10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2019
	or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ___________ .

Commission file number 001-36613

Middlefield Banc Corp.

(Exact Name of Registrant as Specified in its Charter)

Ohio	34-1585111
State or Other Jurisdiction of	I.R.S. Employer Identification No.
Incorporation or Organization
15985 East High Street, Middlefield, Ohio	44062-0035
Address of Principal Executive Offices	Zip Code

	440-632-1666
Registrant’s Telephone Number, Including Area Code

Securities Registered Pursuant To Section 12(b) Of The Act:
Title of Each Class	MBCN	Name of Each Exchange on Which Registered
Common Stock, Without Par Value	Trading Symbol	The NASDAQ Stock Market, LLC
		(NASDAQ Capital Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒ 

The aggregate market value on June 30, 2019 of common stock held by non-affiliates of the registrant was approximately $123.9 million, based on the closing price of $20.50 per share of common stock as reported on the NASDAQ Capital Market. As of March 4, 2020, there were 6,427,667 shares of common stock issued and outstanding.

Documents Incorporated by Reference      Portions of the registrant’s definitive proxy statements for the 2020 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, 2019 are incorporated by reference into Part I and Part II of this report.

MIDDLEFIELD BANC CORP.

YEAR ENDED DECEMBER 31, 2019

INDEX TO FORM 10-K

		Page
Part I
Item 1.	Business	3
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Mine Safety Disclosures	28
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
Item 9A.	Controls and Procedures	29
Item 9B.	Other Information	29
Part III
Item 10.	Directors, Executive Officers, and Corporate Governance	29
Item 11.	Executive Compensation	29
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29
Item 13.	Certain Relationships and Related Transactions, and Director Independence	29
Item 14.	Principal Accountant Fees and Services	29
Part IV
Item 15.	Exhibits and Financial Statement Schedules	30
Item 16.	Form 10-K Summary	34
SIGNATURES

2

Part I

Item 1 — Business

Forward-looking Statements This document contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) about the Company and subsidiaries. Information incorporated in this document by reference, future filings by the Company on Form 10-Q and Form 8-K, and future oral and written statements by the Company 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 the Company and subsidiaries and the perceived overall value of these products and services by customers, including the features, pricing, and quality compared to competitors’ products and services

• the willingness of customers 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 the Company cannot give any assurance that its beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. The Company 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.

Middlefield Banc Corp. Incorporated in 1988 under the Ohio General Corporation Law, Middlefield Banc Corp. (“Company”) is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s subsidiaries are:

1.     The Middlefield Banking Company (“MBC”, or the “Bank”), an Ohio-chartered commercial bank that began operations in 1901. MBC engages in a general commercial banking business in northeastern and central Ohio. MBC’s principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-0035, and the telephone number is (440) 632-1666.

2.     EMORECO Inc., an Ohio asset resolution corporation headquartered in Middlefield, Ohio. EMORECO exists to resolve and dispose of troubled assets. EMORECO’s principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-0035.

The Company makes available free of charge on its Internet website, www.middlefieldbank.bank, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

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

Engaged in general commercial banking in northeastern and central Ohio, MBC offers these services principally to small and medium-sized businesses, professionals, small business owners, and retail customers. MBC has developed a marketing program to attract and retain consumer accounts and to match banking services and facilities with the needs of customers.

3

MBC’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 and mortgage loans, and consumer installment loans to make home improvements and to purchase automobiles, boats, and other personal expenditures. Although the Bank makes agricultural loans, the amount of agricultural loans in the Bank’s loan portfolio is not significant.

On March 13, 2019, MBC established a wholly owned subsidiary named Middlefield Investments, Inc. (MI), headquartered in Middlefield, Ohio. This operating subsidiary exists to hold and manage an investment portfolio. At December 31, 2019, MI’s assets consist of a cash account, investments and related accrued interest accounts. MI may only hold and manage investments, and may not engage in any other activity without prior approval of the Ohio Division of Financial Institutions. All significant intercompany items have been eliminated between MBC and this subsidiary.

EMORECO Organized in 2009 as an Ohio corporation under the name EMORECO, Inc. and wholly owned by the Company, the purpose of the asset resolution subsidiary is to maintain, manage, and dispose of nonperforming loans and other real estate owned (“OREO”) acquired by the subsidiary bank as the result of borrower default on real estate-secured loans. At December 31, 2019, EMORECO’s assets consist of one cash account. According to Federal law governing bank holding companies, real estate must be disposed of within two years of acquisition, although limited extensions may be granted by the Federal Reserve Bank. A holding company subsidiary has limited real estate investment powers. EMORECO may only manage and maintain property and may not improve or develop property without advance approval of the Federal Reserve Bank.

Market Area MBC’s footprint is home to 3.8 million people, or roughly one third of the Ohio population. MBC’s product offering is geared toward traditional banking business delivered to both consumers and businesses located in its footprint of Northeast Ohio and the Columbus metro area. MBC’s current strategy is aimed at using a strong deposit relationship in the more rural markets of Northeast Ohio to fund loan growth and build scale in its newer metro markets of Cleveland/Akron and Columbus. Columbus is in Franklin County and Cleveland is in Cuyahoga County. Franklin County is Ohio’s most populous county and Cuyahoga County is Ohio’s second-most populous county.

MBC’s eleven Northeast Ohio branches are located in Cuyahoga, Geauga, Lake, Portage, Summit, Trumbull, and Ashtabula Counties. The economy of MBC’s Northeast Ohio market is centered around manufacturing and agriculture and includes a large Amish population. MBC’s main branch and three additional branches are located in Geauga County. Geauga County is the center of the 4th largest Amish population in the world. With a median family income of $94,654, Geauga County is ranked third highest among Ohio’s 88 counties.

MBC’s market area in Northeast Ohio benefits from the area’s proximity to Cleveland. The Cleveland metro area’s real personal income per capita is more than $5,200 greater than Ohio’s income per capita. The Cleveland MSA has a population of 2.1 million (2.8 million including Akron).

MBC’s offices in Beachwood and Solon, in Cuyahoga County, are located in two of the top twenty highest ranked cities in Ohio based upon median family income. Beachwood in eastern Cuyahoga County is suburban Cleveland’s premier commercial and financial center. Home to almost 3,000 companies, there is a high concentration of small businesses and affluent individuals in Beachwood. Beachwood’s 12,000 residents have a median household income of $88,287. 52% of the adult residents in Beachwood have at least a bachelor’s degree and 62% are in executive, managerial and professional positions. According to reliable third-party information, there are approximately 30,000 small businesses in Cuyahoga County.

Located in Central Ohio, Columbus is the state capital and largest city in Ohio. The Columbus metro area has experienced strong population growth since 2007, with a 1.2 percent average annual rate compared to 0.1 percent in Ohio and 0.8 percent nationally. According to the U.S. Census Bureau, Columbus saw the eleventh largest numeric population increase between July 1, 2017 and July 1, 2018 in the U.S. – making Columbus the only city in the Midwest on the top 15 list. The Columbus metro area’s real personal income per capita is approximately $3,200 greater than Ohio’s income per capita. The unemployment rate in the Columbus metro area is lower than the state and national rates and reached an 18-year low of 3.3 percent in June 2019. The employment growth rate for the Columbus metro area is faster than Ohio’s growth, responsible for 1 in every 3 new jobs in Ohio. Construction continues to be the fastest-growing sector in the Columbus metro area, as it has been since 2015. Government hiring surged in the 12 months through March 2019 and the financial activities sector, an area in which the Columbus area is specialized relative to the state or nation, is also growing steadily. Per capita income in the Columbus metro area continues to be above the statewide level for Ohio.

MBC’s five central Ohio branches are located in Dublin and Westerville, of Franklin County, Sunbury and Powell, of Delaware County, and Plain City, of Madison County. According to the U.S. Census Bureau, Delaware County is the fastest growing county in Ohio. Based upon the U.S. Census Bureau’s 2014-2018 American Community Survey 5-Year Estimates, Delaware, Madison, and Franklin counties are the first, seventeenth and twentieth highest ranked counties, respectively, among Ohio’s 88 counties based upon median family income. Powell and Dublin are the fourth and fifth highest ranked cities, respectively, in Ohio based upon median family income. A city of more than 47,000 residents located just northwest of Columbus, Ohio, Dublin is home to more than 20 corporate headquarters, an entrepreneurial center, and 4,300+ businesses. Dublin is also home to Ohio’s largest corporation, Cardinal Health – 21 on the Fortune 500 list – and Dublin is headquarters of the Wendy’s Company.

MBC is not dependent upon any one significant customer or specific industry. Business is not seasonal to any material degree.

4

Lending — Loan Portfolio Composition and Activity. The Bank makes residential and commercial mortgage, home equity, secured and unsecured consumer installment, commercial and industrial, and real estate construction loans for owner-occupied and income producing properties. The Bank’s Credit Policy aspires to a loan composition mix consisting of approximately 25% to 50% consumer purpose transactions including residential real estate loans, home equity loans and other consumer loans. The Policy is also designed to provide for 55% to 70% of total loans as business purpose commercial loans and business and consumer credit card accounts of up to 5% of total loans.

Lending Limit Although Ohio law imposes no material restrictions on the types of loans the Bank may make, real estate-based lending has historically been the Bank’s primary focus. For prudential reasons, we avoid lending on the security of real estate located outside our market area. Ohio law does restrict the amount of loans an Ohio-chartered bank may make, generally limiting credit to any single borrower to less than 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 lending. We can accommodate loan volumes exceeding the legal lending limit by selling loan participations to other banks. As of December 31, 2019, MBC’s 15%-of-capital limit on loans to a single borrower was approximately $19.3 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 portion of the Bank’s commercial loans is 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 purposes 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 on a consolidated basis the composition of the loan portfolio along with a reconciliation to loans receivable, net.

	Loan Portfolio Composition at December 31,
(Dollars in thousands)	2019		2018		2017		2016		2015
Type of loan:
Commercial and industrial	$	89,527	$	83,857	$	101,346	$	60,630	$	42,536
Real estate - construction		63,246		56,731		47,017		23,709		22,137
Real estate - mortgage:
Residential		347,047		336,487		318,157		270,830		232,478
Commercial		470,027		498,247		437,947		249,490		231,701
Consumer installment		14,411		16,787		18,746		4,481		4,858
Total loans		984,258		992,109		923,213		609,140		533,710
Less:
Allowance for loan and lease losses		6,768		7,428		7,190		6,598		6,385
Net loans	$	977,490	$	984,681	$	916,023	$	602,542	$	527,325

The following table presents consolidated maturity information for the loan portfolio. 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, 2019
	Commercial				Real Estate -
	and		Real Estate -		Mortgage
(Dollars in thousands)	Industrial		Construction		Commercial		Total
Amount due:
In one year or less	$	18,919	$	5,126	$	16,648	$	40,693
After one year through five years		38,130		8,792		108,010		154,932
After five years		32,478		49,328		345,369		427,175
Total amount due	$	89,527	$	63,246	$	470,027	$	622,800

5

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

The following table shows on a consolidated basis the dollar amount of all loans due after December 31, 2019 that have predetermined interest rates and the dollar amount of all loans due after December 31, 2019 that have floating or adjustable rates.

	Fixed		Adjustable
	Rate		Rate		Total
(Dollars in thousands)
Commercial and industrial	$	44,748	$	44,779	$	89,527
Real estate - construction		6,351		56,895		63,246
Real estate - mortgage:
Commercial		144,397		325,630		470,027
	$	195,496	$	427,304	$	622,800

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 Franklin, Geauga, Portage, Trumbull, Summit, Cuyahoga, Delaware, Madison, and Ashtabula counties. Residential mortgage loans approximated $347.0 million or 35.3% of the Bank’s total loan portfolio at December 31, 2019.

The Bank makes loans of up to 80% of the value of the real estate and improvements securing a loan (“LTV” ratio) on 1-4 family real estate. The Bank generally does not lend in excess of the lower of 80% of the appraised value or sales price of the property. The Bank offers residential real estate loans with terms of up to 30 years.     

Approximately 90.2% of the portfolio of conventional mortgage loans secured by 1-4 family real estate at December 31, 2019 is adjustable rate. Generally, the Bank originates fixed-rate, single-family mortgage loans in conformity with Freddie Mac guidelines that are saleable to Freddie Mac. These loans are sold with servicing rights retained, and are sold in furtherance of the Bank’s goal of better matching the maturities and interest rate sensitivity of its assets and liabilities. The Bank generally retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax payments on behalf of borrowers and otherwise servicing the loans it sells and receives a fee for performing these services. Sales of loans also provide funds for additional lending and other purposes.

The Bank’s home equity credit policy generally allows for a loan of up to 85% of a property’s appraised value (and up to 89% for qualifying properties or borrowers), less the principal balance of the outstanding first mortgage loan. The Bank’s home equity loans generally have terms of 20 years.

At December 31, 2019, residential mortgage loans of approximately $3.3 million were non-accruing or 90 days or more delinquent and accruing on that date, representing 0.9% of the residential mortgage loan portfolio. At December 31, 2018, residential mortgage loans of approximately $3.5 million were over 90 days delinquent or non-accruing on that date, representing 1.0% of the residential mortgage loan portfolio.

Commercial and Industrial Loans and Commercial Real Estate Loans 

The Bank’s commercial loan services include:

•	accounts receivable, inventory and	•	short-term notes
	working capital loans	•	selected guaranteed or subsidized loan programs
•	renewable operating lines of credit		for small businesses
•	loans to finance capital equipment	•	loans to professionals
•	term business loans	•	commercial real estate loans
•	demand lines of credit

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 are loss of income of the owner or lessee of the property and the inability of the market to sustain rent levels. Although commercial and commercial real estate loans generally bear more risk than single-family residential mortgage loans, they tend to be higher yielding, have shorter terms and provide for interest-rate adjustments. 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 composed strictly of residential real estate mortgage loans.

6

Although a risk of nonpayment exists for all loans, certain specific 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 cash flow sufficient to repay the loan. The Bank’s Credit Policy provides that commercial loan applications must be supported by documentation indicating 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 required for business purpose relationships of $500,000 or more. Ongoing financial information is generally required for any commercial relationship where the exposure is $250,000 or more.

The fair value of collateral for collateralized commercial loans must exceed the Bank’s exposure. For this purpose, fair value is determined by independent appraisal or by the loan officer’s estimate employing guidelines established by the Credit Policy. Loans not secured by real estate generally have terms of five years or fewer, unless guaranteed by the U.S. Small Business Administration or other governmental agency, and term loans secured by collateral having a useful life exceeding five years may have longer terms. The Bank’s Credit Policy allows for terms of up to 20 years for loans secured by commercial real estate, and one year for business lines of credit. The maximum LTV ratio for commercial real estate loans is 80% 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 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, 2019, commercial and commercial real estate loans totaled $559.6 million, or 56.9% of the Bank’s total loan portfolio. At December 31, 2019, commercial and commercial real estate loans of approximately $5.4 million were non-accruing or 90 days or more delinquent and accruing on that date, and represented 1.0% of the commercial and commercial real estate loan portfolios. At December 31, 2018, commercial and commercial real estate loans totaled $582.1 million, or 58.7% of the Bank’s total loan portfolio. At December 31, 2018, commercial and commercial real estate loans of approximately $4.1 million were over 90 days delinquent or non-accruing on that date, and represented 0.7% of the commercial and commercial real estate loan portfolios.

Real Estate Construction 

The Bank 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.

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 Credit Policy provides that the Bank may make construction loans with terms of up to one year, with a maximum LTV ratio for residential construction of 80%. The Bank also offers residential construction-to-permanent loans that have a twelve-month construction period followed by 30 years of permanent financing.

At December 31, 2019, real estate construction loans totaled $63.2 million, or 6.4% of the Bank’s total loan portfolio. There were no real estate construction loans 90 days delinquent or non-accruing on that date. At December 31, 2018, real estate construction loans totaled $56.7 million, or 5.7% of the Bank’s total loan portfolio. There were no real estate construction loans 90 days delinquent or non-accruing on that date.

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 Credit 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 three years. Real estate security generally is required for consumer loans having terms exceeding five years.

At December 31, 2019, the Bank had approximately $14.4 million in its consumer installment loan portfolio, representing 1.5% of total loans. At December 31, 2019, consumer installment loans of approximately $197,000 were non-accruing or 90 days or more delinquent and accruing on that date, and represented 1.4% of the consumer installment loan portfolio. At December 31, 2018, the Bank had approximately $16.8 million in its consumer installment loan portfolio, representing 1.7% of total loans. At December 31, 2018, consumer installment loans of approximately $4,000 were non-accruing or 90 days or more delinquent and accruing on that date, and represented 0.0% of the consumer 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.

7

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 of Directors. The Credit Policy specifies each individual officer’s loan approval authority. Loans exceeding an individual officer’s approval authority are submitted to an Officer’s Loan Committee, which has authority to approve loans up to $3,000,000. The Board of Directors’ Loan Committee acts as an approval authority for exposures over $3,000,000 and up to $6,000,000. Loans exceeding $6,000,000 require approval from the full Board of Directors.

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.

Mortgage Banking Activity The Bank originates conventional loans secured by first lien mortgages on one-to-four family residential properties located within its market area for either portfolio or sale into the secondary market. During the year ended December 31, 2019, the Bank recorded gains of $433,000 on the sale of $19.7 million in loans receivable originated for sale. During the year ended December 31, 2018, the Bank recorded gains of $231,000 on the sale of $13.3 million in loans receivable originated for sale. The sold loans were sold on a servicing retained basis to Freddie Mac.

In addition to interest earned on loans and income recognized on the sale of loans, the Bank receives fees for servicing loans that it has sold. Because the Bank has data processing capacity that will allow it to expand its portfolio of serviced loans without incurring significant incremental expenses, the Bank intends in the future to augment its portfolio of loans serviced by continuing to originate and sell such fixed-rate single-family residential mortgage loans to Freddie Mac while retaining servicing.

Income from these activities will vary from period to period with the volume and type of loans originated and sold, which in turn is dependent on prevailing mortgage interest rates and their effect on the demand for loans in the Bank’s market area.

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 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, the real estate is classified as OREO 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, less anticipated cost to sell. Any subsequent write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed. OREO is appraised during the foreclosure process, before acquisition when possible. 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.

Classified Assets FDIC regulations governing classification of assets require nonmember commercial banks — including the Bank — 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 potential weakness, are required to be designated “special mention” by management.

When an FDIC 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 Ohio nonmember bank’s determination about classification of its assets and the amount of its allowances is subject to review by the FDIC and the Ohio Division of Financial Institutions (the “ODFI”), 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.

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Consolidated classified loans were as follows:

	December 31,
	2019					2018					2017					2016					2015
(Dollars in thousands)	Amount		Percent of total loans			Amount		Percent of total loans			Amount		Percent of total loans			Amount		Percent of total loans			Amount		Percent of total loans
Classified loans:
Special mention	$	11,028		1.12	%	$	13,076		1.32	%	$	11,829		1.28	%	$	5,657		0.93	%	$	5,297		0.99	%
Substandard		15,291		1.55	%		13,867		1.40	%		13,625		1.48	%		11,777		1.93	%		15,586		2.92	%
Doubtful		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		130		0.02	%
Total amount due	$	26,319		2.67	%	$	26,943		2.72	%	$	25,454		2.76	%	$	17,434		2.86	%	$	21,013		3.93	%

Other than those disclosed in the preceding table, the Bank does not believe there are any loans classified for regulatory purposes as loss, doubtful, substandard, special mention or otherwise, which will result in losses or have a material impact on future operations, liquidity or capital reserves. We are not aware of any other information that causes us to have serious doubts as to the ability of borrowers in general to comply with repayment terms.

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 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. Ohio 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 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. At this time the Bank has no securities that are classified as held to maturity. 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 fair value. In accordance with the adoption of ASU 2016-01 on January 1, 2018, the Company reclassified $625,000 from investment securities available for sale to equity securities.

The following table exhibits the consolidated amortized cost of the Bank’s investment portfolio:

	December 31,
(Dollars in thousands)	2019		2018		2017
Available for Sale:
U.S. government agency securities	$	-	$	7,442	$	8,664
Subordinated debt		4,000		-		-
Obligations of states and political subdivisions:
Taxable		500		502		504
Tax-exempt		80,436		72,387		65,408
Mortgage-backed securities in government- sponsored entities		18,465		18,185		18,640
Total Available-for-Sale Securities	$	103,401	$	98,516	$	93,216

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The contractual maturity of investment debt securities is as follows:

	December 31, 2019
	One year or less					More than one to five years					More than five to ten years					More than ten years					Total investment securities
	Amortized cost		Average yield			Amortized cost		Average yield			Amortized cost		Average yield			Amortized cost		Average yield			Amortized cost		Average yield			Fair value
(Dollars in thousands)
Subordinated debt	$	-		-		$	-		-		$	4,000		6.00	%	$	-		-		$	4,000		6.00	%	$	4,126
Obligations of states and political subdivisions:
Taxable		-		-			500		5.30	%		-		-			-		-			500		5.30	%		501
Tax-exempt **		148		5.30	%		726		4.71	%		9,701		4.80	%		69,861		3.84	%		80,436		3.96	%		82,476
Mortgage-backed securities in government-sponsored entities		-		-			98		3.11	%		2,912		1.84	%		15,455		2.94	%		18,465		2.77	%		18,630
Total	$	148		5.30	%	$	1,324		4.81	%	$	16,613		4.57	%	$	85,316		3.67	%	$	103,401		3.83	%	$	105,733

** Tax equivalent yield calculated using a 21% tax rate

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.

As of December 31, 2019, the Bank also held 38,477 shares of $100 par value Federal Home Loan Bank (“FHLB”) of Cincinnati stock, which is a restricted security. 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, 2019 was $3.8 million.

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 3 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 on a consolidated basis the amount of time deposits of $100,000 or more as of December 31, 2019, including certificates of deposit, by time remaining until maturity.

