December 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

			Estimated
	Amortized		Market
	Cost		Value
Due in one year or less	$	3,264,867	$	3,264,939
Due after one year through five years		8,292,750		8,411,921
Due after five years through ten years		11,492,322		11,588,142
Due after ten years		33,836,164		33,577,643
Total	$	56,886,103	$	56,842,645

Investment securities with an approximate carrying value of $21,669,555 and $21,323,044 at December 31, 2004 and 2003, respectively, were pledged to secure deposits and other purposes as required by law.

4.   INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)

The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities available for sale for the years ended December 31, 2004 and 2003. The Company had no sales in 2002.

	2004		2003
Proceeds from sales	$	4,912,619	$	1,991,917
Gross gains		—		6,350
Gross losses		98,375		5,808

5.   INVESTMENT SECURITIES HELD TO MATURITY

The amortized cost and estimated market values of investment securities held to maturity are as follows:

	2004
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Obligations of states and political subdivisions:
Tax-exempt	$	221,412	$	22,398	$	—	$	243,810

	2003
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Obligations of states and political subdivisions:
Taxable	$	945,234	$	17,769	$	—	$	963,003
Tax-exempt		913,670		38,693		—		952,363
Total	$	1,858,904	$	56,462	$	—	$	1,915,366

The amortized cost and estimated market value of debt securities at December 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

			Estimated
	Amortized		Market
	Cost		Value
Due after one year through five years	$	121,412	$	128,224
Due after five years through ten years		100,000		115,586
Total	$	221,412	$	243,810

Investment securities held to maturity with carrying values of approximately $89,915 and $685,186 and estimated market values of approximately $93,545 and $704,240 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and other purposes required by law.

6.   UNREALIZED LOSSES ON SECURITIES

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2004.

	Less than Twelve Months					Twelve Months or Greater					Total
	Estimated		Gross			Estimated		Gross			Estimated		Gross
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	1,488,594	$	(7,817	)	$	981,563	$	(9,820	)	$	2,470,157	$	(17,637	)
Obligations of states and political subdivisions		5,227,264		(33,724	)		1,673,533		(43,181	)		6,900,797		(76,905	)
Mortgage-backed securities		7,922,125		(76,319	)		11,860,073		(327,264	)		19,782,198		(403,583	)
Total	$	14,637,983	$	(117,860	)	$	14,515,169	$	(380,265	)	$	29,153,152	$	(498,125	)

The policy of the Company is to recognize an other-than-temporary impairment on equity securities where the fair value has been significantly below cost for three consecutive quarters. For fixed maturity investments with unrealized losses due to interest rates where the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. The Company reviews its position quarterly and has asserted that at December 31, 2004, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability either to hold those securities to maturity or to allow a market recovery.

The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes, sector credit rating changes, or Company-specific rating changes that are not expected to result in the noncollection of principal and interest during the period.

7.   LOANS

Major classifications of loans are summarized as follows:

	2004		2003
Commercial and industrial	$	52,148,055	$	42,063,086
Real estate - construction		3,143,706		3,433,614
Real estate - mortgage:
Residential		147,425,466		134,007,401
Commercial		7,026,582		7,865,893
Consumer installment		5,909,474		5,510,159
		215,653,283		192,880,153
Less allowance for loan losses		2,623,431		2,521,270
Net loans	$	213,029,852	$	190,358,883

The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at December 31, 2004 and 2003, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

8.   ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31 are as follows:

	2004		2003		2002
Balance, January 1	$	2,521,270	$	2,300,485	$	2,062,252
Add:
Provisions charged to operations		174,000		315,000		300,000
Recoveries		46,643		49,942		57,388
Less loans charged off		118,482		144,157		119,155
Balance, December 31	$	2,623,431	$	2,521,270	$	2,300,485

9. PREMISES AND EQUIPMENT

     Major classifications of premises and equipment are summarized as follows:

	2004		2003
Land and land improvements	$	1,295,938	$	1,295,938
Building and leasehold improvements		6,859,242		6,815,018
Furniture , fixtures, and equipment		2,826,230		2,656,874
		10,981,410		10,767,830
Less accumulated depreciation and amortization		4,363,816		3,959,900
Total	$	6,617,594	$	6,807,930

Depreciation and amortization charged to operations was $403,916 in 2004, $377,547 in 2003, and $354,550 in 2002.

10.   OTHER ASSETS

The components of other assets are as follows:

	2004		2003
FHLB stock	$	1,351,000	$	1,297,700
Accrued interest on investment securities		274,740		281,438
Accrued interest on loans		531,086		449,085
Deferred tax asset, net		450,449		337,471
Other		146,302		383,541
Total	$	2,753,577	$	2,749,235

11.   DEPOSITS

Time deposits at December 31, 2004, mature $46,060,731, $19,443,146, $17,726,866, $11,638,696, and $8,919,257 during 2005, 2006, 2007, 2008, and 2009, respectively.

Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated $21,920,929 and $18,834,869 at December 31, 2004 and 2003, respectively.

Maturities on time deposits of $100,000 or more at December 31, 2004, are as follows:

Within three months	$	1,940,752
Beyond three but within six months		1,095,092
Beyond six but within twelve months		6,120,363
Beyond one year		12,764,722
Total	$	21,920,929

12.   SHORT-TERM BORROWINGS

The outstanding balances and related information of short-term borrowings which includes securities sold under agreements to repurchase and federal funds purchased are summarized as follows:

	2004			2003
Balance at year-end	$	1,871,763		$	444,819
Average balance outstanding		298,500			726,874
Maximum month-end balance		2,057,054			2,327,544
Weighted-average rate at year-end		3.80	%		0.23	%
Weighted-average rate during the year		0.73			0.56

Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.

The Company maintains a $4,000,000 line of credit at an adjustable rate, currently 5.5 percent, from Lorain National Bank. At December 31, 2004, the Company had outstanding borrowings of $1,200,000. At December 31, 2003, there were no outstanding balances of this line.

13.   OTHER BORROWINGS

Other borrowings consist of advances from the FHLB as follows:

					Weighted-			Stated interest
	Maturity range				average			rate range
Description	from		to		interest rate			from			to			2004		2003
Fixed rate		08/09/05		09/13/07		3.45	%		3.34	%		3.87	%	$	3,035,000	$	1,560,000
Fixed rate amortizing		07/01/07		02/01/23		3.44			2.70			6.40			12,648,324		8,105,661
Convertible		09/04/08		07/28/10		5.43			4.53			6.45			8,000,000		8,000,000
														$	23,683,324	$	17,665,661

13.   OTHER BORROWINGS (Continued)

The scheduled maturities of advances outstanding are as follows:

	2004
Year Ending			Weighted-
December 31,	Amount		Average Rate
2005	$	3,998,870		3.35	%
2006		3,128,697		3.42
2007		3,931,213		3.32
2008		7,403,604		4.72
2009		1,040,328		3.19
Beyond 2009		4,180,612		4.74
	$	23,683,324		4.02	%

The Bank entered into a ten-year “Convertible Select” fixed commitment advance arrangement with the FHLB. Rates may be reset at the FHLB’s discretion on a quarterly basis based on the three-month LIBOR rate. At each rate change the Bank may exercise a put option and satisfy the obligation without penalty.