(Dollar amounts in thousands)	Amount		Percent of Total
Within three months	$	105,311		42.73	%
Beyond three but within six months		14,207		5.76	%
Beyond six but within twelve months		65,279		26.49	%
Beyond one year		61,654		25.02	%
Total	$	246,451		100.00	%

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 funds 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 pledge collateral agreement. At December 31, 2019, MBC had $5.4 million of FHLB borrowings outstanding. The Bank also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.

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The outstanding balances and related information about short-term borrowings as of December 31, 2019, 2018, and 2017, which includes securities sold under agreements to repurchase, lines of credit with other banks and Federal Funds purchased are summarized on a consolidated basis as follows:

(Dollar amounts in thousands)	2019			2018			2017
Balance at year-end	$	5,075		$	90,398		$	74,707
Average balance outstanding		14,808			42,231			63,910
Maximum month-end balance		92,000			101,857			114,025
Weighted-average rate at year-end		1.66	%		2.53	%		1.36	%
Weighted-average rate during the year		2.49	%		1.99	%		1.18	%

Competition

The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within our markets, including local, regional and national commercial banks and credit unions. We also compete with brokerage firms, consumer finance companies, mutual funds, securities firms, insurance companies, fintech companies and other financial intermediaries for certain of our products and services. Some of our competitors are not currently subject to the regulatory restrictions and the level of regulatory supervision applicable to us.

Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors within the banking and financial services industry. Many of our competitors are much larger financial institutions that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market share through their financial product mix, pricing strategies and banking center locations.

Other important standard competitive factors in our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of personnel and services, capacity and willingness to extend credit, and ability to offer sophisticated banking products and services. While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that the Bank’s commitment to personal service, innovation, and involvement in the communities and primary market areas that the Bank serves, as well as the Bank’s commitment to quality community banking service, are factors that contribute to the Bank’s competitive advantage and will enable us to compete successfully within our markets and enhance our ability to attract and retain customers.

Personnel 

As of December 31, 2019, the Bank had 194 full-time equivalent employees. None of the employees are represented by a collective bargaining group.

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 materially affect the business and prospects of the Company.

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, the Company 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. The Company is required to file annual reports and other information with the Federal Reserve. The bank subsidiary 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.

The Company and The Middlefield Banking Company are subject to federal banking laws, and the Company is also subject 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.

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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 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 the Company does, or if no other person owns a greater percentage of the class of voting securities, control is 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 generally prohibits 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 nonbank 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 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,

• 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, among others, changes in technology, changes in the banking marketplace, and competition for banking services. The Company is engaged solely in activities that were permissible for a bank holding company before enactment of the Gramm-Leach-Bliley Act. Federal Reserve Board rules require that all of the depository institution subsidiaries of a financial holding company be and remain well capitalized and well managed. If all depository institution subsidiaries of a financial holding company do not remain well capitalized and well managed, the financial holding company must enter into an agreement acceptable to the Federal Reserve Board, undertaking to comply with all capital and management requirements within 180 days. In the meantime, the financial holding company may not use its expanded authority to engage in nonbanking activities without Federal Reserve Board approval and the Federal Reserve may impose other limitations on the holding company’s or affiliates’ activities. If a financial holding company fails to restore the well-capitalized and well-managed status of a depository institution subsidiary, the Federal Reserve may order divestiture of the subsidiary.

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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. 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.

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 nonbank businesses or to open new facilities. Failure to satisfy capital guidelines could subject a banking institution to a variety of restrictions or 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.

A bank’s capital hedges its risk exposure, absorbing losses that can be predicted as well as losses that cannot be predicted. According to the Federal Financial Institutions Examination Council’s explanation of the capital component of the Uniform Financial Institutions Rating System, commonly known as the “CAMELS” rating system, a rating system employed by the Federal bank regulatory agencies, a financial institution must “maintain capital commensurate with the nature and extent of risks to the institution and the ability of management to identify, measure, monitor, and control these risks. The effect of credit, market, and other risks on the institution’s financial condition should be considered when evaluating the adequacy of capital.”

Under regulations promulgated by the federal bank regulators, U.S. banking organizations are subject to comprehensive capital standards that were established in July 2013 (the Basel III capital rules), subject to phase-in periods for certain components and other provisions. The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). During the first quarter of 2015, the Company exercised the opt-out election regarding the treatment of AOCI. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the amount or risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk-weight factor assigned by the regulations based on perceived risks inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to-four family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and high volatility commercial real estate loans.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institutions does not hold a “capital conservation buffer: consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. At December 31, 2019, the Bank exceeded the regulatory requirement for the “capital conservation buffer.”

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In November 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework will be available for banks to use in their March 31, 2020, Call Report.  

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.

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 capital ratio, its Tier 1 capital ratio, its common equity 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.” To be considered well capitalized for purposes of the prompt corrective action rules, a bank must maintain total risk-based capital of 10.0% or greater, Tier 1 risk-based capital of 8.0% or greater, common equity Tier 1 capital of 6.5% or greater, and leverage capital of 5.0% or greater. An institution with a capital level that might qualify for well capitalized or adequately capitalized status may nevertheless be treated as though it were in the next lower capital category if its primary federal banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment.

A financial institution’s operations can be significantly affected by its capital classification under the prompt corrective action rules. 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 without advance regulatory approval, which can have an adverse effect on the bank’s liquidity. At each successively lower capital category, an insured depository institution is subject to additional restrictions. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance fund. A bank holding company must guarantee that a subsidiary bank that adopts a capital restoration plan will satisfy its plan obligations. Any capital loans made by a bank holding company to a subsidiary bank are subordinated to the claims of depositors in the bank and to certain other indebtedness of the subsidiary bank. If bankruptcy of a bank holding company occurs, any commitment by the bank holding company to a Federal banking regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and would be entitled to priority of payment. Bank regulatory agencies generally are required to appoint a receiver or conservator shortly after an institution becomes critically undercapitalized.

The following table illustrates the capital and prompt corrective action guidelines applicable to the Company and the bank:

	As of December 31, 2019
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.35	%		12.12	%		12.12	%		12.79	%
Middlefield Banc Corp.		10.23	%		12.56	%		11.77	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

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Limits on Dividends and Other Payments The Company’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. Ohio bank law and FDIC policy are consistent, providing that banks generally may rely solely on current earnings for the payment of dividends. Under Ohio Revised Code section 1107.15(B) a dividend may be declared from surplus, meaning additional paid-in capital, with the approval of (x) the Ohio Superintendent of Financial Institutions and (y) the holders of two thirds of the bank’s outstanding shares. Superintendent approval is also necessary for payment of a dividend if the total of all cash dividends in a year exceeds the sum of (x) net income for the year and (y) retained net income for the two preceding years. Relying on 12 U.S.C. 1818(b), the FDIC may restrict a bank’s ability to pay a dividend if the FDIC has reasonable cause to believe that the dividend would constitute an unsafe and unsound practice. A bank’s ability to pay dividends may be affected also by the FDIC’s capital maintenance requirements and prompt corrective action rules. A bank may not pay a dividend if the bank is undercapitalized or if payment would cause the bank to become undercapitalized.

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.

The Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) became law on July 21, 2010. The DFA includes corporate governance and executive compensation reforms, new registration requirements for hedge fund and private equity fund advisers, increased regulation of over-the-counter derivatives and asset-backed securities, and new rules for credit rating agencies. The DFA includes these provisions:

•  Title X established the Consumer Financial Protection Bureau (the “CFPB”). The CFPB has responsibility for most consumer protection laws, with rulemaking, supervisory, examination, and enforcement authority.

•  the FDIC’s minimum reserve ratio was increased from 1.15% to 1.35%, with the goal of attaining that 1.35% level by September 30, 2020.  As of September 30, 2019, the reserve ratio exceeded the required minimum of 1.35%. The FDIC awarded small banks (i.e., banks with total consolidated assets of less than $10 billion) assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35% to be applied when the reserve ratio is at least 1.35%.  The reserve ratio reached 1.40% as of June 30, 2019, and the FDIC first applied small bank credits on the September 30, 2019 assessment invoice (for the second quarter of 2019).  The FDIC will continue to apply small bank credits so long as the Reserve Ratio is at least 1.35%.  After applying small bank credits for four quarters, the FDIC will remit to small banks the value of any remaining small bank credits in the next assessment period in which the Reserve Ratio is at least 1.35%.  The DFA gives the FDIC much greater discretion to manage its insurance fund reserves, including where to set the insurance fund’s designated reserve ratio.

• the deposit insurance cover limit was increased to $250,000.

• section 627 repealed the longstanding prohibition against financial institutions paying interest on checking accounts.

The CFPB, which has rulemaking, supervisory, and enforcement powers under specific federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, and Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act. In addition to giving the CFPB responsibility for these specific statutes, the DFA grants to the CFPB broad authority to prohibit the offering by banks of consumer financial products or engaging in acts or practices that the CFPB considers to be unfair, deceptive, or abusive. The CFPB has examination and primary enforcement authority over depository institutions with $10 billion or more in assets, not smaller institutions. However, smaller institutions are subject to CFPB rules. In addition, the standards established by the CFPB for large institutions have applied in practice to smaller institutions as well. The DFA does not prevent states from adopting consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Significant mortgage rules mandated by the DFA provisions were enacted in response to the breakdown in the mortgage lending markets and to provide for consumer protections. Final rules issued by the Bureau or jointly with other regulatory agencies implemented requirements under the DFA regarding mortgage-related matters such as ability-to-repay, qualified mortgage standards, mortgage servicing, mortgage loan originator compensation, escrow requirements for higher-priced mortgage loans, and providing appraisals.  These new mortgage rules, effective in January 2014, addressed problems consumers faced in the three major steps in buying a home – shopping for a mortgage, closing on a mortgage, and paying off a mortgage.  

The Regulatory Relief Act The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law in May 2018. The Regulatory Relief Act amends parts of the Dodd-Frank Act, as well as other laws that involve regulation of the financial industry. While the Regulatory Relief Act keeps in place fundamental aspects of the Dodd-Frank Act’s regulatory framework, the Regulatory Relief Act includes a number of provisions that are favorable to bank holding companies with total consolidated assets of less than $10 billion, such as the Company, and also makes changes to consumer mortgage and credit reporting regulations and to the authorities of the agencies that regulate the financial industry. A number of the provisions included in the Regulatory Relief Act require the federal banking agencies to either promulgate regulations or amend existing regulations, and it will likely take some time for these agencies to implement the necessary changes.

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The following is a brief summary of select provisions of the Regulatory Relief Act which are not otherwise covered in other sections below.

Provisions that are Favorable to Community Banks. There are a number of provisions in the Regulatory Relief Act that will have a favorable impact on community banks such as The Middlefield Banking Company. These are briefly referenced below.

- Simplified Capital Requirements for Community Banks. Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to adopt a simple leverage ratio to measure capital adequacy. The community bank leverage ratio framework removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework. To qualify for the framework, a community bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9%. The final rule was modified from the November 2018 proposal to reduce compliance burden while maintaining safety and soundness for qualifying community banks. In particular, the community bank leverage ratio incorporates tier 1 capital as the numerator. In addition, a community bank that falls out of compliance with the framework will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%. A bank will be deemed well-capitalized during the grace period. The community bank leverage ratio framework will first be available for banking organizations to use in their March 31, 2020, Call Report or Form FR Y-9C, as applicable. Banking organizations can opt into or out of the community bank leverage ratio framework in a subsequent Call Report or Form FR Y-9C, as applicable. The agencies have prepared a compliance guide to accompany the rule.

The agencies issued the simplifying changes in July 2019.

- Revised Capital Requirements for High Volatility Commercial Real Estate Loans. The Regulatory Relief Act also provides that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate (HVCRE) exposures unless they are for acquisition, development or construction (ADC), and clarifies ADC status. The Regulatory Relief Act expands the exclusions from the current definition of an HVCRE exposure by (1) excluding loans for (a) the acquisition or refinancing of existing income-producing real property if the cash flow of the property is sufficient to support the debt service and expenses of the property and (b) for improvements to existing income-producing real property if the cash flow of the property is sufficient to support the debt service and expenses of the property and (2) by counting paid development expenses and contributed real property or improvements towards the borrower's contributed capital. This new two-prong test provides lenders with the flexibility to terminate the HVCRE ADC designation and release the borrower's additional capital without the need for refinancing. The Regulatory Relief Act also makes it clear that lenders have discretion to determinate when and if the two-prong test has been satisfied based on their own underwriting criteria.

- Exception for Certain Reciprocal Deposits from Treatment as Brokered Deposits. The Regulatory Relief Act amends the Federal Deposit Insurance Act to exclude reciprocal deposits of an insured depository institution from limitations on broker deposits. A well-managed and well-capitalized depository institution may now hold reciprocal deposits in an amount that does not exceed the lesser of $5 billion or 20% of the depository institution’s total liabilities without those reciprocal deposits being treated as brokered deposits. Reciprocal deposits are defined in the Regulatory Relief Act as deposits that a bank receives through a deposit placement network with the same maturity (if any) and in the same aggregate amount as deposits (other than deposits obtained through a deposit broker) placed by the bank in another network bank. The amendment will also have the effect of lowering deposit insurance premiums for well-capitalized banks that use deposit placement networks.

- Increase in Asset Threshold for Qualifying for an 18-Month Examination Cycle. For well-managed, well-capitalized banks, the Regulatory Relief Act increases the asset threshold for institutions qualifying for an 18-month on-site examination cycle, from the current 12-month on-site examination cycle, from $1 billion to $3 billion in total consolidated assets.

- Consumer Protection Enhancements. The Regulatory Relief Act improves consumer access to mortgage credit by, among other things, (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans; (ii) removing the requirement to obtain appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from expanded Home Mortgage Disclosure Act data disclosures mandated by the Dodd-Frank Act; (iv) amending the SAFE Mortgage Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; (v) requiring the CFPB to clarify how TILA-RESPA Integrated Disclosure applies to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use, (vi) adding certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and creation of an identity theft protection database.

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Other new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially revise regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.

Sarbanes-Oxley Act of 2002 The goals of the Sarbanes-Oxley Act enacted in 2002 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 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 periodic reports with the SEC under the Securities Exchange Act of 1934. The 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 FDIC-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.

Deposit Insurance The Deposit Insurance fund of the FDIC insures deposits at insured depository institutions such as the Bank. Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 based upon the ownership rights and capacities in which deposit accounts are maintained at the Bank. The premium that banks pay for deposit insurance is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

The FDIC is able to assess higher rates to institutions with a significant reliance on secured liabilities or a significant reliance on brokered deposits but, for well-managed and well-capitalized institutions, only when accompanied by rapid asset growth.

Assessments are based on the average consolidated total assets less tangible equity capital of a financial institution. Assessment rates range from 2.5 to 9 basis points on the broader assessment base for banks in the lowest risk category (“well capitalized” and CAMELS I or II) and up to 30 to 45 basis points for banks in the highest risk category.

Effective July 1, 2016, the FDIC changed the way established small banks are assessed for deposit insurance. The FDIC has eliminated the risk categories for banks, such as the Bank, that have been FDIC insured for at least five years and have less than $10 billion in total assets, and assessments are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) for established small banks with CAMELS I or II ratings has been reduced to 1.5 to 16 basis points and the maximum assessment rate for established small banks with CAMELS III through V ratings is 30 basis points.

As of June 30, 2019, the Deposit Insurance Fund reserve ratio exceeded the required minimum of 1.35% set by the DFA. Small banks, such as the Bank, with total assets less than $10 billion began receiving credits, starting with the September 30, 2019 deposit insurance assessment invoice, to offset the portion of their assessments that helped to raise the Deposit Insurance Fund reserve ratio from 1.15% to 1.35%. The FDIC will continue to apply small bank credits so long as the Reserve Ratio is at least 1.35%. After applying small bank credits for four quarters, the FDIC will remit to small banks the value of any remaining small bank credits in the next assessment period in which the Reserve Ratio is at least 1.35%. The Bank received assessment credits in 2019 of approximately $244,000, resulting in a decrease in federal deposit insurance expense on the Consolidated Income Statements of 58.2% from the expense recorded in the prior year. The Bank expects to receive approximately $16,000 of credits in 2020 remaining from the 2019 assessment.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.

Interstate Banking and Branching Section 613 of the DFA amends the interstate branching provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The expanded de novo branching authority of the DFA authorizes a state or national bank to open a de novo branch in another state if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch. Section 607 of the DFA also increases the approval threshold for interstate bank acquisitions, providing that a bank holding company must be well capitalized and well managed as a condition to approval of an interstate bank acquisition, rather than being merely adequately capitalized and adequately managed, and that an acquiring bank must be and remain well capitalized and well managed as a condition to approval of an interstate bank merger.

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Transactions with Affiliates Although The Middlefield Banking Company 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 banks from abuse in financial transactions with affiliates, preventing FDIC-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,

● 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, and

● impost strict collateral requirements on loans or extensions or credit by a bank to an 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.

Banking agency guidance for commercial real estate lending In December 2006 the FDIC and other Federal banking agencies issued final guidance on sound risk management practices for concentrations in commercial real estate lending, including acquisition and development lending, construction lending, and other land loans, which experience has shown can be particularly high-risk lending.

The commercial real estate risk management guidance does not impose rigid limits on commercial real estate lending but does create a much sharper supervisory focus on the risk management practices of banks with concentrations in commercial real estate lending. According to the guidance, an institution that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis of the level and nature of its commercial real estate concentration risk:

- total reported loans for construction, land development, and other land represent 100% or more of the institution’s total capital, or

- total commercial real estate loans represent 300% or more of the institution’s total capital and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

These measures are intended merely to enable the banking agencies to identify institutions that could have an excessive commercial real estate lending concentration, potentially requiring close supervision to ensure that the institutions have sound risk management practices in place. Conversely, these measures do not imply that banks are authorized by the December 2006 guidance to accumulate a commercial real estate lending concentration up to the 100% and 300% thresholds.

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.

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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.

MBC’s CRA performance evaluation dated January 21, 2020 states that MBC’s CRA rating is “Satisfactory.”

Federal Home Loan Bank The Federal Home Loan Bank serves as a credit source for its members. As a member of the FHLB of Cincinnati, MBC is required to maintain an investment in the capital stock of the FHLB of Cincinnati in an amount calculated by reference to the FHLB member bank’s amount of loans, and or “advances,” from the FHLB.

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.

Cybersecurity Recent statements by federal regulators regarding cybersecurity indicate that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised client credentials, including security measures to reliably authenticate clients accessing Internet-based services of the financial institution. Financial institution management is also expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If the Bank fails to observe regulatory guidance regarding appropriate cybersecurity safeguards, we could be subject to various regulatory sanctions, including financial penalties.

In the ordinary course of business, the Bank relies on electronic communications and information systems to conduct its operations and to store sensitive data. The Bank employs an in-depth, layered, defensive approach that incorporates security processes and technology to manage and maintain cybersecurity controls. The Bank employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of the Bank’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our clients and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Bank and its clients.

Anti-money laundering and anti-terrorism legislation The Bank Secrecy Act of 1970 requires financial institutions to maintain records and report transactions to prevent the financial institutions from being used to hide money derived from criminal activity and tax evasion. The Bank Secrecy Act establishes (a) record keeping requirements to assist government enforcement agencies with tracing financial transactions and flow of funds, (b) reporting requirements for Suspicious Activity Reports and Currency Transaction Reports to assist government enforcement agencies with detecting patterns of criminal activity, (c) enforcement provisions authorizing criminal and civil penalties for illegal activities and violations of the Bank Secrecy Act and its implementing regulations, and (d) safe harbor provisions that protect financial institutions from civil liability for their cooperative efforts.

The Treasury’s Office of Foreign Asset Control administers and enforces economic and trade sanctions against targeted foreign countries, entities, and individuals based on U.S. foreign policy and national security goals. As a result, financial institutions must scrutinize transactions to ensure that they do not represent obligations of or ownership interests in entities owned or controlled by sanctioned targets.

Signed into law on October 26, 2001, the USA PATRIOT Act of 2001 is omnibus legislation enhancing the powers of domestic law enforcement organizations to resist the international terrorist threat to United States security. Title III of the legislation, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, most directly affects the financial services industry, enhancing the Federal government’s ability to fight money laundering through monitoring of currency transactions and suspicious financial activities. The USA PATRIOT Act has significant implications for depository institutions and other businesses involved in the transfer of money:

- a financial institution must establish due diligence policies, procedures, and controls reasonably designed to detect and report money laundering through correspondent accounts and private banking accounts,

- no bank may establish, maintain, administer, or manage a correspondent account in the United States for a foreign shell bank,

- financial institutions must abide by Treasury Department regulations encouraging financial institutions, their regulatory authorities, and law enforcement authorities to share information about individuals, entities, and organizations engaged in or suspected of engaging in terrorist acts or money laundering activities,

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- financial institutions must follow Treasury Department regulations setting forth minimum standards regarding customer identification. These regulations require financial institutions to implement reasonable procedures for verifying the identity of any person seeking to open an account, maintain records of the information used to verify the person’s identity, and consult lists of known or suspected terrorists and terrorist organizations provided to the financial institution by government agencies,

- every financial institution must establish anti-money laundering programs, including the development of internal policies and procedures, designation of a compliance officer, employee training, and an independent audit function.

Consumer protection laws and regulations. The Middlefield Banking Company is subject to regular examination by the FDIC to ensure compliance with statutes and regulations applicable to the bank’s business, including consumer protection statutes and implementing regulations, some of which are discussed below. Violations of any of these laws may result in fines, reimbursements, and other related penalties.

Equal Credit Opportunity Act. The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.

Truth in Lending Act. The Truth in Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the Truth in Lending Act, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.

Fair Housing Act. The Fair Housing Act makes it unlawful for a residential mortgage lender to discriminate against any person because of race, color, religion, national origin, sex, handicap, or familial status. A number of lending practices have been held by the courts to be illegal under the Fair Housing Act, including some practices that are not specifically mentioned in the Fair Housing Act.