Advances from the FHLB maturing July 1, 2007, February 1, 2012, June 4, 2012, February 2, 2013, February 26, 2014, July 28, 2014, September 13, 2014, June 4, 2017, February 1, 2018, February 26, 2019, and February 1, 2023, require monthly principal and interest payments and an annual 20 percent paydown of outstanding principal. Monthly principal and interest payments are adjusted after each 20 percent paydown. Under terms of a blanket agreement, collateral for the FHLB borrowings are secured by certain qualifying assets of the Bank which consist principally of first mortgage loans. Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $118 million at December 31, 2004.

14.   OTHER LIABILITIES

The components of other liabilities are as follows:

	2004		2003
Accrued interest payable	$	382,467	$	408,084
Other		568,957		506,660
Total	$	951,424	$	914,744

15.   INCOME TAXES

The provision for federal income taxes consists of:

	2004			2003			2002
Current payable	$	1,363,704		$	1,201,264		$	1,180,108
Deferred		(33,704	)		(69,934	)		(72,302	)
Total provision	$	1,330,000		$	1,131,330		$	1,107,806

15.   INCOME TAXES (Continued)

The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

	2004		2003
Deferred tax assets:
Allowance for loan losses	$	823,034	$	788,299
Net unrealized loss on securities		14,776		—
Supplemental retirement plan		50,764		37,300
Gross deferred tax assets		888,574		825,599
Deferred tax liabilities:
Deferred origination fees, net		118,061		157,979
Premises and equipment		181,273		141,866
Net unrealized gain on securities		—		64,498
Other		138,791		123,785
Gross deferred tax liabilities		438,125		488,128
Net deferred tax assets	$	450,449	$	337,471

No valuation allowance was established at December 31, 2004 and 2003, in view of the Company’s ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows:

	2004						2003						2002
				% of						% of						% of
				Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income
Provision at statutory rate	$	1,565,076			34.0	%	$	1,336,030			34.0	%	$	1,226,976			34.0	%
Tax-free income		(208,593	)		(4.5	)		(236,760	)		(6.1	)		(147,425	)		(4.1	)
Nondeductible interest expense		26,485			0.6			22,789			0.6			21,590			0.6
Other		(52,968	)		(1.2	)		9,271			0.3			6,665			0.2
Actual tax expense and effective rate	$	1,330,000			28.9	%	$	1,131,330			28.8	%	$	1,107,806			30.7	%

16.   EMPLOYEE BENEFITS

Retirement Plan

The Bank maintains a section 401(k) employee savings and investment plan for all full-time employees and officers of the Bank with more than one year of service. The Bank’s contribution to the plan is based on 50 percent matching of voluntary contributions up to 6 percent of compensation. An eligible employee can contribute up to 15 percent of salary. Employee contributions are vested at all times, and the Bank contributions are fully vested after six years beginning at the second year in 20 percent increments. Contributions for 2004, 2003, and 2002 to this plan amounted to $63,083, $56,731, and $53,268, respectively.

16.   EMPLOYEE BENEFITS (Continued)

Supplemental Retirement Plan

The Bank maintains a Directors Retirement Plan to provide postretirement payments over a ten-year period to members of the Board of Directors who have completed five or more years of service. The Plan requires payment of 25 percent of the final average annual board fees paid to a director in the three years preceding the director’s retirement. The expense of the plan for the years ended December 31, 2004, 2003, and 2002, amounted to $39,600, $52,800, and $52,800, respectively.

Stock Option and Restricted Stock Plan

The Company maintains a stock option and restricted stock plan (“the Plan”) for granting incentive stock options, nonqualified stock options, and restricted stock for key officers and employees and nonemployee directors of the Company. A total of 132,972 shares of authorized and unissued or issued common stock are reserved for issuance under the Plan, which expires ten years from the date of stockholder ratification. The per share exercise price of an option granted will not be less than the fair value of a share of common stock on the date the option is granted. No option shall become exercisable earlier than one year from the date the Plan was approved by the stockholders.

     The following table presents share data related to the outstanding options:

				Weighted-					Weighted-
				Average					Average
				Exercise					Exercise
	2004			Price		2003			Price
Outstanding, January 1		51,808		$	25.85		33,545		$	24.47
Granted		14,114			34.66		19,184			28.11
Exercised		(545	)		25.95		(921	)		22.30
Forfeited		—			—		—			—
Outstanding, December 31		65,377		$	27.75		51,808		$	25.85
Exercisable at year-end		51,263			25.84		32,646			24.51

The following table summarizes the characteristics of stock options at December 31, 2004:

			Outstanding						Exercisable
					Contractual		Average				Average
	Exercise				Average		Exercise				Exercise
Grant Date	Price		Shares		Life		Price		Shares		Price
June 14, 1999	$	27.43		7,668		4.45	$	27.43		7,668	$	27.43
November 23, 1999		26.77		2,884		4.90		26.77		2,884		26.77
December 11, 2000		20.73		11,403		5.95		20.73		11,403		20.73
December 9, 2002		20.85		10,127		7.94		20.85		10,127		20.85
December 8, 2003		28.11		19,181		8.94		28.11		19,181		28.11
May 12, 2004		31.67		2,314		9.33		31.67		—		—
December 13, 2004		35.25		11,800		9.95		35.25		—		—
				65,377						51,263

For the years ended December 31, 2004, 2003, and 2002, the Company granted 884 shares, 110 shares, and 530 shares, respectively, of common stock. The Company recognizes compensation expense in the amount of fair value of the common stock at the grant date and as an addition to stockholders’ equity. The Company recognized compensation expense of $3,080, $3,410, and $18,020 for the years ended December 31, 2004, 2003, and 2002, respectively.

17.   COMMITMENTS

In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent financial instruments with off-balance sheet risk. The contract or notional amounts of those instruments reflect the extent of involvement in particular types of financial instruments which were composed of the following:

	2004		2003
Commitments to extend credit	$	33,925,423	$	29,349,316
Standby letters of credit		222,675		67,800
Total	$	34,148,098	$	29,417,116

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

18.   REGULATORY RESTRICTIONS

Loans

Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount of 10 percent of the Bank’s common stock and capital surplus.

Dividends

The Bank is subject to a dividend restriction that generally limits the amount of dividends that can be paid by an Ohio state-chartered bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net profits for the two preceding years less any required transfers to surplus. Under this formula, the amount available for payment of dividends in 2005 was $4,114,417 plus 2005 profits retained up to the date of the dividend declaration.

19.   REGULATORY CAPITAL

Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.

As of December 31, 2004 and 2003, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at least 10 percent, 6 percent, and 5 percent, respectively.