Home Mortgage Disclosure Act. The Home Mortgage Disclosure Act arose out of public concern over credit shortages in certain urban neighborhoods. The Home Mortgage Disclosure Act requires financial institutions to collect data that enable regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The Home Mortgage Disclosure Act also requires the collection and disclosure of data about applicant and borrower characteristics as a way to identify possible discriminatory lending patterns. The vast amount of information that financial institutions collect and disclose concerning applicants and borrowers receives attention not only from state and Federal banking supervisory authorities but also from community-oriented organizations and the general public.

Real Estate Settlement Procedures Act. The Real Estate Settlement Procedures Act requires that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements. The Real Estate Settlement Procedures Act also prohibits abusive practices that increase borrowers’ costs, such as kickbacks and fee-splitting without providing settlement services.

Privacy. Under the Gramm-Leach-Bliley Act, all financial institutions are required to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer data from unauthorized access. In addition, the Fair Credit Reporting Act of 1971 includes many provisions concerning national credit reporting standards and permits consumers to opt out of information-sharing for marketing purposes among affiliated companies.

State Banking Regulation As an Ohio-chartered bank, The Middlefield Banking Company 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.

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Item 1A — Risk Factors

Risks Related to the Company’s Business

We are exposed to interest rate risk. The interest rate risk that exists for most or all financial institutions arises out of interest rates that increase more than anticipated or that increase more quickly than expected. If interest rates change more abruptly than we have simulated or if the increase is greater than we have simulated, this could have an adverse effect on our net interest income and equity value. 

The Company operates in a highly competitive industry and market area. The Company faces significant 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. The Company’s most direct competition for deposits has historically come from commercial banks, savings banks, and savings and loan associations. Technology has also lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Larger competitors may be able to achieve economies of scale and, as a result, offer a broader range of products and services. The Company’s ability to compete successfully depends on a number of factors, including, among other things:

● the ability to develop, maintain, and build long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;

● the ability to expand the Company’s market position;

● the scope, relevance, and pricing of products and services offered to meet customer needs and demands;

● the rate at which the Company introduces new products and services relative to its competitors;

● customer satisfaction with the Company’s level of service; and

● industry and general economic trends

Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect growth and profitability.

The Company may not be able to attract and retain skilled people. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense and the Company may not be able to hire people or to retain them. The unexpected loss of the services of key personnel of the Company could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel. The Company has non-competition agreements with senior officers and key personnel.

The Company 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 and central Ohio markets in which the Company operates have high concentrations of financial institutions. Many of the financial institutions operating in our markets are branches of significantly larger institutions headquartered in Cleveland or in Columbus, with significantly greater financial resources and higher lending limits. In addition, many of these institutions offer services that the Company does 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. The 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 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 Company, or to provide products and services that the Company is not able to economically provide. The Company cannot assure you that we will be able to develop and implement new technology-driven products or services or that the Company will be successful in marketing these products or services to customers. Because of the demand for technology-driven products, banks increasingly rely 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. The Company 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. The Company and its subsidiaries are and will remain subject to extensive state and federal government supervision and regulation. This supervision and regulation affects 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 fund administered by the FDIC. Protection of stockholders is not a goal of banking regulation.

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The burdens of federal and state banking regulation place banks in general at a competitive disadvantage compared to less regulated competitors. Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies have undergone significant changes, and could change significantly again. Federal and state banking agencies also require banks and bank holding companies to maintain adequate 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. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or the Company in particular. The Company gives you no assurance that we will be able to adapt successfully to industry changes caused by governmental actions.

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 attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers. Nevertheless, there is risk that our credit evaluations will prove to be inaccurate due to changed circumstances or otherwise.

Our allowance for loan losses may prove to be insufficient to absorb the probable, incurred losses in our loan portfolio. Lending money is a substantial part of our business. However, every loan we make carries a risk of nonpayment. This risk is affected by, among other things: the cash flow of the borrower and/or the project being financed; in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral, the credit history of a particular borrower, changes in economic and industry conditions, and the duration of the loan. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. Current accounting standards for loan loss provisioning are based on the so-called “incurred loss” model. Under this model, a bank can reserve against a loan loss through a provision to the loan loss reserve only if that loss has been “incurred,” which means a loss that is probable and can be reasonably estimated. To meet that standard, banks have to document why a loss is probable and reasonably estimable, and the easiest way to do that is to refer to historical loss rates and the bank’s own prior loss experience with the type of asset in question. Banks are not limited to using historical experience in deciding the appropriate level of the loan loss reserve. In making these determinations, management can use judgment that takes into account other factors, such as changes in underwriting standards and changes in the economic environment that would have an impact on loan losses.

The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for possible loan losses. If charge-offs in future periods exceed the allowance for possible loan losses, the Company will need additional provisions to increase the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the allowance for loan and lease losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Any increases in the allowance for possible loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations.

A new accounting standard may require us to increase our allowance for loan and lease losses and may have a material adverse effect on our financial condition and results of operations. The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Bank for our first fiscal year after December 15, 2022. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan and lease losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan and lease losses Any change in the allowance for loan and lease losses at the time of adoption will be an adjustment to retained earnings and would change the Bank’s capital levels. A banking organization that experiences a reduction in retained earnings as of the CECL adoption date may elect to phase in the regulatory capital impact of adopting CECL over a three-year transition period. Any increase in our allowance for loan and lease losses or expenses incurred to determine the appropriate level of the allowance for loan and lease losses may have a material adverse effect on our financial condition and results of operations. Upon adoption of the CECL, credit loss allowances may increase, which would decrease retained earnings and thereby affect common equity tier 1 capital for regulatory capital purposes. CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to call report errors, financial misstatements, or operational losses. Successful implementation may require adjustments to existing data elements and credit loss methods.

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Material breaches in security of bank systems may have a significant effect on the Company’s business. Financial institutions are under continuous threat of loss due to cyber-attacks especially as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. The most significant cyber–attack risks that we face are e-fraud, denial of service, and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customer or our accounts. Loss can occur as a result of negative customer experience in the event of a successful denial of service attack that disrupts availability of our on-line banking services. The attempts to breach sensitive customer data, such as account numbers and social security numbers, could present significant operational, reputational, legal and/or regulatory costs to us, if successful. We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both banks and third party service providers. We have security, backup and recovery systems in place, as well as a business continuity plan to ensure systems will not be inoperable. We also have security to prevent unauthorized access to the system. In addition, we require third party service providers to maintain similar controls. However, we cannot be certain that these measures will be successful. A security breach in the system and loss of confidential information could result in losing customers’ confidence and thus the loss of their business as well as additional significant costs for privacy monitoring activities.

Our necessary dependence upon automated systems to record and process transaction volumes poses the risk that technical system flaws or employee errors, tampering or manipulation of those systems will result in losses and may be difficult to detect. We may also be subject to disruptions of the operating systems arising from events that are beyond our control (for example, computer viruses or electrical or telecommunications outages). We are further exposed to the risk that third party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors). These disruptions may interfere with service to customers and result in a financial loss or liability.

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. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted-average yield earned on our interest-earning assets and the weighted-average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect (i) our ability to originate loans, (ii) the value of our interest-earning assets, and our ability to realize gains from the sale of such assets, (iii) our ability to obtain and retain deposits in competition with other available investment alternatives, and (iv) the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. Although the Company believes that the estimated maturities of our interest-earning assets currently are well balanced in relation to the estimated maturities of our interest-bearing liabilities (which involves various estimates as to how changes in the general level of interest rates will impact these assets and liabilities), there can be no assurance that our profitability would not be adversely affected during any period of changes in interest rates.

A transition away from the London Interbank Offered Rate (“LIBOR”) as a reference rate for financial contracts could negatively affect the value of various financial contracts. On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis will not be guaranteed after 2021. The Company formed a special purpose entity to issue $8.0 million of floating rate mandatorily redeemable trust preferred securities (“TruPS”). The rate on the TruPS adjusts quarterly, equal to LIBOR plus 1.67%. The cessation of LIBOR quotes in 2021 and the uncertainty over possible replacement rates for LIBOR will affect our TruPS. The Company expects a consensus as to what rate or rates may become accepted alternatives to LIBOR in 2020.

Climate change, natural disasters, acts of war or terrorism, the impact of pandemics or endemics, and other external events could significantly impact our business. Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or our customers.  Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.

The potential effects of coronavirus on international trade (including supply chains and export levels), travel, employee productivity and other economic activities, may have a destabilizing effect on financial markets and economic activity.  In addition, coronavirus and concerns regarding the extent to which it may spread have affected, and may increasingly affect, international trade (including supply chains and export levels), travel, employee productivity and other economic activities. Coronavirus has the potential to negatively impact our and/or our customers’ costs, demand for our customers' products, and/or the U.S. economy or certain sectors thereof and, thus, adversely affect our business, financial condition, and results of operations.

Environmental liability associated with commercial lending could have a material adverse effect on our business, financial condition or results of operations. A significant portion of our loan portfolio is secured by real property.  During the ordinary course of business, we may foreclose on and take title to properties securing certain loans.  In doing so, there is a risk that hazardous or toxic substances could be found on these properties.  If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage.  In addition, we own and operate certain properties that may be subject to similar environmental liability risks.

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Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.  Although we have policies and procedures requiring the performance of an environmental site assessment before initiating any foreclosure action on real property, these assessments may not be sufficient to detect all potential environmental hazards.  The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition or results of operations.

The increasing complexity of the Company’s operations presents varied risks that could affect its earnings and financial condition. The Company processes a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security and our internal control system and compliance with a complex array of consumer and safety and soundness regulations. We could also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.

The Company has established and maintains a system of internal controls that provides management with information on a timely basis and allows for the monitoring of compliance with operational standards. These systems have been designed to manage operational risks at an appropriate, cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. Losses from operational risks may still occur, however, including losses from the effects of operational errors.

A lack of liquidity could impair our ability to fund operations and adversely impact our business, financial condition and results of operations. Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, sales of our investment securities, sales of loans or other sources could have a substantial negative effect on our liquidity and our ability to continue our growth strategy.

Our most important source of funds is deposits. As of December 31, 2019, approximately $460.7 million, or 45.1%, of our total deposits were negotiable order of withdrawal, or NOW, savings and money market accounts. Historically our savings, money market deposit and NOW accounts have been stable sources of funds. However, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors that may be outside of our control, such as a loss of confidence by customers in us or the banking sector generally, customer perceptions of our financial health and general reputation, increasing competitive pressures from other financial services firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes, any of which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits, increasing our funding costs and reducing our net interest income and net income.

Additional liquidity is provided by our ability to borrow from the Federal Home Loan Bank of Atlanta, or the Cincinnati, and the Federal Reserve Bank of Cleveland. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by one or more adverse regulatory actions against us.

A prolonged economic downturn in our market area would adversely affect our loan portfolio and our growth prospects. Our lending market area is concentrated in northeastern and central Ohio, particularly Franklin, Geauga, Portage, Trumbull, Ashtabula, Summit, Delaware, Madison, and Cuyahoga Counties. A very significant 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 prolonged economic downturn would likely lead to deterioration of the credit quality of our loan portfolio and reduce our level of customer deposits, which in turn would hurt our business. Borrowers may be less likely to repay their loans as scheduled or at all. Moreover, the value of real estate or other collateral that may secure our loans could be adversely affected. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. A prolonged economic downturn could, therefore, result in losses that could materially and adversely affect our business.

Changes in accounting standards could materially impact our consolidated financial statements. Our accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations. The accounting standard setters, including the Financial Accounting Standards Board, the SEC, and other regulatory bodies, from time to time may change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. Management may be required to make difficult, subjective, or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.

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Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability. Rising commercial real estate lending concentrations may expose institutions like the Bank to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. In addition, institutions that are exposed to significant commercial real estate concentration risk may be subject to increased regulatory scrutiny. The federal banking agencies have issued guidance for institutions that are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions that have (i) total reported loans for construction, land development, and other land which represent 100% or more of an institution’s total risk-based capital; or (ii) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the outstanding balance of the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are encouraged to identify and monitor credit concentrations and enhance risk management systems. At December 31, 2019, non-owner occupied commercial real estate loans (including construction, land, and land development loans) represent 331.6% of total risk-based capital and the Bank’s commercial real estate loan portfolio has increased by approximately 42.0% during the prior 36 months. Construction, land, and land development loans represent 49.4% of total risk-based capital as of December 31, 2019. The Bank has determined that its CRE portfolio concentration levels require enhanced monitoring under the regulatory guidance. Management has implemented and continues to maintain heightened portfolio monitoring and reporting, and enhanced underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, our level of commercial real estate lending could limit our growth or require us to obtain additional capital, lead to increased regulatory scrutiny, and could have a material adverse effect on our business, financial condition and results of operations.

Our net-loan-to-deposit-ratio is higher than our peer group and may affect our future profitability and growth. At December 31, 2019, the ratio of our net loans to our total deposits was 95.8%. FDIC-insured, low-cost deposits are a stable and desirable source of funding for banks. If we have insufficient core deposits to fund our loan growth, we may be required to rely more heavily on nondeposit sources of funds. The availability and cost of nondeposit funding are more sensitive to changing economic or financial conditions. Our need to rely on noncore funding sources to support future growth may reduce our net interest margin and have an adverse effect on our profitability.

Changes in tax laws could have an adverse effect on us, our industry, our customers, the value of collateral securing our loans and demand for our loans. Federal tax reform legislation enacted by Congress in December 2017 contains a number of provisions that could have an impact on the banking industry, borrowers and the market for single-family residential and multifamily residential real estate. Among the changes are: a lower cap on the amount of mortgage interest that a borrower may deduct on single-family residential mortgages; the lower mortgage interest cap will be spread among all of the borrower’s residential mortgages, which may result in elimination or lowering of the mortgage interest deduction on a second home; limitations on deductibility of business interest expense; limitations on the deductibility of state and local income and property taxes. Such changes could have an adverse effect on the market for and valuation of single-family residential properties and multifamily residential properties, and on the demand for such loans in the future. If home ownership or multifamily residential property ownership become less attractive, demand for our loans could decrease. The value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of home ownership and multifamily residential ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

We are dependent on our management team and key employees, and if we are not able to retain them, our business operations could be materially adversely affected. Our success depends, in large part, on our management team and key employees. Our management team has significant industry experience. Our future success also depends on our continuing ability to attract, develop, motivate and retain key employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. Because the market for qualified individuals is highly competitive, we may not be able to attract and retain qualified officers or candidates. The loss of any of our management team or our key employees could materially adversely affect our ability to execute our business strategy, and we may not be able to find adequate replacements on a timely basis, or at all. We cannot ensure that we will be able to retain the services of any members of our management team or other key employees. Failure to attract and retain a qualified management team and qualified key employees could have a material adverse effect on our business, financial condition and results of operations.

Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations. We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services and we are unable to transition to other service providers in an orderly manner, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.

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We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The Bank Secrecy Act of 1970, the Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act or Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement Network, or FinCEN, and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. We are also subject to increased scrutiny of compliance with the regulations issued and enforced by the Office of Foreign Assets Control, or OFAC. If our program is deemed deficient, we could be subject to liability, including fines, civil money penalties and other regulatory actions, which may include restrictions on our business operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.

There are risks with respect to future expansion and acquisitions or mergers. The Company may seek in the future to acquire other financial institutions or parts of those institutions. The Company may also expand into new markets or lines of business or offer new products or services. These activities would involve a number of risks, including:

• the time and expense associated with identifying and evaluating potential acquisitions and merger partners;

• using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;

• diluting our existing shareholders in an acquisition;

• the time and expense associated with evaluating new markets for expansion, hiring experienced local management, and opening new offices;

• taking a significant amount of time negotiating a transaction or working on expansion plans, resulting in management’s attention being diverted from the operation of our existing business; and

• the time and expense associated with integrating the operations and personnel of the combined businesses, creating an adverse short-term effect on our results of operations.

There is also a risk that any expansion effort will not be successful.

Government regulation could restrict our ability to pay cash dividends. Dividends from the bank are the only significant source of cash for the Company. Statutory and regulatory limits could prevent the bank from paying dividends or transferring funds to the Company. As of December 31, 2019, MBC could have declared dividends of approximately $20.5 million in the aggregate to the Company. The Company cannot assure you that subsidiary bank profitability will continue to allow dividends to the Company, and the Company therefore cannot assure you that the Company will be able to continue paying regular, quarterly cash dividends.

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We may need to raise additional capital in the future, and such capital may not be available when needed or at all. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve.

We cannot give assurance that such capital will be available on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of counterparties participating in the capital markets, or a downgrade of the Company’s debt ratings, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition and results of operations.

The value of our goodwill and core deposit intangible assets may decline in the future. As of December 31, 2019, we had $17.1 million of goodwill and core deposit intangible assets. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of the Company’s common stock may necessitate taking charges in the future related to the impairment of our goodwill and core deposit intangible assets. If we were to conclude that a future write-down of goodwill and core deposit intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Associated with the Company’s Common Stock

A limited trading market exists for our common shares which could lead to price volatility. Your ability to sell our common shares depends upon the existence of an active trading market for our common shares. While our stock is quoted on the NASDAQ Capital Market, trading volume in our common stock is moderate. As a result, you may be unable to sell or purchase our common shares at the volume, price and time you desire. The limited trading market for our common shares may cause fluctuations in the market value of our common shares to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. In addition, even if a more active market of our common stock develops, we cannot assure you that such a market will continue.

Factors that may affect the volatility of our stock include: 

● our actual or anticipated operating and financial results, including how those results vary from the expectations of management, securities analysts and investors

● changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to other financial institution

● failure to declare dividends on our common stock from time to time

● reports in the press or investment community generally or relating to our reputation or the financial services industry

● developments in our business or operations or in the financial sector generally

● any future offerings by us of our common stock

● legislative or regulatory changes affecting our industry generally or our business and operations specifically

● the operating and stock price performance of companies that investors consider to be comparable to us

● announcements of strategic developments, acquisitions, restructurings, dispositions, financings and other material events by us or our competitors

● expectations of (or actual) equity dilution, including the actual or expected dilution to various financial measures, including earnings per share, that may be caused by this offering

● actions by our current shareholders, including future sales of common shares by existing shareholders, including our directors and executive officers

● proposed or final regulatory changes or developments

● anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us

● other changes in U.S. or global financial markets, global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility

Item 1B — Unresolved Staff Comments

     Not applicable

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Item 2 — Properties

     The Bank’s principal executive offices are located at 15985 East High Street, Middlefield, Ohio 44062.

     As of the date of this Annual Report on Form 10-K, MBC has seventeen financial centers and one administrative office as listed below:

● financial service offices in Middlefield (two offices), Chardon, and Newbury in Geauga County;

● an administrative office in Middlefield in Geauga County;

● financial service offices in Garrettsville and Mantua in Portage County;

● a financial service office in Orwell in Ashtabula County;

● a financial service office in Cortland in Trumbull County;

● financial service offices in Dublin and Westerville in Franklin County;

● a loan production office in Mentor in Lake County;

● financial service offices in Sunbury and Powell in Delaware County;

● financial service offices in Beachwood and Solon in Cuyahoga County;

● a financial service office in Twinsburg in Summit County;

● a financial service office in Plain City in Madison County.

At December 31, 2019, the net book value of the Bank’s investment in premises and equipment totaled $17.9 million.

Item 3 — Legal Proceedings

From time to time the Company and the subsidiary 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 the Company or the subsidiary bank, either individually or in the aggregate.

Item 4 — Mine Safety Disclosures

Not applicable

Part II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Capital Market under the symbol “MBCN.” At the close of business on December 31, 2019, there were approximately 1,002 shareholders of record.

Information relating to the market for Middlefield’s common equity and related shareholder matters appears under “Return on Equity and Assets” and “Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters” in the Company’s 2019 Annual Report to Shareholders and is incorporated herein by reference.

Item 6 — Selected Financial Data

Not applicable.

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 the Company’s 2019 Annual Report to Shareholders and is incorporated herein by reference.

Item 7A — Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8 — Financial Statements and Supplementary Data

The Consolidated Financial Statements of the Company and its subsidiaries, together with the report thereon by S.R. Snodgrass, P.C. appear in the Company’s 2019 Annual Report to Shareholders and are incorporated herein by reference.

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

None

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Item 9A – Controls and Procedures

(a)   Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b)   Internal Controls Over Financial Reporting

Management’s annual report on internal control over financial reporting and the attestation report of the independent registered public accounting firm are incorporated herein by reference to Item 8 - the Company’s audited Consolidated Financial Statements in this Annual Report on Form 10-K.

(c) Changes to Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the period ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B — Other Information

None

Part III

Item 10 — Directors, Executive Officers, and Corporate Governance

Incorporated by reference to the definitive proxy statement for the 2020 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.

The Company’s Code of Ethics is available on the corporate website at https://www.middlefieldbank.bank/uploads/userfiles/files/documents/Code-of-Ethics.pdf. In addition, any future amendments to, or waivers from, a provision of the Code of Ethics that applies to the Company’s directors or executive officers (including the Chief Executive Officer and Principal Financial and Accounting Officer) will be posted at this internet address.

Item 11 — Executive Compensation

Incorporated by reference to the definitive proxy statement for the 2020 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.

Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated by reference to the definitive proxy statement for the 2020 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.

Item 13 — Certain Relationships and Related Transactions, and Director Independence

Incorporated by reference to the definitive proxy statement for the 2020 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.

Item 14 — Principal Accountant Fees and Services

Incorporated by reference to the definitive proxy statement for the 2020 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019.

29

Part IV

Item 15 — Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

Index to Consolidated Financial Statements :

Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the two years in the period ended December 31, 2019:

Report of Independent Registered Public Accounting firm

Consolidated Balance Sheet

Consolidated Statement of Income

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Stockholders’ Equity

Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

(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) 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., as amended	Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006
3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
4	Specimen stock certificate	Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
4.1	Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees	Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
4.2	Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
4.3	Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

30

10.1.0*	2017 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2017 Annual Meeting of Shareholders, Appendix A, filed on April 4, 2017
10.1.1*	2007 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008
10.2*	Change in Control Agreement between Middlefield Banc Corp. and Thomas G. Caldwell	Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019
10.3*	Change in Control Agreement between Middlefield Banc Corp. and James R. Heslop, II	Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019
10.4	Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000	Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
10.4.1*	Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008	Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.4.2*	Change in Control Agreement between Middlefield Banc Corp. and Charles O. Moore	Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019
10.4.3*	Change in Control Agreement between Middlefield Banc Corp. and Donald L. Stacy	Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019
10.4.4*	Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson Jr., dated January 7, 2008	Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.4.5*	Change in Control Agreement between Middlefield Banc Corp. and Michael L. Allen	Incorporated by reference to Exhibit 10.4.5 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on November 5, 2019
10.4.6*	Change in Control Agreement between Middlefield Banc Corp. and John D. Lane	Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on November 5, 2019
10.5	[reserved]
10.6*	Amended Director Retirement Agreement with Richard T. Coyne	Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

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10.7*	Amended Director Retirement Agreement with Frances H. Frank	Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.8	[reserved]
10.9	[reserved]
10.10	[reserved]
10.11*	Director Retirement Agreement with Martin S. Paul	Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
10.12	[reserved]
10.13	[reserved]
10.14*	Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy	Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.15*	DBO Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.16*	DBO Agreement with Alfred F. Thompson Jr.	Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.17*	DBO Agreement with Teresa M. Hetrick	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.18 *	Executive Deferred Compensation Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012
10.19	[reserved]
10.20*	DBO Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

32

10.21*	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.22*	Annual Incentive Plan	Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019
10.22.1	[reserved]
10.23**	Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell	filed herewith
10.24**	Amended Executive Deferred Compensation Agreement with James R. Heslop, II	filed herewith
10.25**	Amended Executive Deferred Compensation Agreement with Donald L. Stacy	filed herewith
10.26**	Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II	filed herewith
10.27**	Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy	filed herewith
10.28**	Executive Deferred Compensation Agreement with Charles O. Moore	filed herewith
10.29*	Form of conditional stock award under the 2007 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 4, 2016
10.29.1	Form of conditional stock award under the 2017 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 24, 2017
10.30**	Executive Deferred Compensation Agreement with Michael L. Allen	Incorporated by reference to Exhibit 10.30 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019
10.31**	Executive Deferred Compensation Agreement with John D. Lane	Incorporated by reference to Exhibit 10.31 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019
13	Portions of Annual Report to Shareholders for the year ended December 31, 2019 incorporated by reference into this Form 10-K	filed herewith
21	Subsidiaries of Middlefield Banc Corp.	filed herewith
23	Consent of S.R. Snodgrass, P.C., independent auditors of Middlefield Banc Corp.	filed herewith

33

31.1	Rule 13a-14(a) certification of Chief Executive Officer	filed herewith
31.2	Rule 13a-14(a) certification of Chief Financial Officer	filed herewith
32	Rule 13a-14(b) certification	filed herewith
99.1	Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company	Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001
101.INS***	XBRL Instance	furnished herewith
101.SCH***	XBRL Taxonomy Extension Schema	furnished herewith
101.CAL***	XBRL Taxonomy Extension Calculation	furnished herewith
101.DEF***	XBRL Taxonomy Extension Definition	furnished herewith
101.LAB***	XBRL Taxonomy Extension Labels	furnished herewith
101.PRE***	XBRL Taxonomy Extension Presentation	furnished herewith

* management contract or compensatory plan or arrangement

** management contract or compensatory plan or arrangement, a schedule has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Item 16 – Form 10-K Summary

None.

34

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
	Date: March 4, 2020

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 4, 2020
Thomas G. Caldwell
President, Chief Executive Officer, and Director
/s/ Donald L. Stacy	March 4, 2020
Donald L. Stacy, Treasurer and Chief Financial Officer
(Principal accounting and financial officer)
/s/ Carolyn J. Turk	March 4, 2020
Carolyn J. Turk, Director
/s/ Eric W. Hummel	March 4, 2020
Eric W. Hummel, Director
/s/ James R. Heslop, II	March 4, 2020
James R. Heslop, II, Executive Vice President,
Chief Operating Officer, and Director
/s/ Kenneth E. Jones	March 4, 2020
Kenneth E. Jones, Director
/s/ James J. McCaskey	March 4, 2020
James J. McCaskey, Director
/s/ William J. Skidmore	March 4, 2020
William J. Skidmore, Chairman of the Board
/s/ Robert W. Toth	March 4, 2020
Robert W. Toth, Director

35

/s/ Clayton W. Rose, III	March 4, 2020
Clayton W. Rose, III, Director
/s/ Darryl E. Mast	March 4, 2020
Darryl E. Mast, Director
/s/ Thomas W. Bevan	March 4, 2020
Thomas W. Bevan, Director
/s/ William A. Valerian	March 4, 2020
William A. Valerian, Director

36

EX-10.23

 Exhibit 10.23

The Middlefield Banking Company
Amended Executive Deferred Compensation Agreement*

     This Amended Executive Deferred Compensation Agreement (this “Agreement”) is entered into as of this 8th day of May, 2008, by and between The Middlefield Banking Company, an Ohio-chartered bank (the “Bank”), and Thomas G. Caldwell, President and Chief Executive Officer of the Bank (the “Executive”).

     Whereas, to encourage the Executive to remain an employee of the Bank, the Bank and the Executive entered into an Executive Deferred Compensation Agreement dated as of December 28, 2006, with contributions made solely by the Bank and benefits payable out of the Bank’s general assets,

     Whereas, the Bank and the Executive desire to amend the December 28, 2006 Executive Deferred Compensation Agreement to ensure that the agreement complies in form and in operation with Internal Revenue Code section 409A,

     Whereas, the Bank and the Executive intend that this Agreement shall amend and restate in its entirety the December 28, 2006 Executive Deferred Compensation Agreement,

     Whereas, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

     Whereas, the parties hereto intend that this Agreement shall be considered an unfunded and noncontributory arrangement maintained primarily to provide supplemental retirement benefits for the Executive, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Executive is fully advised of the Bank’s financial status.

     Now Therefore, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

Article 1
Definitions

     1.1 “Account Balance” means the Bank’s accounting of Annual Contributions made by the Bank, plus accrued interest.

     1.2 “Annual Contribution” means the amount credited to the Account Balance after the end of each Plan Year for which the Performance Goals are achieved. For the first Plan Year, the Executive shall receive an Annual Contribution amount equal to 5% of the Executive’s Base Annual Salary. For every Plan Year after the first Plan Year, the Annual Contribution will be conditional on achievement of the Performance Goals. The Annual Contribution amount in any Plan Year shall not be less than 5% or more than 15% of the Executive’s Base Annual Salary. In its discretion, the Bank’s board of directors may increase or decrease the amount of the Annual Contribution, but the Annual Contribution amount shall be changed no more frequently than annually.

     1.3 “Base Annual Salary” means compensation of the type required to be reported as salary according to Securities and Exchange Commission Rule 229.402(c) (17 CFR 229.402(c)), specifically column (c) of that rule’s Summary Compensation Table (or any successor provision).

     1.4 “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

     1.5 “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

* Schedule A has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

     1.6 “Change in Control” shall mean a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including —

     (a) Change in ownership: a change in ownership of Middlefield Banc Corp., an Ohio corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Middlefield Banc Corp. stock constituting more than 50% of the total fair market value or total voting power of Middlefield Banc Corp. stock,

     (b) Change in effective control: (x) any one person or more than one person acting as a group acquires within a 12-month period ownership of Middlefield Banc Corp. stock possessing 30% or more of the total voting power of Middlefield Banc Corp., or (y) a majority of Middlefield Banc Corp.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Middlefield Banc Corp.’s board of directors, or

     (c) Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of Middlefield Banc Corp.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Middlefield Banc Corp. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Middlefield Banc Corp.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Middlefield Banc Corp.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

     1.7 “Code” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

     1.8 “Effective Date” means January 1, 2006.

     1.9 “Normal Retirement Age” means the Executive’s 65th birthday.

     1.10 “Performance Goals” means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank’s board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A shall be substituted for and shall supersede the old Schedule A, and the new Schedule A shall be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals shall not become effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator shall have sole authority to determine whether the Performance Goals have been achieved for any Plan Year. The Plan Administrator’s determination that the Performance Goals for a Plan Year have or have not been achieved shall be conclusive and binding.

     1.11 “Plan Administrator” or “Administrator” means the plan administrator described in Article 8.

     1.12 “Plan Year” means the calendar year. The first Plan Year shall begin on the Effective Date and end on December 31, 2006.

     1.13 “Separation from Service” means the Executive’s service as an executive or independent contractor to the Bank and any member of a controlled group, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Bank or the Executive’s death. If there is a dispute about the Executive’s status or the date of the Executive’s Separation from Service, the Bank shall have the sole and absolute right to decide the dispute unless a Change in Control shall have occurred.

     1.14 “Termination with Cause” and “Cause” shall have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Middlefield Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive’s employment because of —

     (a) the Executive’s gross negligence or gross neglect of duties or intentional and material failure to perform stated duties after written notice thereof, or

     (b) disloyalty or dishonesty by the Executive in the performance of duties or breach of the Executive’s fiduciary duties for personal profit, in any case whether in the Executive’s capacity as a director or officer, or

2

     (c) intentional wrongful damage by the Executive to the business or property of the Bank or its affiliates, including without limitation the reputation of the Bank, which in the judgement of the Bank causes material harm to the Bank or affiliates, or

     (d) a willful violation by the Executive of any applicable law or significant policy of the Bank or an affiliate that, in the Bank’s judgement, results in an adverse effect on the Bank or the affiliate, regardless of whether the violation leads to criminal prosecution or conviction. For purposes of this Agreement applicable laws include any statute, rule, regulatory order, statement of policy, or final cease-and-desist order of any governmental agency or body having regulatory authority over the Bank, or

     (e) the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of the Bank, under the Bank’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees, or

     (f) the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

     (g) conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more.

Article 2
Deferral Account

     2.1 Annual Contribution. The Bank shall establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank shall credit the Annual Contribution to the Account Balance provided the Performance Goals were achieved for the Plan Year. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. The Annual Contribution shall not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter. However, if the Performance Goals are achieved for the Plan Year in which the Executive attains Normal Retirement Age (and if Separation from Service does not occur before Normal Retirement Age), the Bank shall make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage shall equal the number of days in the Plan Year before the Executive attained Normal Retirement Age divided by 365. No Annual Contributions shall be made by the Bank for the Plan Year in which the Executive’s death or Separation from Service occurs or for any year thereafter (except for a final contribution for the year in which the Executive attains Normal Retirement Age, unless Separation from Service occurs before Normal Retirement Age).

     2.2 Interest. At the end of each Plan Year and until the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest is to be credited on the Account Balance at an annual rate of interest for that Plan Year, compounded monthly on the first day of the month, equal to the prime interest rate as published in The Wall Street Journal (the “Index”). After the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest shall be credited on the Account Balance at an annual rate equal to the yield on a 20-year corporate bond rated Aa by Moody’s, rounded to the nearest ¹/4%.

     2.3 Statement of Account. Within 120 days after the end of each Plan Year, the Bank shall provide to the Executive a statement of the Account Balance at the end of the Plan Year. Each annual statement of the Account Balance shall supersede the previous year’s statement of the Account Balance.

     2.4 Accounting Device Only. The Account Balance is solely a device for measuring amounts to be paid under this Agreement. The Account Balance is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere promise by the Bank to pay benefits. The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

3

Article 3
Benefits During Lifetime

     3.1 Normal Retirement Age. Unless Separation from Service or a Change in Control occurs before Normal Retirement Age, when the Executive attains Normal Retirement Age the Bank shall pay to the Executive the Account Balance as of the end of the month in which the Executive attains Normal Retirement Age, instead of any other benefit under this Agreement. Beginning on the first day of the month after the month in which the Executive attains Normal Retirement Age, the Account Balance shall be paid to the Executive in 180 substantially equal monthly installments. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full. If the Executive’s Separation from Service is a Termination with Cause, no further benefits shall be paid under this Agreement and this Agreement shall terminate.

     3.2 Separation from Service. If Separation from Service occurs before Normal Retirement Age for reasons other than death, instead of any other benefit under this Agreement the Bank shall pay to the Executive the Account Balance as of the end of the month immediately before the month in which payments commence, unless the Change-in-Control benefit shall have been paid under section 3.3. Beginning on the first day of the later of (x) the seventh month after the month in which Separation from Service occurs or (y) the month after the month in which the Executive attains Normal Retirement Age, the Bank shall pay the Account Balance in 180 substantially equal monthly installments. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full.

     3.3 Change in Control. If a Change in Control occurs both before the Executive attains Normal Retirement Age and before the Executive’s Separation from Service, instead of any other benefit payable under this Agreement the Bank shall pay to the Executive the entire Account Balance in a single lump sum within three days after the Change in Control. Payment of the Change-in-Control benefit shall fully discharge the Bank from all obligations under this Agreement, except the legal fee reimbursement obligation under section 9.11.

     3.4 Payout of Normal Retirement Benefit or Separation from Service Benefit after a Change in Control. If when a Change in Control occurs the Executive is receiving the benefit under section 3.1, the Bank shall pay the remaining benefits to the Executive in a single lump sum within three business days after the Change in Control. If when a Change in Control occurs the Executive is receiving or is entitled at Normal Retirement Age to receive the benefit under section 3.2, the Bank shall pay the remaining benefits to the Executive in a single lump sum within three business days after the later of (x) the date of the Change in Control or (y) the first day of the seventh month after the month in which the Executive’s Separation from Service occurs. The lump-sum payment due to the Executive as a result of a Change in Control shall be an amount equal to the Account Balance remaining unpaid.

     3.5 One Benefit Only. Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the first event to occur that is dealt with by this Agreement. Except as provided in section 3.4, later occurrence of events dealt with by this Agreement shall not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

     3.6 Savings Clause Relating to Compliance with Code Section 409A. Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive shall not be entitled to the payments under Article 3 until the earliest of (x) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, (y) the date of the Executive’s death, or (z) any earlier date that does not result in additional tax or interest to the Executive under section 409A. If any provision of this Agreement would subject the Executive to additional tax or interest under section 409A, the Bank shall reform the provision. However, the Bank shall maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Executive to additional tax or interest, and the Bank shall not be required to incur any additional compensation expense as a result of the reformed provision.

Article 4
Death Benefits

     After the Executive’s death, the Bank shall pay to the Executive’s Beneficiary the Account Balance as of the date of the Executive’s death. The Account Balance shall be paid to the Executive’s Beneficiary in a single lump sum 90 days after the date of the Executive’s death. However, if the Executive dies after termination of this Agreement under Article 6, the Executive’s Beneficiary shall be entitled to no benefits under this Agreement.

4

Article 5
Beneficiaries

     5.1 Beneficiary Designations. The Executive shall have the right to designate at any time a Beneficiary to receive any benefits payable under this Agreement after the Executive’s death. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

     5.2 Beneficiary Designation Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

     5.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

     5.4 No Beneficiary Designation. If the Executive dies without a valid beneficiary designation or if all designated Beneficiaries predecease the Executive, the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be paid to the Executive’s estate.

     5.5 Facility of Payment. If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay the benefit to the guardian, legal representative, or person having the care or custody of the minor, incapacitated person, or incapable person. The Bank may require proof of incapacity, minority, or guardianship as it may deem appropriate before distribution of the benefit. Distribution shall completely discharge the Bank from all liability for the benefit.

Article 6
General Limitations

     6.1 Termination with Cause. Despite any contrary provision of this Agreement, the Bank shall not pay any benefit under this Agreement and this Agreement shall terminate if Separation from Service is a Termination with Cause.

     6.2 Misstatement. No benefits shall be paid under this Agreement if the Executive makes any material misstatement of fact on any application or resume provided to the Bank, on any application for life insurance purchased by the Bank, or on any application for benefits provided by the Bank.

     6.3 Removal. Despite any contrary provision of this Agreement, if the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.

     6.4 Default. Despite any contrary provision of this Agreement, if the Bank is in “default” or “in danger of default”, as those terms are defined in of section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.

5

Article 7
Claims and Review Procedures

     7.1  Claims Procedure. Any person who has not received benefits under this Agreement that he or she believes should be paid (the “claimant”) shall make a claim for benefits as follows.

7.1.1	Initiation — written claim. The claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If the claim relates to the contents of a notice received by the claimant, the claim must be made within 60 days after the notice was received by the claimant. All other claims must be made within 180 days after the date of the event that caused the claim to arise. The claim must state with particularity the determination desired by the claimant.
7.1.2	Timing of Administrator response. The Administrator shall respond to the claimant within 90 days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, before the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.
7.1.3	Notice of decision. If the Administrator denies part or all of the claim, the Administrator shall notify the claimant in writing of the denial. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth —

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
(d)	An explanation of the Agreement’s review procedures and the time limits applicable to such procedures, and
(e)	A statement of the claimant’s right to bring a civil action under ERISA section 502(a) after an adverse benefit determination on review.

     7.2  Review Procedure. If the Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Administrator of the denial, as follows.

7.2.1	Initiation — written request. To initiate the review, the claimant must file with the Administrator a written request for review within 60 days after receiving the Administrator’s notice of denial.
7.2.2	Additional submissions — information access. The claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. Upon request and free of charge, the Administrator shall also provide the claimant reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
7.2.3	Considerations on review. In considering the review, the Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether the information was submitted or considered in the initial benefit determination.
7.2.4	Timing of Administrator response. The Administrator shall respond in writing to the claimant within 60 days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 60 days by notifying the claimant in writing before the end of the initial 60-day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.

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7.2.5 Notice of decision. The Administrator shall notify the claimant in writing of its decision on review. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of the Agreement on which the denial is based,
(c)	A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
(d)	A statement of the claimant’s right to bring a civil action under ERISA section 502(a).

Article 8
Administration of Agreement

     8.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator consisting of the board or such committee or persons as the board shall appoint. The Executive may not be a member of the Plan Administrator. The Plan Administrator shall have the discretion and authority to (x) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and (y) decide or resolve any and all questions that may arise, including interpretations of this Agreement.

     8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.

     8.3 Binding Effect of Decisions. The decision or action of the Plan Administrator concerning any question arising out of the administration, interpretation, and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. Neither the Executive nor any Beneficiary shall be deemed to have any right, vested or unvested, regarding the continuing effect of any decision or action of the Plan Administrator.

     8.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

     8.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.

Article 9
Miscellaneous

     9.1 Amendments and Termination. This Agreement may be amended solely by a written agreement signed by the Bank and by the Executive. Except for the case of Termination with Cause, this Agreement shall not be terminated unless the Account Balance is first paid to the Executive or the Executive’s Beneficiary.

     9.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, successors, administrators, and transferees.

     9.3 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the Bank’s business or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Bank would be required to perform this Agreement had no succession occurred.

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     9.4 No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executive’s right to terminate employment at any time.

     9.5 Non-Transferability. Benefits under this Agreement may not be sold, transferred, assigned, pledged, attached, or encumbered.

     9.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

     9.7 Applicable Law. This Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent the laws of the United States of America otherwise require.

     9.8 Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay benefits. The rights to benefits are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.

     9.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. This Agreement amends and restates in its entirety the December 28, 2006 Executive Deferred Compensation Agreement between the Executive and the Bank.

     9.10 Tax Consequences. The Bank does not insure or guarantee the tax consequences of payments provided hereunder for matters beyond its control. The Executive certifies that the Executive’s decision to defer receipt of compensation is not due to reliance on financial, tax, or legal advice given by the Bank or any of its employees, agents, accountants, or legal advisors.

     9.11 Payment of Legal Fees. The Bank is aware that after a Change in Control management of the Bank could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, or could institute or cause or attempt to cause the Bank to institute litigation seeking to have this Agreement declared unenforceable, or could take or attempt to take other action to deny the Executive the benefits intended under this Agreement. In these circumstances the purpose of this Agreement would be frustrated. The Bank desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. The Bank desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (x) the Bank has failed to comply with any of its obligations under this Agreement, or (y) the Bank or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, the Bank irrevocably authorizes the Executive from time to time to retain counsel of the Executive’s choice, at the Bank’s expense as provided in this section 9.11, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Despite any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this section 9.11, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel’s customary practices, up to a maximum aggregate amount of $500,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. The Bank’s obligation to pay the Executive’s legal fees under this section 9.11 operates separately from and in addition to any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance, or other agreement between the Executive and the Bank. Despite anything in this section 9.11 to the contrary however, the Bank shall not be required to pay or reimburse the Executive’s legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

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     9.12 Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of the provision not held invalid, and the remainder of such provision together with all other provisions of this Agreement shall continue in full force and effect to the full extent consistent with law.

     9.13 Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be considered a waiver of the terms or conditions for the future or a waiver of any subsequent breach. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party.

     9.14 Captions and Counterparts. Captions in this Agreement are included for convenience only and shall not affect the interpretation or construction of the Agreement or any of its provisions. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute a single agreement.

     9.15 Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the Board of Directors, The Middlefield Banking Company, 15985 East High Street, Middlefield, Ohio 44062-0035.

     9.16 Termination or Modification of Agreement Because of Changes in Law, Rules or Regulations. The Bank is entering into this Agreement on the assumption that certain existing tax laws, rules, and regulations will continue in effect in their current form. If that assumption materially changes and the change has a material detrimental effect on this Agreement, the Bank reserves the right to terminate or modify this Agreement accordingly, subject to the written consent of the Executive, which shall not be unreasonably withheld. This section 9.16 shall become null and void effective immediately after a Change in Control.

     In Witness Whereof, the Executive and a duly authorized Bank officer have executed this Amended Executive Deferred Compensation Agreement as of the date first written above.