The Company’s actual capital ratios are presented in the following table that shows the Company met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the Company’s.

	2004					2003
	Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Actual	$	27,231,794		14.28	%	$	25,395,628		15.79	%
For Capital Adequacy Purposes		15,251,438		8.00			12,865,299		8.00
To Be Well Capitalized		19,064,298		10.00			16,081,624		10.00
Tier I Capital (to Risk-Weighted Assets)
Actual	$	24,850,706		13.04	%	$	23,379,115		14.54	%
For Capital Adequacy Purposes		7,625,719		4.00			6,432,650		4.00
To Be Well Capitalized		11,438,579		6.00			9,648,975		6.00
Tier I Capital (to Average Assets)
Actual	$	24,850,706		8.51	%	$	23,379,115		8.89	%
For Capital Adequacy Purposes		11,678,293		4.00			10,514,492		4.00
To Be Well Capitalized		14,597,866		5.00			13,143,115		5.00

20.   FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments at December 31 are as follows:

	2004				2003
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and due from banks	$	5,311,776	$	5,311,776	$	3,956,453	$	3,956,453
Federal funds sold		—		—		930,000		930,000
Interest-bearing deposits in other institutions		614,506		614,506		539,147		539,147
Investment securities:
Available for sale		57,240,965		57,240,965		49,966,511		49,966,511
Held to maturity		221,412		243,810		1,858,904		1,915,366
Net loans		213,029,852		219,485,000		190,358,883		199,157,402
Bank-Owned Life Insurance		5,424,304		5,424,304		5,202,385		5,202,385
Federal Home Loan Bank stock		1,351,000		1,351,000		1,297,700		1,297,700
Accrued interest receivable		805,826		805,826		730,523		730,523
Financial liabilities:
Deposits	$	239,885,451	$	241,129,000	$	219,839,910	$	223,046,359
Short-term borrowings		1,871,763		1,871,763		444,819		444,819
Other borrowings		23,683,324		22,160,000		17,665,661		17,763,971
Accrued interest payable		382,467		382,467		408,084		408,084

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

20.   FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)

Cash and Due From Banks, Federal Funds Sold, Interest-Bearing Deposits in Other Institutions, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

Investment Securities

The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

Loans, Deposits, and Other Borrowings

The fair value of loans, certificates of deposit, and other borrowings is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, noninterest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.

21.   PARENT COMPANY

Following are condensed financial statements for the Company.

CONDENSED BALANCE SHEET

	December 31,
	2004		2003
ASSETS
Cash and due from banks	$	229,399	$	329,683
Interest-bearing deposits in other institutions		614,506		539,147
Investment securities available for sale		398,320		—
Investment in subsidiary bank		24,779,799		22,635,484
TOTAL ASSETS	$	26,022,024	$	23,504,314
LIABILITIES
Other borrowings		1,200,000		—
STOCKHOLDERS’ EQUITY	$	24,822,024	$	23,504,314
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	26,022,024	$	23,504,314

CONDENSED STATEMENT OF INCOME

	Year Ended December 31,
	2004			2003			2002
INCOME
Dividends from subsidiary bank	$	1,092,122		$	1,044,637		$	1,020,895
Interest income		5,369			5,179			6,963
Total income		1,097,491			1,049,816			1,027,858
EXPENSES		168,524			99,473			166,800
Income before income tax benefit		928,967			950,343			861,058
Income tax benefit		(46,000	)		(32,056	)		(54,636	)
Income before equity in undistributed net income of subsidiary		974,967			982,399			915,695
Equity in undistributed net income of subsidiary		2,298,196			1,816,221			1,585,254
NET INCOME	$	3,273,163		$	2,798,620		$	2,500,949

21.   PARENT COMPANY (Continued)

CONDENSED STATEMENT OF CASH FLOWS

	Year Ended December 31,
	2004			2003			2002
OPERATING ACTIVITIES
Net income	$	3,273,163		$	2,798,620		$	2,500,949
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiary		(2,298,196	)		(1,816,221	)		(1,585,254	)
Net cash provided by operating activities		974,967			982,399			915,695
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in other institutions		(75,359	)		(255,178	)		93,237
Purchase of investment securities		(398,320	)		—			—
Net cash provided by (used for) investing activities		(473,679	)		(255,178	)		93,237
FINANCING ACTIVITIES
Net increase in short-term borrowings		1,200,000			—			—
Purchase of treasury stock		(1,224,864	)		(81,624	)		(204,070	)
Sale of treasury stock		—			—			18,020
Exercise of stock options		14,198			19,916			23,509
Common stock issued		277,171			170,513			—
Proceeds from dividend reinvestment plan		215,120			167,407			142,178
Cash dividends		(1,083,197	)		(966,697	)		(862,696	)
Net cash used for financing activities		(601,572	)		(690,485	)		(883,059	)
Increase (decrease) in cash		(100,284	)		36,736			125,873
CASH AT BEGINNING OF YEAR		329,683			292,947			167,074
CASH AT END OF YEAR	$	229,399		$	329,683		$	292,947

22.   SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2004		2004		2004		2004
Total interest income	$	3,798,928	$	3,889,197	$	3,978,576	$	4,065,835
Total interest expense		1,383,071		1,411,961		1,456,471		1,517,395
Net interest income		2,415,857		2,477,236		2,522,105		2,548,440
Provision for loan losses		30,000		30,000		51,000		63,000
Net interest income after provision for loan losses		2,385,857		2,447,236		2,471,105		2,485,440
Total noninterest income		396,719		485,889		484,244		412,379
Total noninterest expense		1,781,318		1,682,607		1,803,558		1,698,223
Income before income taxes		1,001,258		1,250,518		1,151,791		1,199,596
Income taxes		316,000		342,000		330,000		342,000
Net income	$	685,258	$	908,518	$	821,791	$	857,596
Per share data:
Net income
Basic	$	0.53	$	0.70	$	0.64	$	0.66
Diluted		0.53		0.70		0.63		0.66
Average shares outstanding
Basic		1,285,676		1,289,441		1,293,649		1,294,890
Diluted		1,292,832		1,297,620		1,301,829		1,309,041

22.   SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (Continued)

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2003		2003		2003		2003
Total interest income	$	3,587,523	$	3,626,098	$	3,700,273	$	3,681,472
Total interest expense		1,451,033		1,450,680		1,430,071		1,393,123
Net interest income		2,136,490		2,175,418		2,270,202		2,288,349
Provision for loan losses		105,000		105,000		105,000		—
Net interest income after provision for loan losses		2,031,490		2,070,418		2,165,202		2,288,349
Total noninterest income		276,579		358,101		375,364		469,897
Total noninterest expense		1,310,758		1,613,208		1,592,379		1,589,105
Income before income taxes		997,311		815,311		948,187		1,169,141
Income taxes		344,565		200,363		246,000		340,402
Net income	$	652,746	$	614,948	$	702,187	$	828,739
Per share data:
Net income
Basic	$	0.51	$	0.48	$	0.55	$	0.65
Diluted		0.51		0.48		0.55		0.64
Average shares outstanding
Basic		1,274,964		1,274,760		1,277,766		1,280,421
Diluted		1,277,222		1,278,101		1,281,508		1,284,868

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The consolidated review and analysis of Middlefield Banc Corp. (“MBC” or “Company”) is intended to assist the reader in evaluating the performance of MBC for the years ended December 31, 2004 and 2003. This information should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements.

MBC is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“Bank”). The Bank is a state-chartered bank located in Middlefield, Ohio. Middlefield and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earnings on residential real estate, commercial mortgage, commercial, and consumer financings as well as interest earnings on investment securities and deposit services to its customers through six locations.

The Bank is subject to examination and comprehensive regulation by the FDIC and the Ohio Department of Banking. MBC is a member of the Federal Home Loan Bank (FHLB) of Cincinnati, which is one of the twelve regional banks comprising the FHLB System.

This Management Discussion and Analysis section of the Annual Report contains certain forward-looking statements. Forward-looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond Middlefield’s control. Although Middlefield believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a

representation by Middlefield or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.

These forward-looking statements may involve significant risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results in these forward-looking statements.

Significant Financial Events in 2004

MBC’s board of directors declared a 5 percent share dividend for shareholders of record on December 1, 2004, and a quarterly cash dividend of $0.22 per common share. On December 15, 2004, shareholders of record received additional stock shares equal to 5% of their holdings. Payment of the fourth quarter cash dividend in the amount of $0.22 per share was on the total holdings including the share dividend. The fourth quarter cash dividend, after adjustment for the stock dividend, is 10% higher than the fourth quarter 2003 cash payout. All share and related price and dividend amounts discussed herein have been adjusted to reflect this stock dividend where applicable.

On May 12, 2004 MBC announced that its board authorized the repurchase of up to 4.99% of Middlefield Banc Corp.’s outstanding common stock. In December the Company purchased 34,000 shares of MBC stock at a price of $36.00. The total purchase amount of $1.2 million caused a 4.7% decline in the companies tier 1 capital.

Critical Accounting Policies

Allowance for loan losses

Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio.

Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment, which is affected by changing economic conditions and various external factors and which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of “Notes to Consolidated Financial Statements” commencing on the following pages of this Annual Report.

The allowance for loan losses at December 31, 2004 totaled $2.6 million, compared to $2.5 million at December 31, 2003. The variance in the allowance from 2003 to 2004 is primarily the result of the growth of the loan portfolio of 12% for the year.

Changes in Financial Condition

General. The Company’s total assets increased $28.8 million or 11% to $291.2 million at December 31, 2004 from $262.4 million at December 31, 2003. This increase was composed of a net increase in securities of $5.6 million, net loans receivable of $22.7 million and Bank-owned life insurance of $222,000 which were partially offset by decreases in premises and equipment and Federal funds sold of $190,000 and $930,000 respectively.

The increase in the Company’s total assets reflects a corresponding increase in total liabilities of $27.5 million or 11.5% to $266.4 million at December 31, 2004 from $238.9 million at December 31, 2003 and a increase in total stockholders’ equity of $1.3 million or 5.6% to $24.8 million at December 31, 2004 from $23.5 million at December 31, 2003. The increase in total liabilities was primarily due to increases in deposits of $20 million, and other borrowed funds of $7.4 million. The net increase in total stockholders’ equity can be attributed primarily to an increase in additional paid in capital and net income offset by an increase in treasury stock of $1.2 million.

Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits and federal funds sold represent cash equivalents which increased a combined $425,000 or 8.7% to $5.3 million at

December 31, 2004 from $4.9 million at December 31, 2003. 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 net increase in 2004 can be attributed principally to increases in deposits.

Securities. The Company’s loan and securities portfolios represent its two largest balance sheet asset classifications, respectively. The Company’s securities portfolio increased a net $5.6 million or 10.9% to $57.5 million at December 31, 2004 from $51.8 million at December 31, 2003. During 2004, the Company recorded purchases of available for sale securities of $27.6 million, consisting primarily of mortgage-backed securities and municipal bonds. Partially offsetting the purchases were $16.5 million of maturities and repayments of principal, and $4.9 million of securities sold. The Company’s deposits and borrowings primarily fund the securities portfolio.

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 $22.7 million or 11.9% to $213 million at December 31, 2004 from $190.4 million at December 31, 2003. Included in this increase were increases in mortgage loans of $12.6 million or 8.9% and commercial and industrial loans of $10.1 million or 23.9%,, which were partially offset by a decrease in real estate construction loans of $290,000. The result was a decrease to the yield on the Company’s loan portfolio from 6.99% in 2003 to 6.67% in 2004.

FHLB stock. FHLB stock increased $53,000 or 4.1% to $1,351,000 at December 31, 2004 from $1,298,000 at December 31, 2003, primarily as a result of the increase in FHLB advances to $23.7 million at December 31, 2004 from $17.7 million at December 31, 2003.

Premises and equipment. Premises and equipment decreased $190,000 or 2.8% to $6.6 million at December 31, 2004 from $6.8 million at December 31, 2003. This decrease can be attributed to normal yearly depreciation.

Bank owned life insurance. Bank owned life insurance (BOLI) is universal life insurance, purchased by the Bank, on the lives of the Bank’s officers. The beneficial aspects of these universal life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by the Bank as the owner of the policies. BOLI increased by $222,000 to $5.4 million as of December 31, 2004 from $5.2 million at the end of 2003 as a result of the earnings of the underlying insurance policies.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds totaling $239.9 million or 90.1% of the Company’s total funding sources at December 31, 2004. Total deposits increased $20 million or 9.1% to $239.9 million at December 31, 2004 from $219.8 million at December 31, 2003. For the year, the Company’s noninterest-bearing demand deposits increased $6.9 million or 23.5%, time deposits increased $6.0 million or 6.2%, and savings deposits increased $5.7 million or 8.2%.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include FHLB advances and repurchase agreement borrowings. Borrowed funds increased $7.4 million or 41% to $25.6 million at December 31, 2004 from $18.1 million at December 31, 2003. FHLB advances increased $6.0 million or 34% and repurchase agreements decreased $343,000 or 77%. The increase in borrowed funds for the year reflects the Company’s decision to complement deposits in the support of asset growth.

Stockholders’ equity. Stockholders’ equity increased by $1.3 million or 5.6% to $24.8 million at December 31, 2004 from $23.5 million at December 31, 2003. The net increase in total stockholders’ equity can be attributed primarily to an increase in additional paid in capital of $2.8 million and net income of $3.3 million, offset by an increase in treasury stock of $1.2 million. These items were also partially offset by a decrease in accumulated other comprehensive income of $154,000.
Changes in Results of Operations

2004 Results Compared to 2003 Results

General. The Company reported net income of $3.3 million and $2.8 million for 2004 and 2003, respectively. The $475,000 or 17% increase in net income between 2004 and 2003 can primarily be attributed to a increase in interest income of $1.1 million, and an increase in non-interest income of $351,000, which were partially offset by a increase in interest expense of $44,000 and an increase in non-interest expense of $860,000. Basic earnings per share increased by $.33 a share or 15% to $2.51 at December 31, 2004 from $2.18 at December 31, 2003.