Executive:	Bank:
	The Middlefield Banking
Company
/s/ Thomas G. Caldwell
Thomas G. Caldwell	By:
	Its:

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The Middlefield Banking Company
Amended Executive Deferred Compensation Agreement
Beneficiary Designation

     I designate the following as beneficiary under this Amended Executive Deferred Compensation Agreement of benefits payable after my death.

Primary:

Contingent:

a

Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

     I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature:
	Thomas G. Caldwell
Date:	, 2008

     Received by the Bank this ___ day of                     , 2008

By:

Title:

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EX-10.24

 Exhibit 10.24

The Middlefield Banking Company

Amended Executive Deferred Compensation Agreement*

     This Amended Executive Deferred Compensation Agreement (this “Agreement”) is entered into as of this 8th day of May, 2008, by and between The Middlefield Banking Company, an Ohio-chartered bank (the “Bank”), and James R. Heslop II, Executive Vice President and Chief Operating Officer of the Bank (the “Executive”).

     Whereas, to encourage the Executive to remain an employee of the Bank, the Bank and the Executive entered into an Executive Deferred Compensation Agreement dated as of December 28, 2006, with contributions made solely by the Bank and benefits payable out of the Bank’s general assets,

     Whereas, the Bank and the Executive desire to amend the December 28, 2006 Executive Deferred Compensation Agreement to ensure that the agreement complies in form and in operation with Internal Revenue Code section 409A,

     Whereas, the Bank and the Executive intend that this Agreement shall amend and restate in its entirety the December 28, 2006 Executive Deferred Compensation Agreement,

     Whereas, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

     Whereas, the parties hereto intend that this Agreement shall be considered an unfunded and noncontributory arrangement maintained primarily to provide supplemental retirement benefits for the Executive, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Executive is fully advised of the Bank’s financial status.

     Now Therefore, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

Article 1
Definitions

     1.1 “Account Balance” means the Bank’s accounting of Annual Contributions made by the Bank, plus accrued interest.

     1.2 “Annual Contribution” means the amount credited to the Account Balance after the end of each Plan Year for which the Performance Goals are achieved. For the first Plan Year, the Executive shall receive an Annual Contribution amount equal to 5% of the Executive’s Base Annual Salary. For every Plan Year after the first Plan Year, the Annual Contribution will be conditional on achievement of the Performance Goals. The Annual Contribution amount in any Plan Year shall not be less than 5% or more than 15% of the Executive’s Base Annual Salary. In its discretion, the Bank’s board of directors may increase or decrease the amount of the Annual Contribution, but the Annual Contribution amount shall be changed no more frequently than annually.

     1.3 “Base Annual Salary” means compensation of the type required to be reported as salary according to Securities and Exchange Commission Rule 229.402(c) (17 CFR 229.402(c)), specifically column (c) of that rule’s Summary Compensation Table (or any successor provision).

     1.4 “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

     1.5 “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

* Schedule A has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

     1.6 “Change in Control” shall mean a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including -

     (a) Change in ownership: a change in ownership of Middlefield Banc Corp., an Ohio corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Middlefield Banc Corp. stock constituting more than 50% of the total fair market value or total voting power of Middlefield Banc Corp. stock,

     (b) Change in effective control: (x) any one person or more than one person acting as a group acquires within a 12-month period ownership of Middlefield Banc Corp. stock possessing 30% or more of the total voting power of Middlefield Banc Corp., or (y) a majority of Middlefield Banc Corp.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Middlefield Banc Corp.’s board of directors, or

     (c) Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of Middlefield Banc Corp.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Middlefield Banc Corp. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Middlefield Banc Corp.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Middlefield Banc Corp.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

     1.7 “Code” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

     1.8 “Effective Date” means January 1, 2006.

     1.9 “Normal Retirement Age” means the Executive’s 65th birthday.

     1.10 “Performance Goals” means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank’s board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A shall be substituted for and shall supersede the old Schedule A, and the new Schedule A shall be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals shall not become effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator shall have sole authority to determine whether the Performance Goals have been achieved for any Plan Year. The Plan Administrator’s determination that the Performance Goals for a Plan Year have or have not been achieved shall be conclusive and binding.

     1.11 “Plan Administrator” or “Administrator” means the plan administrator described in Article 8.

     1.12 “Plan Year” means the calendar year. The first Plan Year shall begin on the Effective Date and end on December 31, 2006.

     1.13 “Separation from Service” means the Executive’s service as an executive or independent contractor to the Bank and any member of a controlled group, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Bank or the Executive’s death. If there is a dispute about the Executive’s status or the date of the Executive’s Separation from Service, the Bank shall have the sole and absolute right to decide the dispute unless a Change in Control shall have occurred.

     1.14 “Termination with Cause” and “Cause” shall have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Middlefield Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive’s employment because of —

     (a) the Executive’s gross negligence or gross neglect of duties or intentional and material failure to perform stated duties after written notice thereof, or

     (b) disloyalty or dishonesty by the Executive in the performance of duties or breach of the Executive’s fiduciary duties for personal profit, in any case whether in the Executive’s capacity as a director or officer, or

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     (c) intentional wrongful damage by the Executive to the business or property of the Bank or its affiliates, including without limitation the reputation of the Bank, which in the judgement of the Bank causes material harm to the Bank or affiliates, or

     (d) a willful violation by the Executive of any applicable law or significant policy of the Bank or an affiliate that, in the Bank’s judgement, results in an adverse effect on the Bank or the affiliate, regardless of whether the violation leads to criminal prosecution or conviction. For purposes of this Agreement applicable laws include any statute, rule, regulatory order, statement of policy, or final cease-and-desist order of any governmental agency or body having regulatory authority over the Bank, or

     (e) the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of the Bank, under the Bank’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees, or

     (f) the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

     (g) conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more.

Article 2
Deferral Account

     2.1 Annual Contribution. The Bank shall establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank shall credit the Annual Contribution to the Account Balance provided the Performance Goals were achieved for the Plan Year. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. The Annual Contribution shall not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter. However, if the Performance Goals are achieved for the Plan Year in which the Executive attains Normal Retirement Age (and if Separation from Service does not occur before Normal Retirement Age), the Bank shall make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage shall equal the number of days in the Plan Year before the Executive attained Normal Retirement Age divided by 365. No Annual Contributions shall be made by the Bank for the Plan Year in which the Executive’s death or Separation from Service occurs or for any year thereafter (except for a final contribution for the year in which the Executive attains Normal Retirement Age, unless Separation from Service occurs before Normal Retirement Age).

     2.2 Interest. At the end of each Plan Year and until the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest is to be credited on the Account Balance at an annual rate of interest for that Plan Year, compounded monthly on the first day of the month, equal to the prime interest rate as published in The Wall Street Journal (the “Index”). After the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest shall be credited on the Account Balance at an annual rate equal to the yield on a 20-year corporate bond rated Aa by Moody’s, rounded to the nearest ¹/4%.

     2.3 Statement of Account. Within 120 days after the end of each Plan Year, the Bank shall provide to the Executive a statement of the Account Balance at the end of the Plan Year. Each annual statement of the Account Balance shall supersede the previous year’s statement of the Account Balance.

     2.4 Accounting Device Only. The Account Balance is solely a device for measuring amounts to be paid under this Agreement. The Account Balance is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere promise by the Bank to pay benefits. The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

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Article 3
Benefits During Lifetime

     3.1 Normal Retirement Age. Unless Separation from Service or a Change in Control occurs before Normal Retirement Age, when the Executive attains Normal Retirement Age the Bank shall pay to the Executive the Account Balance as of the end of the month in which the Executive attains Normal Retirement Age, instead of any other benefit under this Agreement. Beginning on the first day of the month after the month in which the Executive attains Normal Retirement Age, the Account Balance shall be paid to the Executive in 180 substantially equal monthly installments. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full. If the Executive’s Separation from Service is a Termination with Cause, no further benefits shall be paid under this Agreement and this Agreement shall terminate.

     3.2 Separation from Service. If Separation from Service occurs before Normal Retirement Age for reasons other than death, instead of any other benefit under this Agreement the Bank shall pay to the Executive the Account Balance as of the end of the month immediately before the month in which payments commence, unless the Change-in-Control benefit shall have been paid under section 3.3. Beginning on the first day of the later of (x) the seventh month after the month in which Separation from Service occurs or (y) the month after the month in which the Executive attains Normal Retirement Age, the Bank shall pay the Account Balance in 180 substantially equal monthly installments. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full.

     3.3 Change in Control. If a Change in Control occurs both before the Executive attains Normal Retirement Age and before the Executive’s Separation from Service, instead of any other benefit payable under this Agreement the Bank shall pay to the Executive the entire Account Balance in a single lump sum within three days after the Change in Control. Payment of the Change-in-Control benefit shall fully discharge the Bank from all obligations under this Agreement, except the legal fee reimbursement obligation under section 9.11.

     3.4 Payout of Normal Retirement Benefit or Separation from Service Benefit after a Change in Control. If when a Change in Control occurs the Executive is receiving the benefit under section 3.1, the Bank shall pay the remaining benefits to the Executive in a single lump sum within three business days after the Change in Control. If when a Change in Control occurs the Executive is receiving or is entitled at Normal Retirement Age to receive the benefit under section 3.2, the Bank shall pay the remaining benefits to the Executive in a single lump sum within three business days after the later of (x) the date of the Change in Control or (y) the first day of the seventh month after the month in which the Executive’s Separation from Service occurs. The lump-sum payment due to the Executive as a result of a Change in Control shall be an amount equal to the Account Balance remaining unpaid.

     3.5 One Benefit Only. Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the first event to occur that is dealt with by this Agreement. Except as provided in section 3.4, later occurrence of events dealt with by this Agreement shall not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

     3.6 Savings Clause Relating to Compliance with Code Section 409A. Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive shall not be entitled to the payments under Article 3 until the earliest of (x) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, (y) the date of the Executive’s death, or (z) any earlier date that does not result in additional tax or interest to the Executive under section 409A. If any provision of this Agreement would subject the Executive to additional tax or interest under section 409A, the Bank shall reform the provision. However, the Bank shall maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Executive to additional tax or interest, and the Bank shall not be required to incur any additional compensation expense as a result of the reformed provision.

Article 4
Death Benefits

     After the Executive’s death, the Bank shall pay to the Executive’s Beneficiary the Account Balance as of the date of the Executive’s death. The Account Balance shall be paid to the Executive’s Beneficiary in a single lump sum 90 days after the date of the Executive’s death. However, if the Executive dies after termination of this Agreement under Article 6, the Executive’s Beneficiary shall be entitled to no benefits under this Agreement.

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Article 5
Beneficiaries

     5.1 Beneficiary Designations. The Executive shall have the right to designate at any time a Beneficiary to receive any benefits payable under this Agreement after the Executive’s death. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

     5.2 Beneficiary Designation Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

     5.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

     5.4 No Beneficiary Designation. If the Executive dies without a valid beneficiary designation or if all designated Beneficiaries predecease the Executive, the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be paid to the Executive’s estate.

     5.5 Facility of Payment. If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay the benefit to the guardian, legal representative, or person having the care or custody of the minor, incapacitated person, or incapable person. The Bank may require proof of incapacity, minority, or guardianship as it may deem appropriate before distribution of the benefit. Distribution shall completely discharge the Bank from all liability for the benefit.

Article 6
General Limitations

     6.1 Termination with Cause. Despite any contrary provision of this Agreement, the Bank shall not pay any benefit under this Agreement and this Agreement shall terminate if Separation from Service is a Termination with Cause.

     6.2 Misstatement. No benefits shall be paid under this Agreement if the Executive makes any material misstatement of fact on any application or resume provided to the Bank, on any application for life insurance purchased by the Bank, or on any application for benefits provided by the Bank.

     6.3 Removal. Despite any contrary provision of this Agreement, if the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.

     6.4 Default. Despite any contrary provision of this Agreement, if the Bank is in “default” or “in danger of default”, as those terms are defined in of section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.

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Article 7
Claims and Review Procedures

     7.1 Claims Procedure. Any person who has not received benefits under this Agreement that he or she believes should be paid (the “claimant”) shall make a claim for benefits as follows.

7.1.1	Initiation — written claim. The claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If the claim relates to the contents of a notice received by the claimant, the claim must be made within 60 days after the notice was received by the claimant. All other claims must be made within 180 days after the date of the event that caused the claim to arise. The claim must state with particularity the determination desired by the claimant.
7.1.2	Timing of Administrator response. The Administrator shall respond to the claimant within 90 days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, before the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.
7.1.3	Notice of decision. If the Administrator denies part or all of the claim, the Administrator shall notify the claimant in writing of the denial. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth —

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
(d)	An explanation of the Agreement’s review procedures and the time limits applicable to such procedures, and
(e)	A statement of the claimant’s right to bring a civil action under ERISA section 502(a) after an adverse benefit determination on review.

     7.2 Review Procedure. If the Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Administrator of the denial, as follows.

7.2.1	Initiation — written request. To initiate the review, the claimant must file with the Administrator a written request for review within 60 days after receiving the Administrator’s notice of denial.
7.2.2	Additional submissions — information access. The claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. Upon request and free of charge, the Administrator shall also provide the claimant reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
7.2.3	Considerations on review. In considering the review, the Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether the information was submitted or considered in the initial benefit determination.
7.2.4	Timing of Administrator response. The Administrator shall respond in writing to the claimant within 60 days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 60 days by notifying the claimant in writing before the end of the initial 60-day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.

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7.2.5 Notice of decision. The Administrator shall notify the claimant in writing of its decision on review. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of the Agreement on which the denial is based,
(c)	A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
(d)	A statement of the claimant’s right to bring a civil action under ERISA section 502(a).

Article 8
Administration of Agreement

     8.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator consisting of the board or such committee or persons as the board shall appoint. The Executive may not be a member of the Plan Administrator. The Plan Administrator shall have the discretion and authority to (x) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and (y) decide or resolve any and all questions that may arise, including interpretations of this Agreement.

     8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.

     8.3 Binding Effect of Decisions. The decision or action of the Plan Administrator concerning any question arising out of the administration, interpretation, and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. Neither the Executive nor any Beneficiary shall be deemed to have any right, vested or unvested, regarding the continuing effect of any decision or action of the Plan Administrator.

     8.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

     8.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.

Article 9
Miscellaneous

     9.1 Amendments and Termination. This Agreement may be amended solely by a written agreement signed by the Bank and by the Executive. Except for the case of Termination with Cause, this Agreement shall not be terminated unless the Account Balance is first paid to the Executive or the Executive’s Beneficiary.

     9.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, successors, administrators, and transferees.

     9.3 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the Bank’s business or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Bank would be required to perform this Agreement had no succession occurred.

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     9.4 No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executive’s right to terminate employment at any time.

     9.5 Non-Transferability. Benefits under this Agreement may not be sold, transferred, assigned, pledged, attached, or encumbered.

     9.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

     9.7 Applicable Law. This Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent the laws of the United States of America otherwise require.

     9.8 Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay benefits. The rights to benefits are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.

     9.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. This Agreement amends and restates in its entirety the December 28, 2006 Executive Deferred Compensation Agreement between the Executive and the Bank.

     9.10 Tax Consequences. The Bank does not insure or guarantee the tax consequences of payments provided hereunder for matters beyond its control. The Executive certifies that the Executive’s decision to defer receipt of compensation is not due to reliance on financial, tax, or legal advice given by the Bank or any of its employees, agents, accountants, or legal advisors.

     9.11 Payment of Legal Fees. The Bank is aware that after a Change in Control management of the Bank could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, or could institute or cause or attempt to cause the Bank to institute litigation seeking to have this Agreement declared unenforceable, or could take or attempt to take other action to deny the Executive the benefits intended under this Agreement. In these circumstances the purpose of this Agreement would be frustrated. The Bank desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. The Bank desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (x) the Bank has failed to comply with any of its obligations under this Agreement, or (y) the Bank or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, the Bank irrevocably authorizes the Executive from time to time to retain counsel of the Executive’s choice, at the Bank’s expense as provided in this section 9.11, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Despite any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this section 9.11, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel’s customary practices, up to a maximum aggregate amount of $500,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. The Bank’s obligation to pay the Executive’s legal fees under this section 9.11 operates separately from and in addition to any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance, or other agreement between the Executive and the Bank. Despite anything in this section 9.11 to the contrary however, the Bank shall not be required to pay or reimburse the Executive’s legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

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     9.12 Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of the provision not held invalid, and the remainder of such provision together with all other provisions of this Agreement shall continue in full force and effect to the full extent consistent with law.

     9.13 Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be considered a waiver of the terms or conditions for the future or a waiver of any subsequent breach. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party.

     9.14 Captions and Counterparts. Captions in this Agreement are included for convenience only and shall not affect the interpretation or construction of the Agreement or any of its provisions. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute a single agreement.

     9.15 Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the Board of Directors, The Middlefield Banking Company, 15985 East High Street, Middlefield, Ohio 44062-0035.

     9.16 Termination or Modification of Agreement Because of Changes in Law, Rules or Regulations. The Bank is entering into this Agreement on the assumption that certain existing tax laws, rules, and regulations will continue in effect in their current form. If that assumption materially changes and the change has a material detrimental effect on this Agreement, the Bank reserves the right to terminate or modify this Agreement accordingly, subject to the written consent of the Executive, which shall not be unreasonably withheld. This section 9.16 shall become null and void effective immediately after a Change in Control.

     In Witness Whereof, the Executive and a duly authorized Bank officer have executed this Amended Executive Deferred Compensation Agreement as of the date first written above.

Executive:	Bank:
	The Middlefield Banking
Company
/s/ James R. Heslop II
James R. Heslop II
	By:
	Its:

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The Middlefield Banking Company
Amended Executive Deferred Compensation Agreement
Beneficiary Designation

     I designate the following as beneficiary under this Amended Executive Deferred Compensation Agreement of benefits payable after my death.

Primary:

Contingent:

Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

     I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature:
	James R. Heslop II
Date:	, 2008

     Received by the Bank this ___ day of

                                          , 2008

By:

Title:

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EX-10.25

Exhibit 10.25

The Middlefield Banking Company
Amended Executive Deferred Compensation Agreement*

This Amended Executive Deferred Compensation Agreement (this “Agreement”) is entered into as of this 8th day of May, 2008, by and between The Middlefield Banking Company, an Ohio-chartered bank (the “Bank”), and Donald L. Stacy, Treasurer and Chief Financial Officer of the Bank (the “Executive”).

Whereas, to encourage the Executive to remain an employee of the Bank, the Bank and the Executive entered into an Executive Deferred Compensation Agreement dated as of December 28, 2006, with contributions made solely by the Bank and benefits payable out of the Bank’s general assets,

Whereas, the Bank and the Executive desire to amend the December 28, 2006 Executive Deferred Compensation Agreement to ensure that the agreement complies in form and in operation with Internal Revenue Code section 409A,

Whereas, the Bank and the Executive intend that this Agreement shall amend and restate in its entirety the December 28, 2006 Executive Deferred Compensation Agreement,

Whereas, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

Whereas, the parties hereto intend that this Agreement shall be considered an unfunded and noncontributory arrangement maintained primarily to provide supplemental retirement benefits for the Executive, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Executive is fully advised of the Bank’s financial status.

Now Therefore, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

Article 1
Definitions

1.1 “Account Balance” means the Bank’s accounting of Annual Contributions made by the Bank, plus accrued interest.

1.2 “Annual Contribution” means the amount credited to the Account Balance after the end of each Plan Year for which the Performance Goals are achieved. For the first Plan Year, the Executive shall receive an Annual Contribution amount equal to 5% of the Executive’s Base Annual Salary. For every Plan Year after the first Plan Year, the Annual Contribution will be conditional on achievement of the Performance Goals. The Annual Contribution amount in any Plan Year shall not be less than 5% or more than 15% of the Executive’s Base Annual Salary. In its discretion, the Bank’s board of directors may increase or decrease the amount of the Annual Contribution, but the Annual Contribution amount shall be changed no more frequently than annually.

1.3 “Base Annual Salary” means compensation of the type required to be reported as salary according to Securities and Exchange Commission Rule 229.402(c) (17 CFR 229.402(c)), specifically column (c) of that rule’s Summary Compensation Table (or any successor provision).

1.4 “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

1.5 “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

* Schedule A has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

1.6 “Change in Control” shall mean a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including –

(a) Change in ownership: a change in ownership of Middlefield Banc Corp., an Ohio corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Middlefield Banc Corp. stock constituting more than 50% of the total fair market value or total voting power of Middlefield Banc Corp. stock,

(b) Change in effective control: (x) any one person or more than one person acting as a group acquires within a 12-month period ownership of Middlefield Banc Corp. stock possessing 30% or more of the total voting power of Middlefield Banc Corp., or (y) a majority of Middlefield Banc Corp.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Middlefield Banc Corp.’s board of directors, or

(c) Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of Middlefield Banc Corp.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Middlefield Banc Corp. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Middlefield Banc Corp.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Middlefield Banc Corp.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

1.7 “Code” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

1.8 “Effective Date” means January 1, 2006.

1.9 “Normal Retirement Age” means the Executive’s 65th birthday.

1.10 “Performance Goals” means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank’s board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A shall be substituted for and shall supersede the old Schedule A, and the new Schedule A shall be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals shall not become effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator shall have sole authority to determine whether the Performance Goals have been achieved for any Plan Year. The Plan Administrator’s determination that the Performance Goals for a Plan Year have or have not been achieved shall be conclusive and binding.

1.11 “Plan Administrator” or “Administrator” means the plan administrator described in Article 8.

1.12 “Plan Year” means the calendar year. The first Plan Year shall begin on the Effective Date and end on December 31, 2006.

1.13 “Separation from Service” means the Executive’s service as an executive or independent contractor to the Bank and any member of a controlled group, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Bank or the Executive’s death. If there is a dispute about the Executive’s status or the date of the Executive’s Separation from Service, the Bank shall have the sole and absolute right to decide the dispute unless a Change in Control shall have occurred.