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%.

	For the Year Ended Dec 31,
	2004							2003							2002
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
	(Dollars in thousands)							(Dollars in thousands)							(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	204,191	$	13,618		6.67	%	$	183,683	$	12,847		6.99	%	$	163,828	$	12,341		7.53	%
Investments securities		54,413		2,004		4.25	%		45,011		1,683		4.30	%		35,169		1,615		5.21	%
Interest-bearing deposits with other banks		5,723		111		1.94	%		6,883		117		1.70	%		6,116		164		2.68	%
Total interest-earning assets		264,327		15,733		6.07	%		235,577		14,647		6.32	%		205,113		14,120		6.99	%
Noninterest-earning assets		15,030							12,327							8,368
Total assets	$	279,357						$	247,904						$	213,481
Interest-bearing liabilities:
Interest - bearing demand deposits	$	8,759		56		0.64	%	$	8,623		61		0.71	%	$	7,905		109		1.38	%
Money market deposits		15,145		277		1.83	%		13,355		259		1.94	%		9,090		199		2.19	%
Savings deposits		73,067		1,030		1.41	%		57,413		828		1.44	%		46,045		948		2.06	%
Certificates of deposit		103,022		3,543		3.44	%		98,512		3,758		3.81	%		89,857		4,222		4.70	%
Borrowings		20,630		863		4.18	%		19,635		819		4.17	%		14,258		670		4.70	%
Total interest-bearing liabilities		220,623		5,769		2.61	%		197,538		5,725		2.90	%		167,155		6,148		3.68	%
Noninterest-bearing liabilities
Other liabilities		34,236							27,773							25,621
Stockholders’ equity		24,498							22,594							20,705
Total liabilities and stockholders’ equity	$	279,357						$	247,905						$	213,481
Net interest income			$	9,964						$	8,922						$	7,972
Interest rate spread (1)						3.46	%						3.42	%						3.31	%
Net yield on interest-earning assets (2)						3.89	%						3.89	%						3.99	%
Ratio of average interest-earning assets to average interest-bearing liabilities						119.81	%						119.26	%						122.71	%

(1)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(2)	Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

Rate/Volume Analysis. The following table sets forth certain information regarding the changes in our interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (changes in average

volume multiplied by prior year rate), and (2) changes in rates (changes in rate multiplied by prior year average volume). Increases and decreases due to both rate and volume have been allocated proportionally to the change due to volume and the change due to rate.

	Year Ended December 31,						Year Ended December 31,
	2004 vs. 2003						2003 vs. 2002
	Increase (Decrease)						Increase (Decrease)
	Due to						Due to
	Volume		Rate		Total		Volume		Rate		Total
	(In Thousands)						(In Thousands)
Interest income:
Loans Receivable	$	1,434	$	-663	$	771	$	1,235	$	-729	$	506
Investment securities		404		-83		321		182		-114		68
Other interest-earning assets		-20		14		-6		24		-71		-47
Total interest-earning assets		1,818		-732		1,086		1,441		-914		527
Interest expense:
Interest-bearing demand		1		-6		-5		11		-59		-48
Money market		35		-17		18		79		-19		60
Savings		226		-24		202		563		-683		-120
Certificates		172		-387		-215		487		-951		-464
Other interest-bearing liabilities		42		2		44		212		-63		149
Total interest-bearing liabilities		669		-625		44		1,352		-1,775		-423
Change in net interest income	$	1,149	$	-107	$	1,042	$	89	$	861	$	950

Net interest income. Net interest income, which is the Company’s largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest earning assets and liabilities. Net interest income increased considerably by $1.0 million or 11.7% to $10 million for 2004, compared to $8.9 million for 2003. This increase in net interest income can be attributed to an increase in interest income of approximately $1.1 million, offset partially by a increase in interest expense of $44,000.

Interest income. Interest income increased $1.1 million or 7.4% to $15.7 million for 2004, compared to $14.6 million for 2003. This increase in interest income can be attributed to a increase in interest earned on loans receivable of $771,000 and interest earned on securities of $322,000.

Interest earned on loans receivable increased $771,000 or 6.0% to $13.6 million for 2004, compared to $12.8 million for 2003. This increase was primarily attributable to a increase in the average balance of loans outstanding of $20.5 million or 11.2% to $204.2 million for the year ended December 31, 2004 as compared to $183.7 million for the year ended December 31, 2003. An offset to the growth was a decline in the yield on loans to 6.67% for 2004, compared to 6.99% for 2003.

Interest earned on securities increased $322,000 or 19.1% to $2.0 million for 2004, compared to $1.7 million for 2003. This increase was primarily attributable to an increase in the average balance of securities of $9.4 million to $54.4 million for the year ended December 31, 2004 as compared to $45.0 million for the year ended December 31, 2003.

Interest expense. Interest expense increased slightly by $44,000 or less than 1% to $5.8 million for 2004, compared to $5.7 million for 2003. This increase in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities of $23.1 million to $220.6 million for the year ended December 31, 2004 as compared to $197.5 million for the year ended December 31, 2003. Interest incurred on deposits stayed the same at $4.9 million for both 2004 and 2003. This lack of change was due to a shift in deposit growth from certificates to lower cost savings and demand deposit accounts along with an 11.7% increase in average interest-bearing liabilities. Interest incurred on FHLB advances, repurchase agreements and other borrowings increased $44,000 or 5.4% to $863,000 for 2004, compared to $819,000 million for 2003. This slight increase was primarily attributable to an increase in the average balance of FHLB advances.

Loan Loss Provision — The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses was $174,000 in 2004 as compared to $315,000 in 2003. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of nonperforming loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management’s judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations. The change in the loan loss provision in 2004 was principally a result of an increase in loan volume during the year.

Noninterest income. Noninterest income increased $351,000 or 24.6% to $1.8 million for 2004, compared to $1.4 million for 2003. This increase can be attributed to increases in fees and service charges of $368,000 and the earnings on bank-owned life insurance of $20,000. Partially offsetting these increases were the net realized loss on sales of securities available for sale of $98,000.

Fees and service charges increased $368,000 or 35.6% to $1.4 million for 2004, compared to $1.0 million for 2003. This increase resulted from the Company introducing a new overdraft service in the second quarter of 2004.

Noninterest expense. Noninterest expenses increased $860,000 or 14.1% to $7 million for 2004, compared to $6.1 million for 2003. The growth can be attributed to increases in salaries and employee benefits, occupancy and advertising expense which, increased $357,000, $91,000 and $85,000 respectively.

Compensation and employee benefits expense increased $357,000 or 11.6% to $3.4 million for 2004, compared to $3.1 million for 2003. This increase can be attributed to increases to payroll expenses, the cost of health benefits and profit sharing expenses of $224,000, $54,000 and $49,000, respectively.

Data processing expense increased $68,000 or 14.5% to $538,000 for 2004, compared to $470,000 for 2003. The increase to data processing expense is a reflection of the Company’s commitment to continually improve technology in order to enhance service to its customer base.

Occupancy expense increased $91,000 or 22.6% to $495,000 for 2004, compared to $404,000 for 2003. The increased occupancy expense was due in part to increased utility costs as well as leasehold improvements to the Mantua facility.

Advertising expense increased $85,000 or 50.4% to $254,000 for 2004, compared to $169,000 for 2003. The increase in Advertising was due to the Company’s commitment to enhance the marketing budget for Bank promotions.

Other expenses increased $165,000 or 16.5% to $1.2 million for 2004, compared to $1.0 million for 2003. The increase to other noninterest expense is a result in part to the rising cost of examination and auditing expense brought about by the continuing regulatory burdens on the banking industry.

Provision for Income Taxes. The provision for income taxes increased $199,000 or 17.6% to $1.3 million for 2004, compared to $1.1 million for 2003. This increase was primarily the result of an increase in income before income taxes $673,000 or 17.1% to $4.6 million for 2004, compared to $3.9 million for 2003.

2003 Results Compared to 2002 Results

General. For the fifth year in a row your Company posted record earnings. Middlefield recorded net income of $2.8 million in 2003, which represents an increase of $300,000, or 11.92%, over 2002. Net income for 2002 of $2.5 million represented an increase of $230,000, or 10.1%, over 2001. Diluted earnings per share have increased each of the past two years to $2.18 per share for 2003 and $1.95 per share for 2002.

Net Interest Income — Net interest income for 2003 increased to $8.9 million, compared to $8.0 million for 2002. Interest income for 2003 was $14.6 million as compared to $14.1 million for 2002. This increase of $527,000 or 3.7% was influenced primarily by an increase in interest earned on loans receivable of $506,000, while offset by decreases in interest earned on interest-bearing deposits in other institutions, and federal funds sold, of $31,000, and $16,000 respectively. Although the 2003 rate environment was characterized by lower interest rate yields, 2003’s increase in interest income was driven by increases in average balances of interest-earning assets. The average balance of loans receivable and investment securities increased $19.9 million to $183.7 million and $9.8 million to $45.0 million, respectively, during 2003. The tax-equivalent yield on interest earning assets decreased to 6.32% for 2003 from 6.99% for 2002, and primarily resulted from a 91 basis point and 54 basis point decrease in investment securities and loans receivable, respectively. During 2003, $22.5 million in called, sold, and re-payed investment securities were reinvested at substantially lower rates. The inflow of deposits coupled with the rapid repayment of mortgage-backed securities has resulted in reinvestment options at substantially lower rates than the previous year. The lower interest rate environment resulted when interest rates were driven downward by an aggressive rate reduction policy by the Federal Reserve Board over the past few years.

Interest expense decreased $423,000 or 6.9% for 2003 to $5,725,000 from $6,148,000 for 2002. Interest expense incurred on deposits decreased $572,000 for 2003 as compared to 2002 and was primarily attributable to the current interest rate environment that resulted in a lowering of the cost of funds to 2.90% for 2003 as compared to 3.68% for 2002. Offsetting the declining rates was an increase in the average balance of interest-bearing liabilities of $30.4 million to $197.5 million for 2003. In particular, the average balance of savings and certificates of deposits increased $11.4 million and $8.7 million, respectively. Core deposit growth also was driven by a general shift in customer preference away from the equity markets and into insured bank deposits. Although the Bank reduced its costs on all deposit products during 2003, certificates of deposits were the primary target as such costs decreased by 89 basis points. Interest expense on borrowings increased to $819,000 for 2003 as compared to $670,000 for 2002 and resulted primarily from an additional $5.4 million in borrowings with the Federal Home Loan Bank in 2003. The Company borrowed from the FHLB in varying maturities at an average rate of 2.9% to lock into what management believes to be a low cost of funds.

Loan Loss Provision — The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses was $315,000 in 2003 as compared to $300,000 in 2002. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of nonperforming loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management’s judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations. The change in the loan loss provision in 2003 was principally a result of an increase in net charge-offs to average loans during the year.

Noninterest Income. Noninterest income is made up of bank related fees and service charges, as well as other income-producing services. These include ATM/interchange income, safe deposit box rental income and other miscellaneous items. In addition the bank invested in Bank Owned Life Insurance (BOLI) in 2003. The earnings from this investment are reflected in the Company’s noninterest income. Total noninterest income increased 25% in 2003 to $1.4 million from $1.1 million for 2002. The increase is accounted for principally by the income from the purchase of bank owned life insurance (BOLI) of $202,000 in 2003. An increase in fee income from deposit accounts also contributed significantly to 2003’s increased noninterest income. Deposit account service fees have progressively increased as the number of accounts and volume of related transactions have increased.

Transaction deposit accounts grew at a steady pace in 2003 and 2002. In general, management prices deposits at rates competitive with rates offered by the other banks in Middlefield’s market, which rates tend to be somewhat lower than rates offered by thrift institutions and credit unions. Middlefield generally has not imposed service charges and fees to the same extent as other local institutions. Although a wider range of service charges and fees and higher service charges and fees would yield more income for each dollar of deposits, imposing service charges and fees on a basis equivalent to those imposed by many other area banks might adversely affect deposit growth. To promote deposit growth and provide cross-selling opportunities, Middlefield has not adopted the most aggressive fee structure. Deposit growth is generated by developing strong customer relationships and cross-selling deposit relationships to loan customers. Management intends to continue promoting demand deposit products, particularly noninterest-bearing deposit products, in order to obtain additional interest-free lendable funds.

Noninterest Expense —Noninterest expense increased 17.3% to $6.1 million for 2003 as compared to $5.2 million for 2002. Compensation and employee benefits increased $562,000, or 22.3%, primarily as a result of normal merit raises and the establishment of an employee profit sharing plan Occupancy and equipment expenses increased 8.0% or $55,000 as a result of added capital expenditures in prior years. As a result of increased transaction activity from operating a larger organization, data processing expenses increased $43,000 or 10.1% during 2003 as compared to 2002. In addition, all other expenses increased $239,000 or 15.2%. A large part of this increase of $104,000 was due to an enhanced marketing budget in 2003 to promote the bank’s new look and logo. Increases in other expense also included operating expenses that resulted from expanding into a larger organization.