1.14 “Termination with Cause” and “Cause” shall have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Middlefield Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive’s employment because of –

(a) the Executive’s gross negligence or gross neglect of duties or intentional and material failure to perform stated duties after written notice thereof, or  

(b) disloyalty or dishonesty by the Executive in the performance of duties or breach of the Executive’s fiduciary duties for personal profit, in any case whether in the Executive’s capacity as a director or officer, or

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(c) intentional wrongful damage by the Executive to the business or property of the Bank or its affiliates, including without limitation the reputation of the Bank, which in the judgement of the Bank causes material harm to the Bank or affiliates, or

(d) a willful violation by the Executive of any applicable law or significant policy of the Bank or an affiliate that, in the Bank’s judgement, results in an adverse effect on the Bank or the affiliate, regardless of whether the violation leads to criminal prosecution or conviction. For purposes of this Agreement applicable laws include any statute, rule, regulatory order, statement of policy, or final cease-and-desist order of any governmental agency or body having regulatory authority over the Bank, or

(e) the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of the Bank, under the Bank’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees, or

(f) the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

(g) conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more.

Article 2
Deferral Account

2.1 Annual Contribution. The Bank shall establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank shall credit the Annual Contribution to the Account Balance provided the Performance Goals were achieved for the Plan Year. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. The Annual Contribution shall not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter. However, if the Performance Goals are achieved for the Plan Year in which the Executive attains Normal Retirement Age (and if Separation from Service does not occur before Normal Retirement Age), the Bank shall make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage shall equal the number of days in the Plan Year before the Executive attained Normal Retirement Age divided by 365. No Annual Contributions shall be made by the Bank for the Plan Year in which the Executive’s death or Separation from Service occurs or for any year thereafter (except for a final contribution for the year in which the Executive attains Normal Retirement Age, unless Separation from Service occurs before Normal Retirement Age).

2.2 Interest. At the end of each Plan Year and until the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest is to be credited on the Account Balance at an annual rate of interest for that Plan Year, compounded monthly on the first day of the month, equal to the prime interest rate as published in The Wall Street Journal (the “Index”). After the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest shall be credited on the Account Balance at an annual rate equal to the yield on a 20-year corporate bond rated Aa by Moody’s, rounded to the nearest ¹/4%.

2.3 Statement of Account. Within 120 days after the end of each Plan Year, the Bank shall provide to the Executive a statement of the Account Balance at the end of the Plan Year. Each annual statement of the Account Balance shall supersede the previous year’s statement of the Account Balance.

2.4 Accounting Device Only. The Account Balance is solely a device for measuring amounts to be paid under this Agreement. The Account Balance is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere promise by the Bank to pay benefits. The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

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Article 3
Benefits During Lifetime

3.1 Normal Retirement Age. Unless Separation from Service or a Change in Control occurs before Normal Retirement Age, when the Executive attains Normal Retirement Age the Bank shall pay to the Executive the Account Balance as of the end of the month in which the Executive attains Normal Retirement Age, instead of any other benefit under this Agreement. Beginning on the first day of the month after the month in which the Executive attains Normal Retirement Age, the Account Balance shall be paid to the Executive in 180 substantially equal monthly installments. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full. If the Executive’s Separation from Service is a Termination with Cause, no further benefits shall be paid under this Agreement and this Agreement shall terminate.

3.2 Separation from Service. If Separation from Service occurs before Normal Retirement Age for reasons other than death, instead of any other benefit under this Agreement the Bank shall pay to the Executive the Account Balance as of the end of the month immediately before the month in which payments commence, unless the Change-in-Control benefit shall have been paid under section 3.3. Beginning on the first day of the later of (x) the seventh month after the month in which Separation from Service occurs or (y) the month after the month in which the Executive attains Normal Retirement Age, the Bank shall pay the Account Balance in 180 substantially equal monthly installments. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full.

3.3 Change in Control. If a Change in Control occurs both before the Executive attains Normal Retirement Age and before the Executive’s Separation from Service, instead of any other benefit payable under this Agreement the Bank shall pay to the Executive the entire Account Balance in a single lump sum within three days after the Change in Control. Payment of the Change-in-Control benefit shall fully discharge the Bank from all obligations under this Agreement, except the legal fee reimbursement obligation under section 9.11.

3.4 Payout of Normal Retirement Benefit or Separation from Service Benefit after a Change in Control. If when a Change in Control occurs the Executive is receiving the benefit under section 3.1, the Bank shall pay the remaining benefits to the Executive in a single lump sum within three business days after the Change in Control. If when a Change in Control occurs the Executive is receiving or is entitled at Normal Retirement Age to receive the benefit under section 3.2, the Bank shall pay the remaining benefits to the Executive in a single lump sum within three business days after the later of (x) the date of the Change in Control or (y) the first day of the seventh month after the month in which the Executive’s Separation from Service occurs. The lump-sum payment due to the Executive as a result of a Change in Control shall be an amount equal to the Account Balance remaining unpaid.

3.5 One Benefit Only. Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the first event to occur that is dealt with by this Agreement. Except as provided in section 3.4, later occurrence of events dealt with by this Agreement shall not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

3.6 Savings Clause Relating to Compliance with Code Section 409A. Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive shall not be entitled to the payments under Article 3 until the earliest of (x) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, (y) the date of the Executive’s death, or (z) any earlier date that does not result in additional tax or interest to the Executive under section 409A. If any provision of this Agreement would subject the Executive to additional tax or interest under section 409A, the Bank shall reform the provision. However, the Bank shall maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Executive to additional tax or interest, and the Bank shall not be required to incur any additional compensation expense as a result of the reformed provision.

Article 4
Death Benefits

After the Executive’s death, the Bank shall pay to the Executive’s Beneficiary the Account Balance as of the date of the Executive’s death. The Account Balance shall be paid to the Executive’s Beneficiary in a single lump sum 90 days after the date of the Executive’s death. However, if the Executive dies after termination of this Agreement under Article 6, the Executive’s Beneficiary shall be entitled to no benefits under this Agreement.

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Article 5
Beneficiaries

5.1 Beneficiary Designations. The Executive shall have the right to designate at any time a Beneficiary to receive any benefits payable under this Agreement after the Executive’s death. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

5.2 Beneficiary Designation Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

5.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

5.4 No Beneficiary Designation. If the Executive dies without a valid beneficiary designation or if all designated Beneficiaries predecease the Executive, the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be paid to the Executive’s estate.

5.5 Facility of Payment. If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay the benefit to the guardian, legal representative, or person having the care or custody of the minor, incapacitated person, or incapable person. The Bank may require proof of incapacity, minority, or guardianship as it may deem appropriate before distribution of the benefit. Distribution shall completely discharge the Bank from all liability for the benefit.

Article 6
General Limitations

6.1 Termination with Cause. Despite any contrary provision of this Agreement, the Bank shall not pay any benefit under this Agreement and this Agreement shall terminate if Separation from Service is a Termination with Cause.

6.2 Misstatement. No benefits shall be paid under this Agreement if the Executive makes any material misstatement of fact on any application or resume provided to the Bank, on any application for life insurance purchased by the Bank, or on any application for benefits provided by the Bank.

6.3 Removal. Despite any contrary provision of this Agreement, if the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.

6.4 Default. Despite any contrary provision of this Agreement, if the Bank is in “default” or “in danger of default”, as those terms are defined in of section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.

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Article 7
Claims and Review Procedures

7.1 Claims Procedure. Any person who has not received benefits under this Agreement that he or she believes should be paid (the “claimant”) shall make a claim for benefits as follows.

7.1.1 Initiation – written claim. The claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If the claim relates to the contents of a notice received by the claimant, the claim must be made within 60 days after the notice was received by the claimant. All other claims must be made within 180 days after the date of the event that caused the claim to arise. The claim must state with particularity the determination desired by the claimant.

7.1.2 Timing of Administrator response. The Administrator shall respond to the claimant within 90 days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, before the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.

7.1.3 Notice of decision. If the Administrator denies part or all of the claim, the Administrator shall notify the claimant in writing of the denial. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth –

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
(d)	An explanation of the Agreement’s review procedures and the time limits applicable to such procedures, and
(e)	A statement of the claimant’s right to bring a civil action under ERISA section 502(a) after an adverse benefit determination on review.

7.2 Review Procedure. If the Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Administrator of the denial, as follows.

7.2.1	Initiation – written request. To initiate the review, the claimant must file with the Administrator a written request for review within 60 days after receiving the Administrator’s notice of denial.
7.2.2	Additional submissions – information access. The claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. Upon request and free of charge, the Administrator shall also provide the claimant reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
7.2.3	Considerations on review. In considering the review, the Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether the information was submitted or considered in the initial benefit determination.
7.2.4	Timing of Administrator response. The Administrator shall respond in writing to the claimant within 60 days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 60 days by notifying the claimant in writing before the end of the initial 60-day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.

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7.2.5 Notice of decision. The Administrator shall notify the claimant in writing of its decision on review. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of the Agreement on which the denial is based,
(c)	A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
(d)	A statement of the claimant’s right to bring a civil action under ERISA section 502(a).

Article 8
Administration of Agreement

8.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator consisting of the board or such committee or persons as the board shall appoint. The Executive may not be a member of the Plan Administrator. The Plan Administrator shall have the discretion and authority to (x) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and (y) decide or resolve any and all questions that may arise, including interpretations of this Agreement.

8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.

8.3 Binding Effect of Decisions. The decision or action of the Plan Administrator concerning any question arising out of the administration, interpretation, and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. Neither the Executive nor any Beneficiary shall be deemed to have any right, vested or unvested, regarding the continuing effect of any decision or action of the Plan Administrator.

8.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.

Article 9
Miscellaneous

9.1 Amendments and Termination. This Agreement may be amended solely by a written agreement signed by the Bank and by the Executive. Except for the case of Termination with Cause, this Agreement shall not be terminated unless the Account Balance is first paid to the Executive or the Executive’s Beneficiary.

9.2 Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, successors, administrators, and transferees.

9.3 Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the Bank’s business or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Bank would be required to perform this Agreement had no succession occurred.

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9.4 No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executive’s right to terminate employment at any time.

9.5 Non-Transferability. Benefits under this Agreement may not be sold, transferred, assigned, pledged, attached, or encumbered.

9.6 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.7 Applicable Law. This Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent the laws of the United States of America otherwise require.

9.8 Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay benefits. The rights to benefits are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.

9.9 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. This Agreement amends and restates in its entirety the December 28, 2006 Executive Deferred Compensation Agreement between the Executive and the Bank.

9.10 Tax Consequences. The Bank does not insure or guarantee the tax consequences of payments provided hereunder for matters beyond its control. The Executive certifies that the Executive’s decision to defer receipt of compensation is not due to reliance on financial, tax, or legal advice given by the Bank or any of its employees, agents, accountants, or legal advisors.

9.11 Payment of Legal Fees. The Bank is aware that after a Change in Control management of the Bank could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, or could institute or cause or attempt to cause the Bank to institute litigation seeking to have this Agreement declared unenforceable, or could take or attempt to take other action to deny the Executive the benefits intended under this Agreement. In these circumstances the purpose of this Agreement would be frustrated. The Bank desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. The Bank desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (x) the Bank has failed to comply with any of its obligations under this Agreement, or (y) the Bank or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, the Bank irrevocably authorizes the Executive from time to time to retain counsel of the Executive’s choice, at the Bank’s expense as provided in this section 9.11, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Despite any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this section 9.11, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel’s customary practices, up to a maximum aggregate amount of $500,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. The Bank’s obligation to pay the Executive’s legal fees under this section 9.11 operates separately from and in addition to any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance, or other agreement between the Executive and the Bank. Despite anything in this section 9.11 to the contrary however, the Bank shall not be required to pay or reimburse the Executive’s legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

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9.12 Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of the provision not held invalid, and the remainder of such provision together with all other provisions of this Agreement shall continue in full force and effect to the full extent consistent with law.

9.13 Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be considered a waiver of the terms or conditions for the future or a waiver of any subsequent breach. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party.

9.14 Captions and Counterparts. Captions in this Agreement are included for convenience only and shall not affect the interpretation or construction of the Agreement or any of its provisions. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute a single agreement.

9.15 Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the Board of Directors, The Middlefield Banking Company, 15985 East High Street, Middlefield, Ohio 44062-0035.

9.16 Termination or Modification of Agreement Because of Changes in Law, Rules or Regulations. The Bank is entering into this Agreement on the assumption that certain existing tax laws, rules, and regulations will continue in effect in their current form. If that assumption materially changes and the change has a material detrimental effect on this Agreement, the Bank reserves the right to terminate or modify this Agreement accordingly, subject to the written consent of the Executive, which shall not be unreasonably withheld. This section 9.16 shall become null and void effective immediately after a Change in Control.

In Witness Whereof, the Executive and a duly authorized Bank officer have executed this Amended Executive Deferred Compensation Agreement as of the date first written above.

Executive:	Bank:
	The Middlefield Banking
Company
/s/ Donald L. Stacy
Donald L. Stacy	By:
	Its:

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The Middlefield Banking Company
Amended Executive Deferred Compensation Agreement
Beneficiary Designation

I designate the following as beneficiary under this Amended Executive Deferred Compensation Agreement of benefits payable after my death.

Primary:

Contingent:

Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature:                                                             
                    Donald L. Stacy

Date:                                                                     , 2008

Received by the Bank this                      day of                                         , 2008

By:                                                                

Title:                                                             

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EX-10.26

Exhibit 10.26

The Middlefield Banking Company

Executive Variable Benefit Deferred Compensation Agreement*

This Executive Variable Benefit Deferred Compensation Agreement (this “Agreement”) is entered into as of this 9th day of July, 2018, by and between The Middlefield Banking Company, an Ohio-chartered bank (the “Bank”), and James R. Heslop, II, Executive Vice President and Chief Operating Officer of the Bank (the “Executive”).

Whereas, the Bank and the Executive entered into an Amended Executive Deferred Compensation Agreement dated as of May 8, 2008, with contributions made solely by the Bank and benefits payable out of the Bank’s general assets,

Whereas, the Amended Executive Deferred Compensation Agreement does not provide for employer contributions to continue after age 65 because Section 2.1 of the Amended Executive Deferred Compensation Agreement states “The Annual Contribution shall not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter.”

Whereas, this Agreement does not supersede the May 8, 2008 Amended Executive Deferred Compensation Agreement,

Whereas, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

Whereas, the parties hereto intend that this Agreement shall be considered an unfunded arrangement maintained primarily to provide supplemental retirement benefits for the Executive (who is a key employee and member of a select group of management), and to be considered a top hat plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Executive is fully advised of the Bank’s financial status.

Now Therefore, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

Article 1

Definitions

1.1     “Account Balance” means the Bank’s accounting of Annual Contributions made by the Bank, plus accrued interest.

1.2     “Annual Contribution” means the amount credited to the Account Balance after the end of each Plan Year for which the Performance Goals are achieved. The Annual Contribution will be conditional on achievement of the Performance Goals. The Annual Contribution amount in any Plan Year shall not be less than 5% or more than 15% of the Executive’s Base Annual Salary. The Annual Contribution amount shall be changed no more frequently than annually.

* Schedule A has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

1.3     “Base Annual Salary” means compensation of the type required to be reported as salary according to Securities and Exchange Commission Rule 229.402(c) (17 CFR 229.402(c)), specifically column (c) of that rule’s Summary Compensation Table (or any successor provision), but excluding fees or any other form of compensation payable on account of service as a director. Base Annual Salary shall be calculated before reduction for amounts voluntarily deferred or contributed by the Executive pursuant to qualified plans.

1.4     “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

1.5     “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

1.6     “Change in Control” shall mean a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, applying the percentage threshold specified in each of paragraphs (a) through (c) of this section 1.6 or the related percentage threshold specified in section 409A and rules, regulations, and guidance of general application thereunder, whichever is greater –

(a)     Change in ownership: a change in ownership of Middlefield Banc Corp. (“Banc Corp.”), an Ohio corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Banc Corp. stock constituting more than 50% of the total fair market value or total voting power of Banc Corp. stock,

(b)     Change in effective control: (x) any one person or more than one person acting as a group acquires within a 12-month period ownership of Banc Corp. stock possessing 30% or more of the total voting power of Banc Corp., or (y) a majority of Banc Corp.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Banc Corp.’s board of directors, or

(c)     Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of Banc Corp.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Banc Corp. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Banc Corp.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Banc Corp.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

1.7     “Code” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

1.8     “Effective Date” means January 1, 2018.

1.9     “Intentional” for purposes of this Agreement, no act or failure to act on the Executive’s part will be considered intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive’s part is intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the Bank’s best interests. Any act or failure to act based upon authority granted by resolutions duly adopted by the board of directors or based upon the advice of counsel for the Bank is conclusively presumed to be in good faith and in the Bank’s best interests.

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1.10     “Performance Goals” means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank’s board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A shall be substituted for and shall supersede the old Schedule A, and the new Schedule A shall be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals shall not become effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator shall have sole authority to determine whether the Performance Goals have been achieved for any Plan Year. The Plan Administrator’s determination that the Performance Goals for a Plan Year have or have not been achieved shall be conclusive and binding.

1.11     “Plan Administrator” or “Administrator” means the plan administrator described in Article 8.

1.12     “Plan Year” means the calendar year. The first Plan Year shall begin on the Effective Date and end on December 31, 2018.

1.13     “Separation from Service” means separation from service as defined in Treasury Regulation 1.409A-1(h), other than because of the Executive’s death.

1.14     “Termination with Cause” and “Cause” shall have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive’s employment because of –

(a)       the Executive’s gross negligence or gross neglect of duties or intentional and material failure to perform stated duties after written notice thereof, or

(b)       disloyalty or dishonesty by the Executive in the performance of duties or breach of the Executive’s fiduciary duties for personal profit, in any case whether in the Executive’s capacity as a director or officer, or

(c)       intentional wrongful damage by the Executive to the business or property of the Bank or its affiliates, including without limitation the reputation of the Bank, which in the judgement of the Bank causes material harm to the Bank or affiliates, or

(d)       a willful violation by the Executive of any applicable law or significant policy of the Bank or an affiliate that, in the Bank’s judgement, results in an adverse effect on the Bank or the affiliate, regardless of whether the violation leads to criminal prosecution or conviction. For purposes of this Agreement applicable laws include any statute, rule, regulatory order, statement of policy, or final cease-and-desist order of any governmental agency or body having regulatory authority over the Bank, or

(e)       the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of the Bank, under the Bank’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees, or

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(f)       the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

(g)      conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more.

Article 2

Deferral Account

2.1     Annual Contribution. The Bank shall establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank shall credit the Annual Contribution to the Account Balance provided the Performance Goals were achieved for the Plan Year. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. However, if the Performance Goals are achieved for the Plan Year in which the Executive has a Separation from Service or dies, the Bank shall make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage shall equal the number of days in the Plan Year before the Executive’s Separation from Service or death divided by 365.

2.2     Interest. At the end of each Plan Year and until the first to occur of (x) the Executive’s death, or (y) the Executive’s Separation from Service, interest is to be credited on the Account Balance at an annual rate of interest for that Plan Year, compounded monthly on the first day of the month, equal to the prime interest rate as published in The Wall Street Journal. After the Executive’s Separation from Service, interest shall be credited on the Account Balance at an annual rate equal to the yield on a 10-year corporate bond rated Aa by Moody’s, rounded to the nearest ¼%.

2.3     Statement of Account. Within 120 days after the end of each Plan Year, the Bank shall provide to the Executive a statement of the Account Balance at the end of the Plan Year. Each annual statement of the Account Balance shall supersede the previous year’s statement of the Account Balance.

2.4     Accounting Device Only. The Account Balance is solely a device for measuring amounts to be paid under this Agreement. The Account Balance is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere promise by the Bank to pay benefits. The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

Article 3

Benefits During Lifetime

3.1     Separation from Service. Unless the Executive dies or a Change in Control occurs before Separation from Service, when the Executive has a Separation from Service the Bank shall pay to the Executive the Account Balance as of the end of the month in which the Executive has a Separation from Service. Beginning on the first day of the seventh month after the Executive has a Separation from Service, the Account Balance shall be paid to the Executive in 120 substantially equal monthly installments with each subsequent payment to be made on the first day of each subsequent month. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full. If the Executive’s Separation from Service is a Termination with Cause, no benefits shall be paid under this Agreement and this Agreement shall terminate.

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3.2     Change in Control. If a Change in Control occurs before the Executive’s Separation from Service, instead of any other benefit payable under this Agreement the Bank shall pay to the Executive the entire Account Balance in a single lump sum on the date of the Change in Control. Payment of the Change-in-Control benefit shall fully discharge the Bank from all obligations under this Agreement, except the legal fee reimbursement obligation under section 9.11.

3.3     Payout of Separation from Service Benefit after a Change in Control. If when a Change in Control occurs the Executive is receiving or is entitled to receive the benefit under section 3.1, the Bank shall pay the remaining benefits to the Executive in a single lump sum on the later of (x) the date of the Change in Control or (y) the first day of the seventh month after the month in which the Executive’s Separation from Service occurs. The lump-sum payment due to the Executive as a result of a Change in Control shall be an amount equal to the Account Balance remaining unpaid.

3.4     One Benefit Only. Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the first event to occur that is dealt with by this Agreement. Except as provided in section 3.3, later occurrence of events dealt with by this Agreement shall not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

3.5     Savings Clause Relating to Compliance with Code Section 409A. Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive shall not be entitled to the payments under Article 3 until the earliest of (x) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, (y) the date of the Executive’s death, or (z) any earlier date that does not result in additional tax or interest to the Executive under section 409A.