Provision for Income Taxes. The provision for income taxes fluctuated in 2003, 2002, and 2001 in direct correlation to the changing level of pre-taxable income during these periods. The purchase BOLI did not materially alter the effective marginal tax rate

Asset and Liability Management

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of its interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in strong asset/liability management in order to insulate the Company from material and prolonged increases in interest rates. As a result of this policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans in the form of mortgage-backed securities. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company.

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management.. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies, which were implemented by the Company over the past few years.

Interest Rate Sensitivity Simulation Analysis

The Company utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Asset and Liability Management Committee of the Company believes that simulation modeling enables the Company to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve and different loan and mortgage-backed security prepayment and deposit decay assumptions under various interest rate scenarios.

Earnings simulation modeling, assumptions about the timing and variability of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across the different rate risk measures.

The Company has established the following guidelines for assessing interest rate risk:

Net interest income simulation. Given a 200 basis point parallel gradual increase or decrease in market interest rates, net interest income may not change by more than 10% for a one-year period.

Portfolio equity simulation. Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity.

The following table presents the simulated impact of a 200 basis point upward or downward shift of market interest rates on net interest income, and the change in portfolio equity. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2004 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the December 31, 2004 levels for net interest income, and portfolio equity The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2004 for portfolio equity:

	Increase			Decrease
	+200			-200
	BP			BP
Net interest income - increase (decrease)		7.67	%		(9.23	)%
Portfolio equity - increase (decrease)		(6.97	)%		.20	%

Allowance for Loan Losses. The allowance for loan losses represents the amount management estimates is adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. At December 31, 2004, Middlefield’s allowance for loan losses increased to $2.6 million from $2.5 million at December 31, 2003, and now represents 1.22% of the gross loan portfolio as compared to 1.30% for the previous period. The allowance for loan losses is established through a provision for loan losses, which is charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan losses, taking into account the overall risk characteristics of the various portfolio segments, the bank’s loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a formula allowance, and an unallocated allowance.

The specific allowance incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (“FAS”) No. 114, Accounting by Creditors for Impairment of a Loan, and FAS No. 118, Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures. These accounting standards prescribe the measurement methods, income recognition and disclosures for impaired loans. The formula allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio, and consideration of historical loss experience.

The unallocated allowance is determined based upon management’s evaluation of existing economic and business conditions affecting the key lending areas of the bank and other conditions, such as new loan products, credit quality trends, collateral values, specific industry conditions within portfolio segments that existed as of the balance sheet date, and the impact of those conditions on the collectibility of the loan portfolio. Management reviews these conditions quarterly. The unallocated allowance is subject to a higher degree of uncertainty because it considers risk factors that may not be reflected in the historical loss factors.

Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses was adequate at December 31, 2004, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy and employment could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review a bank’s loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

The following table sets forth information concerning the Middlefield’s allowance for loan losses at the dates and for the periods presented.

	For the Years Ended
	December 31,
	2004			2003			2002
	(Dollars in thousands)
Allowance balance at beginning of period	$	2,521		$	2,300		$	2,062
Loans charged off:
Commercial and industrial		-61			-75			-67
Real estate-construction
Real estate-mortgage:
Residential		—			-32			—
Commercial		—			—			—
Consumer installment		-57			-37			-52
Total loans charged off		-118			-144			-119
Recoveries of loans previously charged-off:
Commercial and industrial		27			28			24
Real estate-construction		—			—			—
Real estate-mortgage:		—			—			—
Residential		3			—			—
Commercial		—			—			—
Consumer installment		16			22			33
Total recoveries		46			50			57
Net loans recovered (charged off)		-72			-94			-62
Provision for loan losses		174			315			300
Allowance balance at end of period	$	2,623		$	2,521		$	2,300
Loans outstanding:
Average	$	204,191		$	183,683		$	163,828
End of period		215,653			192,880			174,943
Ratio of allowance for loan losses to loans outstanding at end of period		1.22	%		1.31	%		1.31
Net recoveries (charge offs) to average loans		-0.04			-0.05			-0.04

The following table illustrates the allocation of Middlefield’s allowance for probable loan losses for each category of loan for each reported period. The allocation of the allowance to each category is not necessarily indicative of future loss in a particular category and does not restrict our use of the allowance to absorb losses in other loan categories.

	At December 31,
	2004					2003					2002
			Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars in Thousands)
Type of Loans:
Commercial and industrial	$	1,139		24.10	%	$	568		21.81	%	$	611		18.82
Real estate construction		31		1.79			32		1.78			38		1.83
Mortgage:
Residential		1,019		68.36			844		69.48			888		70.79
Commercial		145		3.16			228		4.08			230		5.44
Consumer installment		123		2.70			120		2.85			124		3.12
Unallocated		166		—			435		—			409		—
Total	$	2,623		100	%	$	2,227		100	%	$	2,300		100

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Payments received on nonaccrual loans are recorded as income or applied against principal according to management’s judgment as to the collectibility of principal.

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the bank expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Management evaluates all loans identified as impaired individually. The bank estimates credit losses on impaired loans based on the present value of expected cash flows, or the fair value of the underlying collateral if loan repayment is expected to come from the sale or operation of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until that time, an allowance for loan losses is maintained for estimated losses.

Unless otherwise required by the loan terms, cash receipts on impaired loans are applied first to accrued interest receivable, except when an impaired loan is also a nonaccrual loan, in which case the portion of the payment related to interest is recognized as income.

Nonperforming loans as a percentage of total net loans at December 31, 2004 increased to 0.68% from 0.26% for

2003. The bank had nonaccrual loans of $279,000 and $372,000 at December 31, 2004 and 2003, respectively. Interest income recognized on nonaccrual loans during all of the periods was insignificant. Management does not believe the nonaccrual loans or any amounts classified as nonperforming had a significant effect on operations or liquidity in 2004. Furthermore, management is not aware of any trends or uncertainties related to any loans classified as doubtful or substandard that might have a material effect on earnings, liquidity, or capital resources. Management is not aware of any information pertaining to material credits that would cause it to doubt the ability of borrowers to comply with repayment terms.

The following table summarizes nonperforming assets by category.

	At December 31,
	2004			2003			2002
	(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial	$	—		$	—		$	—
Real estate-construction		—			—			—
Real estate-mortgage:								—
Residential		279			372			357
Commercial		—			—			—
Consumer installment		—			—			—
Total nonaccrual loans		279			372			357
Accruing loans which are contractually past due 90 days or more:
Commercial and industrial		239			4			30
Real estate-construction		—			—			—
Real estate-mortgage:		—			—			—
Residential		722			114			144
Commercial		209			—			—
Consumer installment		25			19			7
Total accruing loans which are contractually past due 90 days or more		1,195			137			181
Total non - performing loans		1,474			509			538
Real estate owned		—			—			—
Other non-performing assets		—			—			—
Total non-performing assets	$	1,474		$	509		$	538
Total non-performing loans to total loans		0.68	%		0.26	%		0.31	%
Total non-performing loans to total assets		0.51	%		0.19	%		0.24	%
Total non-performing assets to total assets		0.51	%		0.19	%		0.24	%

(1)	Represents accruing loans delinquent greater than 90 days that are considered by management to be well secured and that are
in the process of collection.