Article 4

Death Benefits

After the Executive’s death, the Bank shall pay to the Executive’s Beneficiary the Account Balance as of the date of the Executive’s death. The Account Balance shall be paid to the Executive’s Beneficiary in a single lump sum, 90 days after the date of the Executive’s death. However, if the Executive dies after termination of this Agreement under Article 6, the Executive’s Beneficiary shall be entitled to no benefits under this Agreement.

Article 5

Beneficiaries

5.1     Beneficiary Designations. The Executive shall have the right to designate at any time a Beneficiary to receive any benefits payable under this Agreement after the Executive’s death. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

5.2     Beneficiary Designation Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

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5.3     Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

5.4     No Beneficiary Designation. If the Executive dies without a valid beneficiary designation or if all designated Beneficiaries predecease the Executive, the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be paid to the Executive’s estate.

5.5     Facility of Payment. If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay the benefit to the guardian, legal representative, or person having the care or custody of the minor, incapacitated person, or incapable person. The Bank may require proof of incapacity, minority, or guardianship as it may deem appropriate before distribution of the benefit. Distribution shall completely discharge the Bank from all liability for the benefit.

Article 6

General Limitations

6.1     Termination with Cause. Despite any contrary provision of this Agreement, the Bank shall not pay any benefit under this Agreement and this Agreement shall terminate if Separation from Service is a Termination with Cause.

6.2      Removal. Despite any contrary provision of this Agreement, if the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.

6.3     Default. Despite any contrary provision of this Agreement, if the Bank is in “default” or “in danger of default”, as those terms are defined in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.

Article 7

Claims and Review Procedures

7.1     Claims Procedure. The Bank will notify any person or entity that makes a claim for benefits under this Agreement (the “Claimant”) in writing, within 90 days after receiving Claimant’s written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Plan Administrator determines that the Claimant is not eligible for benefits or full benefits, the notice will state (w) the specific reasons for denial, (x) a specific reference to the provisions of the Agreement on which the denial is based, (y) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, and (z) an explanation of the Agreement’s claims review procedure and other appropriate information concerning steps to be taken if the Claimant wishes to have the claim reviewed. If the Plan Administrator determines that there are special circumstances requiring additional time to make a decision, the Bank will notify the Claimant of the special circumstances and the date by which a decision is expected to be made and may extend the time for up to an additional 90 days.

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7.2     Review Procedure. If the Claimant is determined by the Plan Administrator not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant will have the opportunity to have his or her claim reviewed by the Bank by filing a petition for review with the Bank within 60 days after receipt of the notice issued by the Bank. The Claimant’s petition must state the specific reasons the Claimant believes entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt by the Bank of the petition, the Plan Administrator will give the Claimant (and counsel, if any) an opportunity to present his or her position verbally or in writing, and the Claimant (or counsel) will have the right to review the pertinent documents. The Plan Administrator will notify the Claimant of the Plan Administrator’s decision in writing within the 60-day period, stating specifically the basis of its decision, written in a manner to be understood by the Claimant, and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period is not sufficient, the decision may be deferred for up to another 60 days at the election of the Plan Administrator but notice of this deferral will be given to the Claimant.

Article 8

Administration of Agreement

8.1     Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator consisting of the board or such committee or persons as the board shall appoint. The Executive may not be a member of the Plan Administrator. The Plan Administrator shall have the discretion and authority to (x) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and (y) decide or resolve any and all questions that may arise, including interpretations of this Agreement.

8.2     Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.

8.3     Binding Effect of Decisions. The decision or action of the Plan Administrator concerning any question arising out of the administration, interpretation, and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. Neither the Executive nor any Beneficiary shall be deemed to have any right, vested or unvested, regarding the continuing effect of any decision or action of the Plan Administrator.

8.4     Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5     Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.

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Article 9

Miscellaneous

9.1     Amendments and Termination. This Agreement may be amended solely by a written agreement signed by the Bank and by the Executive, except that the Bank’s Plan Administrator may on its own change the financial condition or conditions constituting the Performance Goals, which change shall constitute an amendment of this Agreement, provided that written notice of the change is given to the Executive as promptly as practicable after the change is adopted by the Plan Administrator. This Agreement may be terminated by the Bank without the Executive’s consent. Unless Article 6 provides that the Executive is not entitled to payment or unless when termination occurs the Executive has already received payment of benefits under this Agreement, the Bank must pay the Account Balance in a single lump sum to the Executive if the Bank terminates this Agreement. The lump-sum termination payment will be made to the Executive consistent with the terms of the Code section 409A plan-termination exception to the prohibition against accelerated payment [Rule 1.409A-3(j)(4)(ix)].

9.2     Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, successors, administrators, and transferees.

9.3     Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the Bank’s business or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Bank would be required to perform this Agreement had no succession occurred.

9.4     No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executive’s right to terminate employment at any time.

9.5     Non-Transferability. Benefits under this Agreement may not be sold, transferred, assigned, pledged, attached, or encumbered.

9.6     Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.7     Applicable Law. This Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent the laws of the United States of America otherwise require.

9.8     Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay benefits. The rights to benefits are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.

9.9     Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. This Agreement does not supersede or modify the May 8, 2008 Amended Executive Deferred Compensation Agreement. This Agreement and the May 8, 2008 Amended Executive Deferred Compensation Agreement are entirely independent of each other.

9.10     Tax Consequences. The Bank does not insure or guarantee the tax consequences of payments provided hereunder for matters beyond its control. The Bank shall not be liable in any way to Executive if any payment or benefit which is to be provided pursuant to this Agreement and which is considered deferred compensation subject to Code section 409A otherwise fails to comply with, or be exempt from, the requirements of Code section 409A.

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9.11     Payment of Legal Fees. The Bank is aware that after a Change in Control management of the Bank could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement or could institute or cause or attempt to cause the Bank to institute litigation seeking to have this Agreement declared unenforceable or could take or attempt to take other action to deny the Executive the benefits intended under this Agreement. In these circumstances the purpose of this Agreement would be frustrated. The Bank desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. The Bank desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (x) the Bank has failed to comply with any of its obligations under this Agreement, or (y) the Bank or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, the Bank irrevocably authorizes the Executive from time to time to retain counsel of the Executive’s choice, at the Bank’s expense as provided in this section 9.11, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Despite any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this section 9.11, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel’s customary practices, up to a maximum aggregate amount of $500,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. The Bank’s obligation to pay the Executive’s legal fees under this section 9.11 operates separately from and in addition to any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance, or other agreement between the Executive and the Bank. Despite anything in this section 9.11 to the contrary however, the Bank shall not be required to pay or reimburse the Executive’s legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

9.12     Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of the provision not held invalid, and the remainder of such provision together with all other provisions of this Agreement shall continue in full force and effect to the full extent consistent with law.

9.13     Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be considered a waiver of the terms or conditions for the future or a waiver of any subsequent breach. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party.

9.14     Captions and Counterparts. Captions in this Agreement are included for convenience only and shall not affect the interpretation or construction of the Agreement or any of its provisions. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute a single agreement.

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9.15     Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the Board of Directors, The Middlefield Banking Company, 15985 East High Street, Middlefield, Ohio 44062-0035.

In Witness Whereof, the Executive and a duly authorized Bank officer have executed this Executive Deferred Variable Benefit Compensation Agreement as of the date first written above.

Executive:	Bank:
	The Middlefield Banking Company
/s/ James R. Heslop, II
James R. Heslop, II	By:
	Its:

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The Middlefield Banking Company

Executive Variable Benefit Deferred Compensation Agreement

Beneficiary Designation

I designate the following as beneficiary under this Executive Variable Benefit Deferred Compensation Agreement of benefits payable after my death.

Primary:

Contingent:

Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature:                                                          

James R. Heslop, II

Date:                                                                  , 2018

Received by the Bank this              day of                                  , 2018

By:                                                                  

Title:                                                               

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EX-10.27

Exhibit 10.27

The Middlefield Banking Company

Executive Variable Benefit Deferred Compensation Agreement*

This Executive Variable Benefit Deferred Compensation Agreement (this “Agreement”) is entered into as of this 9^th day of July, 2018, by and between The Middlefield Banking Company, an Ohio-chartered bank (the “Bank”), and Donald L. Stacy, Executive Vice President and Chief Financial Officer of the Bank (the “Executive”).

Whereas, the Bank and the Executive entered into an Amended Executive Deferred Compensation Agreement dated as of May 8, 2008, with contributions made solely by the Bank and benefits payable out of the Bank’s general assets,

Whereas, the Amended Executive Deferred Compensation Agreement does not provide for employer contributions to continue after age 65 because Section 2.1 of the Amended Executive Deferred Compensation Agreement states “The Annual Contribution shall not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter.”

Whereas, this Agreement does not supersede the May 8, 2008 Amended Executive Deferred Compensation Agreement,

Whereas, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

Whereas, the parties hereto intend that this Agreement shall be considered an unfunded arrangement maintained primarily to provide supplemental retirement benefits for the Executive (who is a key employee and member of a select group of management), and to be considered a top hat plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Executive is fully advised of the Bank’s financial status.

Now Therefore, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

Article 1

Definitions

1.1     “Account Balance” means the Bank’s accounting of Annual Contributions made by the Bank, plus accrued interest.

1.2     “Annual Contribution” means the amount credited to the Account Balance after the end of each Plan Year for which the Performance Goals are achieved. The Annual Contribution will be conditional on achievement of the Performance Goals. The Annual Contribution amount in any Plan Year shall not be less than 5% or more than 15% of the Executive’s Base Annual Salary. The Annual Contribution amount shall be changed no more frequently than annually.

* Schedule A has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

1.3     “Base Annual Salary” means compensation of the type required to be reported as salary according to Securities and Exchange Commission Rule 229.402(c) (17 CFR 229.402(c)), specifically column (c) of that rule’s Summary Compensation Table (or any successor provision), but excluding fees or any other form of compensation payable on account of service as a director. Base Annual Salary shall be calculated before reduction for amounts voluntarily deferred or contributed by the Executive pursuant to qualified plans.

1.4     “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

1.5     “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

1.6     “Change in Control” shall mean a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, applying the percentage threshold specified in each of paragraphs (a) through (c) of this section 1.6 or the related percentage threshold specified in section 409A and rules, regulations, and guidance of general application thereunder, whichever is greater –

(a)     Change in ownership: a change in ownership of Middlefield Banc Corp. (“Banc Corp.”), an Ohio corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Banc Corp. stock constituting more than 50% of the total fair market value or total voting power of Banc Corp. stock,

(b)     Change in effective control: (x) any one person or more than one person acting as a group acquires within a 12-month period ownership of Banc Corp. stock possessing 30% or more of the total voting power of Banc Corp., or (y) a majority of Banc Corp.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Banc Corp.’s board of directors, or

(c)     Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of Banc Corp.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Banc Corp. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Banc Corp.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Banc Corp.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

1.7     “Code” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

1.8     “Effective Date” means January 1, 2018.

1.9     “Intentional” for purposes of this Agreement, no act or failure to act on the Executive’s part will be considered intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive’s part is intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the Bank’s best interests. Any act or failure to act based upon authority granted by resolutions duly adopted by the board of directors or based upon the advice of counsel for the Bank is conclusively presumed to be in good faith and in the Bank’s best interests.

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1.10     “Performance Goals” means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank’s board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A shall be substituted for and shall supersede the old Schedule A, and the new Schedule A shall be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals shall not become effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator shall have sole authority to determine whether the Performance Goals have been achieved for any Plan Year. The Plan Administrator’s determination that the Performance Goals for a Plan Year have or have not been achieved shall be conclusive and binding.

1.11     “Plan Administrator” or “Administrator” means the plan administrator described in Article 8.

1.12     “Plan Year” means the calendar year. The first Plan Year shall begin on the Effective Date and end on December 31, 2018.

1.13     “Separation from Service” means separation from service as defined in Treasury Regulation 1.409A-1(h), other than because of the Executive’s death.

1.14     “Termination with Cause” and “Cause” shall have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive’s employment because of –

(a)        the Executive’s gross negligence or gross neglect of duties or intentional and material failure to perform stated duties after written notice thereof, or

(b)        disloyalty or dishonesty by the Executive in the performance of duties or breach of the Executive’s fiduciary duties for personal profit, in any case whether in the Executive’s capacity as a director or officer, or

(c)        intentional wrongful damage by the Executive to the business or property of the Bank or its affiliates, including without limitation the reputation of the Bank, which in the judgement of the Bank causes material harm to the Bank or affiliates, or

(d)       a willful violation by the Executive of any applicable law or significant policy of the Bank or an affiliate that, in the Bank’s judgement, results in an adverse effect on the Bank or the affiliate, regardless of whether the violation leads to criminal prosecution or conviction. For purposes of this Agreement applicable laws include any statute, rule, regulatory order, statement of policy, or final cease-and-desist order of any governmental agency or body having regulatory authority over the Bank, or

(e)       the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of the Bank, under the Bank’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees, or

(f)       the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

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(g)       conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more.

Article 2

Deferral Account

2.1     Annual Contribution. The Bank shall establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank shall credit the Annual Contribution to the Account Balance provided the Performance Goals were achieved for the Plan Year. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. However, if the Performance Goals are achieved for the Plan Year in which the Executive has a Separation from Service or dies, the Bank shall make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage shall equal the number of days in the Plan Year before the Executive’s Separation from Service or death divided by 365.

2.2     Interest. At the end of each Plan Year and until the first to occur of (x) the Executive’s death, or (y) the Executive’s Separation from Service, interest is to be credited on the Account Balance at an annual rate of interest for that Plan Year, compounded monthly on the first day of the month, equal to the prime interest rate as published in The Wall Street Journal. After the Executive’s Separation from Service, interest shall be credited on the Account Balance at an annual rate equal to the yield on a 10-year corporate bond rated Aa by Moody’s, rounded to the nearest ¼%.

2.3     Statement of Account. Within 120 days after the end of each Plan Year, the Bank shall provide to the Executive a statement of the Account Balance at the end of the Plan Year. Each annual statement of the Account Balance shall supersede the previous year’s statement of the Account Balance.

2.4     Accounting Device Only. The Account Balance is solely a device for measuring amounts to be paid under this Agreement. The Account Balance is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere promise by the Bank to pay benefits. The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

Article 3

Benefits During Lifetime

3.1     Separation from Service. Unless the Executive dies or a Change in Control occurs before Separation from Service, when the Executive has a Separation from Service the Bank shall pay to the Executive the Account Balance as of the end of the month in which the Executive has a Separation from Service. Beginning on the first day of the seventh month after the Executive has a Separation from Service, the Account Balance shall be paid to the Executive in 120 substantially equal monthly installments with each subsequent payment to be made on the first day of each subsequent month. The Bank shall credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full. If the Executive’s Separation from Service is a Termination with Cause, no benefits shall be paid under this Agreement and this Agreement shall terminate.

3.2     Change in Control. If a Change in Control occurs before the Executive’s Separation from Service, instead of any other benefit payable under this Agreement the Bank shall pay to the Executive the entire Account Balance in a single lump sum on the date of the Change in Control. Payment of the Change-in-Control benefit shall fully discharge the Bank from all obligations under this Agreement, except the legal fee reimbursement obligation under section 9.11.

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3.3     Payout of Separation from Service Benefit after a Change in Control. If when a Change in Control occurs the Executive is receiving or is entitled to receive the benefit under section 3.1, the Bank shall pay the remaining benefits to the Executive in a single lump sum on the later of (x) the date of the Change in Control or (y) the first day of the seventh month after the month in which the Executive’s Separation from Service occurs. The lump-sum payment due to the Executive as a result of a Change in Control shall be an amount equal to the Account Balance remaining unpaid.

3.4     One Benefit Only. Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the first event to occur that is dealt with by this Agreement. Except as provided in section 3.3, later occurrence of events dealt with by this Agreement shall not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

3.5     Savings Clause Relating to Compliance with Code Section 409A. Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive shall not be entitled to the payments under Article 3 until the earliest of (x) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, (y) the date of the Executive’s death, or (z) any earlier date that does not result in additional tax or interest to the Executive under section 409A.

Article 4

Death Benefits

After the Executive’s death, the Bank shall pay to the Executive’s Beneficiary the Account Balance as of the date of the Executive’s death. The Account Balance shall be paid to the Executive’s Beneficiary in a single lump sum, 90 days after the date of the Executive’s death. However, if the Executive dies after termination of this Agreement under Article 6, the Executive’s Beneficiary shall be entitled to no benefits under this Agreement.

Article 5

Beneficiaries

5.1     Beneficiary Designations. The Executive shall have the right to designate at any time a Beneficiary to receive any benefits payable under this Agreement after the Executive’s death. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

5.2     Beneficiary Designation Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

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5.3     Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

5.4     No Beneficiary Designation. If the Executive dies without a valid beneficiary designation or if all designated Beneficiaries predecease the Executive, the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be paid to the Executive’s estate.

5.5     Facility of Payment. If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay the benefit to the guardian, legal representative, or person having the care or custody of the minor, incapacitated person, or incapable person. The Bank may require proof of incapacity, minority, or guardianship as it may deem appropriate before distribution of the benefit. Distribution shall completely discharge the Bank from all liability for the benefit.

Article 6

General Limitations

6.1     Termination with Cause. Despite any contrary provision of this Agreement, the Bank shall not pay any benefit under this Agreement and this Agreement shall terminate if Separation from Service is a Termination with Cause.

6.2      Removal. Despite any contrary provision of this Agreement, if the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order.

6.3     Default. Despite any contrary provision of this Agreement, if the Bank is in “default” or “in danger of default”, as those terms are defined in section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement shall terminate.

Article 7

Claims and Review Procedures

7.1     Claims Procedure. The Bank will notify any person or entity that makes a claim for benefits under this Agreement (the “Claimant”) in writing, within 90 days after receiving Claimant’s written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Plan Administrator determines that the Claimant is not eligible for benefits or full benefits, the notice will state (w) the specific reasons for denial, (x) a specific reference to the provisions of the Agreement on which the denial is based, (y) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, and (z) an explanation of the Agreement’s claims review procedure and other appropriate information concerning steps to be taken if the Claimant wishes to have the claim reviewed. If the Plan Administrator determines that there are special circumstances requiring additional time to make a decision, the Bank will notify the Claimant of the special circumstances and the date by which a decision is expected to be made and may extend the time for up to an additional 90 days.

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7.2     Review Procedure. If the Claimant is determined by the Plan Administrator not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant will have the opportunity to have his or her claim reviewed by the Bank by filing a petition for review with the Bank within 60 days after receipt of the notice issued by the Bank. The Claimant’s petition must state the specific reasons the Claimant believes entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt by the Bank of the petition, the Plan Administrator will give the Claimant (and counsel, if any) an opportunity to present his or her position verbally or in writing, and the Claimant (or counsel) will have the right to review the pertinent documents. The Plan Administrator will notify the Claimant of the Plan Administrator’s decision in writing within the 60-day period, stating specifically the basis of its decision, written in a manner to be understood by the Claimant, and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the 60-day period is not sufficient, the decision may be deferred for up to another 60 days at the election of the Plan Administrator but notice of this deferral will be given to the Claimant.

Article 8

Administration of Agreement

8.1     Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator consisting of the board or such committee or persons as the board shall appoint. The Executive may not be a member of the Plan Administrator. The Plan Administrator shall have the discretion and authority to (x) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and (y) decide or resolve any and all questions that may arise, including interpretations of this Agreement.

8.2     Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.

8.3     Binding Effect of Decisions. The decision or action of the Plan Administrator concerning any question arising out of the administration, interpretation, and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. Neither the Executive nor any Beneficiary shall be deemed to have any right, vested or unvested, regarding the continuing effect of any decision or action of the Plan Administrator.

8.4     Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5     Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.

Article 9

Miscellaneous

9.1     Amendments and Termination. This Agreement may be amended solely by a written agreement signed by the Bank and by the Executive, except that the Bank’s Plan Administrator may on its own change the financial condition or conditions constituting the Performance Goals, which change shall constitute an amendment of this Agreement, provided that written notice of the change is given to the Executive as promptly as practicable after the change is adopted by the Plan Administrator. This Agreement may be terminated by the Bank without the Executive’s consent. Unless Article 6 provides that the Executive is not entitled to payment or unless when termination occurs the Executive has already received payment of benefits under this Agreement, the Bank must pay the Account Balance in a single lump sum to the Executive if the Bank terminates this Agreement. The lump-sum termination payment will be made to the Executive consistent with the terms of the Code section 409A plan-termination exception to the prohibition against accelerated payment [Rule 1.409A-3(j)(4)(ix)].

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9.2     Binding Effect. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, successors, administrators, and transferees.

9.3     Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the Bank’s business or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Bank would be required to perform this Agreement had no succession occurred.

9.4     No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executive’s right to terminate employment at any time.

9.5     Non-Transferability. Benefits under this Agreement may not be sold, transferred, assigned, pledged, attached, or encumbered.

9.6     Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.7     Applicable Law. This Agreement and all rights hereunder shall be governed by the laws of the State of Ohio, except to the extent the laws of the United States of America otherwise require.

9.8     Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay benefits. The rights to benefits are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.

9.9     Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. This Agreement does not supersede or modify the May 8, 2008 Amended Executive Deferred Compensation Agreement. This Agreement and the May 8, 2008 Amended Executive Deferred Compensation Agreement are entirely independent of each other.

9.10     Tax Consequences. The Bank does not insure or guarantee the tax consequences of payments provided hereunder for matters beyond its control. The Bank shall not be liable in any way to Executive if any payment or benefit which is to be provided pursuant to this Agreement and which is considered deferred compensation subject to Code section 409A otherwise fails to comply with, or be exempt from, the requirements of Code section 409A.