Liquidity and Capital Resources

Liquidity. Liquidity management for Middlefield is measured and monitored on both a short- and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to Middlefield. Both short- and long-term liquidity needs are addressed by maturities and sales of investments securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provide the core ingredients for satisfying depositor, borrower, and creditor needs.

Middlefield’s liquid assets consist of cash and cash equivalents, which include investments in very short-term investments (i.e. federal funds sold), and investment securities classified as available for sale. The level of these assets is dependent on Middlefield’s operating, investing, and financing activities during any given period. At December 31, 2004, cash and cash equivalents totaled $5.3 million or 1.8% of total assets while investment securities classified as available for sale totaled $57.2 million or 19.7% of total assets. Management believes that the liquidity needs of Middlefield are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable Middlefield to meet cash obligations and off-balance sheet commitments as they come due.

Operating activities provided net cash of $4.0 million, $3.5 million, and $3.2 million for 2004, 2003, and 2002, respectively, generated principally from net income of $3.3 million, $2.8 million, and $2.5 million in each of these respective periods.

Investing activities consist primarily of loan originations and repayments and investment purchases and maturities. These cash usages primarily consisted of loan originations of $22.7 million, as well as investment purchases of $27.6 million. Partially offsetting the usage of investment activities is $21.4 million of proceeds from investment security maturities, sales and repayments. For the same period ended 2003, investing activities used $34.1 million in funds, principally for the net origination of loans and the purchase of investment securities of $17.9 million and $32.9 million, respectively. During the same period ended 2002, cash usages primarily consisted of loan originations of $22.1 million, as well as investment purchases of $24.4 million.

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, treasury stock activity, and the payment of dividends. During 2004, net cash provided by financing activities totaled $25.7 million, principally derived from an increase in deposit accounts in general, and savings deposits specifically. Also contributing to this influx of cash was proceeds from other borrowings of $6.0 million. During 2003, net cash provided by financing activities totaled $33.4 million, principally derived from an increase in deposit accounts. During the same period ended 2002, net cash provided by financing activities was $25.6 million, principally derived from an increase in deposit accounts.

Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on Middlefield’s commitment to make loans, as well as management’s assessment of Middlefield’s ability to generate funds. Middlefield anticipates that it will have sufficient liquidity to satisfy estimated short-term and long-term funding needs.

Capital Resources. Middlefield’s primary source of capital has been retained earnings. Historically, Middlefield has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to not only ensure compliance with regulations, but also to ensure capital adequacy for future expansion.

Middlefield is subject to federal regulations imposing minimum capital requirements. Management monitors both Middlefield’s and the Bank’s Total risk-based, Tier I risk-based and Tier I leverage capital ratios to assess

compliance with regulatory guidelines. At December 31, 2004, both Middlefield and the Bank exceeded the minimum risk-based and leverage capital ratio requirements. Middlefield’s Total risk-based, Tier I risk-based and Tier I leverage ratios were 14.28%, 13.04%, and 8.51%, and the Bank’s were 14.28%, 13.02%, and 8.51%, respectively, at December 31, 2004.

The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments.

Contractual Obligations:

Contractual Obligations

The following table discloses our contractual obligations and commitments as of December 31, 2004:

			Less Than						After
	Total		1 Year		1 - 3 Years		4 - 5 Years		5 Years
	(Dollars in thousands)
Short-term borrowings	$	1,872	$	1,872	$	—	$	—	$	—
Federal Home Loan Bank advances		23,683		3,999		7,060		8,444		4,180
Total	$	25,555	$	5,871	$	7,060	$	8,444	$	4,180

	Total
	Amounts		Less Than						After
	Committed		1 Year		1 - 3 Years		4 - 5 Years		5 Years
	(Dollars in thousands)
Standby letters of credit	$	223	$	223	$	—	$	—	$	—
Other commitments to extend credit (1)		33,925		33,925		—		—		—
Total	$	34,148	$	34,148	$	—	$	—	$	—

(1) Represents amounts committed to customers.

Commitments to extend credit, include loan commitments, standby letters of credit and do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

     Market for Middlefield’s Common Equity and Related Stockholder Matters

Middlefield had approximately 787 stockholders of record as of February 17, 2005. There is no established market for Middlefield common stock. The stock is traded very infrequently. Bid prices are quoted from time to time on the National Quotation Bureau’s “pink sheets” under the symbol “MBCN.” The following table shows the high and low bid prices of and cash dividends paid on Middlefield common stock in 2004 and 2003, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or commissions, and does not necessarily represent actual transactions.

					Cash Dividends
	High Bid		Low Bid		per share
2004
First Quarter	$	30.707	$	30.581	$	0.200
Second Quarter	$	31.390	$	30.829	$	0.200
Third Quarter	$	33.880	$	33.676	$	0.210
Fourth Quarter	$	35.836	$	35.815	$	0.220
2003
First Quarter	$	27.665	$	24.943	$	0.182
Second Quarter	$	28.118	$	26.304	$	0.182
Third Quarter	$	28.617	$	27.220	$	0.190
Fourth Quarter	$	29.524	$	27.643	$	0.200

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Registration Statement of Middlefield Banc Corp. on Form S-8 of our report dated January 14, 2005 appearing in the Annual Report on Form 10K of Middlefield Banc Corp. for the year ended December 31, 2004.

/s/ S.R. Snodgrass, A.C.  

S.R. Snodgrass, A.C. 

Wexford, Pennsylvania
March 22, 2005

30

EX-31.1

Exhibit 31.1

302
Certification of Principal Executive Officer

I, Thomas G. Caldwell, certify that:

1. I have reviewed this Form 10-K for the year ended December 31, 2004 of Middlefield Banc Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [intentionally omitted]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: 3/22/05	/s/ Thomas G. Caldwell
	Thomas G. Caldwell
	President

EX-31.2

Exhibit 31.2

302
Certification of Principal Financial and Accounting Officer

I, Donald L. Stacy, certify that:

1. I have reviewed this Form 10-K for the year ended December 31, 2004 of Middlefield Banc Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [intentionally omitted]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: 3/22/05	/s/ Donald L. Stacy
	Donald L. Stacy
	Principal Financial and Accounting Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Middlefield Banc Corp. (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Thomas G. Caldwell, President ,and Donald L. Stacy, Chief Financial Officer, certify, pursuant to 18 U.S.C. ‘ 1350, as adopted pursuant to ‘ 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  Thomas G. Caldwell	/s/ Donald L. Stacy
Thomas G. Caldwell	Donald L. Stacy
President	Principal Financial and Accounting Officer

March 22, 2005

A signed original of this written statement required by Section 906 has been provided to Middlefield Banc Corp. and will be retained by Middlefield Banc Corp. and furnished to the Securities and Exchange Commission or its staff upon request