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9.11     Payment of Legal Fees. The Bank is aware that after a Change in Control management of the Bank could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement or could institute or cause or attempt to cause the Bank to institute litigation seeking to have this Agreement declared unenforceable or could take or attempt to take other action to deny the Executive the benefits intended under this Agreement. In these circumstances the purpose of this Agreement would be frustrated. The Bank desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. The Bank desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (x) the Bank has failed to comply with any of its obligations under this Agreement, or (y) the Bank or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, the Bank irrevocably authorizes the Executive from time to time to retain counsel of the Executive’s choice, at the Bank’s expense as provided in this section 9.11, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Despite any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this section 9.11, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel’s customary practices, up to a maximum aggregate amount of $500,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. The Bank’s obligation to pay the Executive’s legal fees under this section 9.11 operates separately from and in addition to any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance, or other agreement between the Executive and the Bank. Despite anything in this section 9.11 to the contrary however, the Bank shall not be required to pay or reimburse the Executive’s legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

9.12     Severability. If any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of the provision not held invalid, and the remainder of such provision together with all other provisions of this Agreement shall continue in full force and effect to the full extent consistent with law.

9.13     Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be considered a waiver of the terms or conditions for the future or a waiver of any subsequent breach. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party.

9.14     Captions and Counterparts. Captions in this Agreement are included for convenience only and shall not affect the interpretation or construction of the Agreement or any of its provisions. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute a single agreement.

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9.15     Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the Board of Directors, The Middlefield Banking Company, 15985 East High Street, Middlefield, Ohio 44062-0035.

In Witness Whereof, the Executive and a duly authorized Bank officer have executed this Executive Deferred Variable Benefit Compensation Agreement as of the date first written above.

Executive:	Bank:
	The Middlefield Banking Company
/s/ Donald L. Stacy
Donald L. Stacy	By:
	Its:

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The Middlefield Banking Company

Executive Variable Benefit Deferred Compensation Agreement

Beneficiary Designation

I designate the following as beneficiary under this Executive Variable Benefit Deferred Compensation Agreement of benefits payable after my death.

Primary:

Contingent:

Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature:                                                    

Donald L. Stacy

Date:                                                                  , 2018

Received by the Bank this              day of                               , 2018

By:                                                                 

Title:                                                              

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EX-10.28

 Exhibit 10.28

The Middlefield Banking Company

Executive Deferred Compensation Agreement*

This Executive Deferred Compensation Agreement (this “Agreement”) is entered into as of this 18^th day of June, 2016 by and between The Middlefield Banking Company, an Ohio-chartered bank (the “Bank”), and Charles O. Moore, an executive of the Bank (the “Executive”).

Whereas, the Executive has contributed substantially to the Bank’s success and the Bank desires that the Executive remain in its employ,

Whereas, to encourage the Executive to remain a Bank employee, the Bank desires to establish a noncontributory, defined contribution arrangement to provide a supplemental retirement income opportunity for the Executive, with contributions made solely by the Bank and benefits payable out of the Bank’s general assets,

Whereas, as of the date of this Agreement none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

Whereas, the parties hereto intend this Agreement to be considered an unfunded and noncontributory arrangement maintained primarily to provide supplemental retirement benefits for the Executive, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Executive is fully advised of the Bank’s financial status.

Now Therefore, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

Article 1

Definitions

1.1     “Account Balance” means the Bank’s accounting of Annual Contributions made by the Bank, plus accrued interest.

1.2     “Annual Contribution” means the amount credited to the Account Balance after the end of each Plan Year for which the Performance Goals are achieved. The Annual Contribution is conditional on achievement of the Performance Goals, except that the Annual Contribution amount in any Plan Year will not be less than 5% or more than 15% of the Executive’s Base Annual Salary. In its discretion, the Bank’s board of directors may increase or decrease the amount of the Annual Contribution, but the Annual Contribution amount may be changed no more frequently than annually.

* Schedule A has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

1.3     “Base Annual Salary” means compensation of the type required to be reported as salary according to Securities and Exchange Commission Rule 229.402(c) (17 CFR 229.402(c)), specifically column (c) of that rule’s Summary Compensation Table (or any successor provision).

1.4     “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

1.5     “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

1.6     “Change in Control” means a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including –

(a)     Change in ownership: a change in ownership of Middlefield Banc Corp., an Ohio corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Middlefield Banc Corp. stock constituting more than 50% of the total fair market value or total voting power of Middlefield Banc Corp. stock,

(b)     Change in effective control: (x) any one person or more than one person acting as a group acquires within a 12-month period ownership of Middlefield Banc Corp. stock possessing 30% or more of the total voting power of Middlefield Banc Corp., or (y) a majority of Middlefield Banc Corp.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Middlefield Banc Corp.’s board of directors, or

(c)     Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of Middlefield Banc Corp.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Middlefield Banc Corp. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Middlefield Banc Corp.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Middlefield Banc Corp.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

1.7     “Code” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

1.8     “Effective Date” means January 1, 2016.

1.9     “Normal Retirement Age” means age 65.

1.10     “Performance Goals” means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank’s board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A will be substituted for and supersede the old Schedule A, and the new Schedule A will be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals is not effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator has sole authority to determine whether the Performance Goals are achieved for any Plan Year. The Plan Administrator’s determination that the Performance Goals for a Plan Year have or have not been achieved is conclusive and binding.

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1.11     “Plan Administrator” or “Administrator” means the plan administrator described in Article 8.

1.12     “Plan Year” means the calendar year. The first Plan Year begins on the Effective Date and ends on December 31, 2016.

1.13     “Separation from Service” means the Executive’s service as an executive or independent contractor to the Bank and any member of a controlled group, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Bank or the Executive’s death. If there is a dispute about the Executive’s status or the date of the Executive’s Separation from Service, the Bank has the sole and absolute right to decide the dispute unless a Change in Control has occurred.

1.14     “Termination with Cause” and “Cause” have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Middlefield Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive’s employment because of –

(a)       gross negligence or gross neglect of duties or intentional and material failure to perform stated duties after written notice, or

(b)       disloyalty or dishonesty in the performance of duties or breach of fiduciary duties for personal profit, in any case whether in the Executive’s capacity as a director or officer, or

(c)       intentional wrongful damage to the business or property of the Bank or its affiliates, including without limitation the reputation of the Bank, which in the judgement of the Bank causes material harm to the Bank or affiliates, or

(d)       a willful violation of any applicable law or significant policy of the Bank or an affiliate that, in the Bank’s judgement, results in an adverse effect on the Bank or the affiliate, regardless of whether the violation leads to criminal prosecution or conviction. For purposes of this Agreement applicable laws include any statute, rule, regulatory order, statement of policy, or final cease-and-desist order of any governmental agency or body having regulatory authority over the Bank, or

(e)       the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of the Bank, under the Bank’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees, or

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(f)       removal from office or permanent prohibition from participating in the Bank’s affairs by an order issued under section 8(e)(4) or section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

(g)     conviction of or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or actual incarceration for 45 consecutive days or more.

Article 2

Deferral Account

2.1     Annual Contribution. The Bank will establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank will credit the Annual Contribution to the Account Balance provided the Performance Goals were achieved for the Plan Year. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. The Annual Contribution will not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter. However, if the Performance Goals are achieved for the Plan Year in which the Executive attains Normal Retirement Age (and if Separation from Service does not occur before Normal Retirement Age), the Bank will make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage is equal the number of days in the Plan Year before the Executive attained Normal Retirement Age, divided by 365. No Annual Contribution will be made by the Bank for the Plan Year in which the Executive’s death or Separation from Service occurs or for any year thereafter (except for a final contribution for the year in which the Executive attains Normal Retirement Age, unless Separation from Service occurs before Normal Retirement Age).

2.2     Interest. At the end of each Plan Year and until the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest is to be credited on the Account Balance at an annual rate of interest for that Plan Year, compounded monthly on the first day of the month, equal to the prime interest rate as published in The Wall Street Journal (the “Index”). After the first to occur of (x) Normal Retirement Age, (y) the Executive’s death, or (z) the Executive’s Separation from Service, interest will be credited on the Account Balance at an annual rate selected by the Plan Administrator in its sole discretion, except that the rate may not equal or exceed the rate for which expense accruals for the post-retirement period would during the Executive’s pre-retirement service period be necessary under generally accepted accounting principles. The rate may but need not be the composite corporate bond rate published by the Internal Revenue Service from time to time, the Bloomberg 20-year Investment Grade Financial Institutions Index rate published from time to time, or a comparable rate or index.

2.3     Statement of Account. Within 120 days after the end of each Plan Year the Bank will provide to the Executive a statement of the Account Balance at the end of the Plan Year. Each annual statement of the Account Balance supersedes the previous year’s statement of the Account Balance.

2.4     Accounting Device Only. The Account Balance is solely a device for measuring amounts to be paid under this Agreement. The Account Balance is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere promise by the Bank to pay benefits. The Executive’s rights are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

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Article 3

Benefits During Lifetime

3.1     Normal Retirement Age. Unless Separation from Service or a Change in Control occurs before Normal Retirement Age, when the Executive attains Normal Retirement Age the Bank will pay to the Executive the Account Balance as of the end of the month in which the Executive attains Normal Retirement Age, instead of any other benefit under this Agreement. Beginning on the first day of the month after the month in which the Executive attains Normal Retirement Age, the Account Balance will be paid to the Executive in 180 substantially equal monthly installments. The Bank will credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full. If the Executive’s Separation from Service is a Termination with Cause, no further benefits will be paid under this Agreement and this Agreement will terminate.

3.2     Separation from Service. If Separation from Service occurs before Normal Retirement Age for reasons other than death or Termination with Cause, instead of any other benefit under this Agreement the Bank will pay to the Executive the Account Balance as of the end of the month immediately before the month in which payments commence, unless the Change-in-Control benefit has been paid under section 3.3. Beginning on the first day of the later of (x) the seventh month after the month in which Separation from Service occurs or (y) the month after the month in which the Executive attains Normal Retirement Age, the Bank will pay the Account Balance in 180 substantially equal monthly installments. The Bank will credit interest according to the formula of section 2.2, compounded monthly, until the Account Balance is paid in full.

3.3     Change in Control. If a Change in Control occurs both before the Executive attains Normal Retirement Age and before the Executive’s Separation from Service, instead of any other benefit payable under this Agreement the Bank will pay to the Executive the entire Account Balance in a single lump sum on the day of the Change in Control. Payment of the Change-in-Control benefit fully discharges the Bank from all obligations under this Agreement, except the legal fee reimbursement obligation under section 9.11.

3.4     Payout of Normal Retirement Benefit or Separation from Service Benefit after a Change in Control. If when a Change in Control occurs the Executive is receiving the benefit under section 3.1, the Bank will pay the remaining benefits to the Executive in a single lump sum on the day of the Change in Control. If when a Change in Control occurs the Executive is receiving or is entitled at Normal Retirement Age to receive the benefit under section 3.2, the Bank will pay the remaining benefits to the Executive in a single lump sum three business days after the later of (x) the date of the Change in Control or (y) the first day of the seventh month after the month in which the Executive’s Separation from Service occurs. The lump-sum payment due to the Executive as a result of a Change in Control is the amount equal to the Account Balance remaining unpaid.

3.5     One Benefit Only. Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which is determined by the first event to occur that is dealt with by this Agreement. Except as provided in section 3.4, later occurrence of events dealt with by this Agreement do not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

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3.6     Savings Clause Relating to Compliance with Code Section 409A. Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive is not entitled to the payments under Article 3 until the earliest of (x) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, (y) the date of the Executive’s death, or (z) any earlier date that does not result in additional tax or interest to the Executive under section 409A. If any provision of this Agreement would subject the Executive to additional tax or interest under section 409A, the Bank will reform the provision. However, the Bank will maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Executive to additional tax or interest, and the Bank is not required to incur any additional compensation expense as a result of the reformed provision.

Article 4

Death Benefits

After the Executive’s death, the Bank will pay to the Executive’s Beneficiary the Account Balance as of the date of the Executive’s death. The Account Balance will be paid to the Executive’s Beneficiary in a single lump sum 90 days after the date of the Executive’s death. However, if the Executive dies after termination of this Agreement under Article 6, the Executive’s Beneficiary is entitled to no benefits under this Agreement.

Article 5

Beneficiaries

5.1     Beneficiary Designations. The Executive may designate at any time a Beneficiary to receive any benefits payable under this Agreement after the Executive’s death. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

5.2     Beneficiary Designation Change. The Executive designates a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. The Executive’s Beneficiary designation is automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive may change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed are cancelled. The Plan Administrator is entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

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5.3     Acknowledgment. No designation or change in designation of a Beneficiary is effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

5.4     No Beneficiary Designation. If the Executive dies without a valid beneficiary designation or if all designated Beneficiaries predecease the Executive, the Executive’s spouse is the designated Beneficiary. If the Executive has no surviving spouse, the benefits will be paid to the Executive’s estate.

5.5     Facility of Payment. If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay the benefit to the guardian, legal representative, or person having the care or custody of the minor, incapacitated person, or incapable person. The Bank may require proof of incapacity, minority, or guardianship as it may deem appropriate before distribution of the benefit. Distribution completely discharges the Bank from all liability for the benefit.

Article 6

General Limitations

6.1     Termination with Cause. Despite any contrary provision of this Agreement, the Bank will not pay any benefit under this Agreement and this Agreement terminates if Separation from Service is a Termination with Cause.

6.2     Misstatement. No benefit will be paid under this Agreement if the Executive makes any material misstatement of fact on any application or resume provided to the Bank, on any application for life insurance purchased by the Bank, or on any application for benefits provided by the Bank.

6.3     Removal. Despite any contrary provision of this Agreement, if the Executive is removed from office or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement terminate as of the effective date of the order.

6.4     Default. Despite any contrary provision of this Agreement, if the Bank is in “default” or “in danger of default”, as those terms are defined in of section 3(x) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(x), all obligations under this Agreement terminate.

Article 7

Claims and Review Procedures

7.1     Claims Procedure. Any person who has not received benefits under this Agreement that he or she believes should be paid (the “claimant”) may make a claim for benefits as follows.

7.1.1     Initiation – written claim. The claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If the claim relates to the contents of a notice received by the claimant, the claim must be made within 60 days after the notice was received by the claimant. All other claims must be made within 180 days after the date of the event that caused the claim to arise. The claim must state with particularity the determination desired by the claimant.

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7.1.2     Timing of Administrator response. The Administrator will respond to the claimant within 90 days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator may extend the response period by an additional 90 days by notifying the claimant in writing, before the end of the initial 90-day period, that an additional period is required. The notice of extension must state the special circumstances and the date by which the Administrator expects to render its decision.

7.1.3     Notice of decision. If the Administrator denies part or all of the claim, the Administrator will notify the claimant in writing of the denial. The Administrator will write the notification in a manner calculated to be understood by the claimant. The notification must state:

(a) the specific reasons for the denial,

(b) a reference to the specific provisions of this Agreement on which the denial is based,

(c) a description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,

(d) an explanation of the Agreement’s review procedures and the time limits applicable to the procedures, and

(e) a statement of the claimant’s right to bring a civil action under ERISA section 502(a) after an adverse benefit determination on review.

7.2     Review Procedure. If the Administrator denies part or all of the claim, the claimant has the opportunity for a full and fair review by the Administrator of the denial, as follows.

7.2.1     Initiation – written request. To initiate the review, the claimant must file with the Administrator a written request for review within 60 days after receiving the Administrator’s notice of denial.

7.2.2     Additional submissions – information access. The claimant then has the opportunity to submit written comments, documents, records, and other information relating to the claim. Upon request and free of charge, the Administrator will also provide the claimant reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

7.2.3     Considerations on review. In considering the review, the Administrator will take into account all materials and information the claimant submits relating to the claim, without regard to whether the information was submitted or considered in the initial benefit determination.

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7.2.4     Timing of Administrator response. The Administrator will respond in writing to the claimant within 60 days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator may extend the response period by an additional 60 days by notifying the claimant in writing before the end of the initial 60-day period that an additional period is required. The notice of extension must state the special circumstances and the date by which the Administrator expects to render its decision.

7.2.5     Notice of decision. The Administrator will notify the claimant in writing of its decision on review. The Administrator will write the notification in a manner calculated to be understood by the claimant. The notification must state:

(a) the specific reasons for the denial,

(b) a reference to the specific provisions of the Agreement on which the denial is based,

(c) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and

(d) a statement of the claimant’s right to bring a civil action under ERISA section 502(a).

Article 8

Administration of Agreement

8.1     Plan Administrator Duties. This Agreement will be administered by a Plan Administrator consisting of the board or such committee or persons as the board appoints. The Executive may not be a member of the Plan Administrator. The Plan Administrator has the discretion and authority to (x) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and (y) decide or resolve any and all questions that may arise, including interpretations of this Agreement.

8.2     Agents. In the administration of this Agreement the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.

8.3     Binding Effect of Decisions. The decision or action of the Plan Administrator concerning any question arising out of the administration, interpretation, and application of the Agreement and the rules and regulations promulgated hereunder is final and conclusive and binding upon all persons having any interest in the Agreement. Neither the Executive nor any Beneficiary has any right, vested or unvested, regarding the continuing effect of any decision or action of the Plan Administrator.

8.4     Indemnity of Plan Administrator. The Bank will indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

9

8.5     Bank Information. To enable the Plan Administrator to perform its functions, the Bank will supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator reasonably requires.

Article 9

Miscellaneous

9.1     Amendments and Termination. This Agreement may be amended solely by a written agreement signed by the Bank and by the Executive. Except for the case of Termination with Cause, this Agreement may not be terminated unless the Account Balance is first paid to the Executive or the Executive’s Beneficiary.

9.2     Binding Effect. This Agreement binds the Executive and the Bank and their beneficiaries, survivors, executors, successors, administrators, and transferees.

9.3     Successors; Binding Agreement. By an assumption agreement in form and substance satisfactory to the Executive, the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the Bank’s business or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Bank would be required to perform this Agreement had no succession occurred.

9.4     No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executive’s right to terminate employment at any time.

9.5     Non-Transferability. Benefits under this Agreement may not be sold, transferred, assigned, pledged, attached, or encumbered.

9.6     Tax Withholding. The Bank will withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.7     Applicable Law. This Agreement and all rights hereunder are governed by the laws of the State of Ohio, except to the extent the laws of the United States of America otherwise require.

9.8     Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay benefits. The rights to benefits are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.

10

9.9     Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth.

9.10     Tax Consequences. The Bank does not insure or guarantee the tax consequences of payments provided hereunder for matters beyond its control. The Executive certifies that the Executive’s decision to defer receipt of compensation is not due to reliance on financial, tax, or legal advice given by the Bank or any of its employees, agents, accountants, or legal advisors.

9.11     Payment of Legal Fees. The Bank is aware that after a Change in Control management could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, or could institute or cause or attempt to cause the Bank to institute litigation seeking to have this Agreement declared unenforceable, or could take or attempt to take other action to deny the Executive benefits intended under this Agreement. In these circumstances the purpose of this Agreement would be frustrated. The Bank desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. The Bank desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control it appears to the Executive that (x) the Bank has failed to comply with any of its obligations under this Agreement, or (y) the Bank or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or recover from the Executive the benefits intended to be provided hereunder, the Bank irrevocably authorizes the Executive to retain counsel of the Executive’s choice, at the Bank’s expense as provided in this section 9.11, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Despite any existing or previous attorney-client relationship between the Bank and any counsel chosen under this section 9.11, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel and the Bank and the Executive agree that a confidential relationship exists between the Executive and that counsel. The fees and expenses of counsel selected by the Executive will be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel’s customary practices, regardless of whether suit is brought and regardless of whether incurred in trial, bankruptcy, or appellate proceedings, but the Bank’s payment or reimbursement of the Executive’s counsel’s fees and expenses must occur on or before the last day of the Executive’s tax year immediately after the Executive’s tax year in which the expense is incurred. If the Executive is a specified employee, as defined in Code section 409A, on the date of termination, payment under this section 9.11 will be made on the first day of the seventh month after the month in which the Executive’s termination occurs. Interest will accrue on the payment from the date of termination through the date of payment at the Prime Rate of Interest in effect on the date of termination and as reported in the Wall Street Journal. The six-month delay applies if and only if an exemption from the six-month delay requirement of Code section 409A is not available. The Executive’s right to payment or reimbursement under this section 9.11 is not subject to liquidation or exchange for another benefit. The Bank’s obligation to make reimbursement payments will not apply later than the Executive’s remaining lifetime (or, if longer, through the 20^th anniversary of the effective date of this Agreement). The legal fee reimbursements are intended to satisfy the requirements for “reimbursement or in-kind benefit plans” described in Treasury Regulation section 1.409A-3(i)(1)(iv)(A) and will be administered to satisfy those requirements. The Bank’s obligation to pay the Executive’s legal fees under this section 9.11 operates separately from and in addition to any legal fee reimbursement obligation the Bank may have under any separate employment, severance, or other agreement. Despite any contrary provision in this Agreement however, the Bank is not required to pay or reimburse legal expenses if doing so violates section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 C.F.R. 359.3].

11

9.12     Severability. If any provision of this Agreement is held invalid, invalidity does not affect any other provision of this Agreement not held invalid, and each such other provision continues in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, invalidity does not affect the remainder of the provision not held invalid, and together with all other provisions of this Agreement the remainder of the provision continues in full force and effect to the full extent consistent with law.

9.13     Waiver. A waiver by either party of any of the terms or conditions of this Agreement in any one instance is not a waiver of the terms or conditions for the future or a waiver of any subsequent breach. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement are cumulative, and none of them limits any other remedy, right, undertaking, obligation or agreement of either party.

9.14     Captions and Counterparts. Captions in this Agreement are included for convenience only and do not affect the interpretation or construction of the Agreement or any of its provisions. This Agreement may be executed in two or more counterparts, each of which is an original and all of which taken together constitute a single agreement.

9.15     Notice. All notices, requests, demands, and other communications hereunder must be in writing and will be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid. Unless otherwise changed by notice, notice is properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the Board of Directors, The Middlefield Banking Company, 15985 East High Street, Middlefield, Ohio 44062-0035.

9.16     Termination or Modification of Agreement Because of Changes in Law, Rules or Regulations. The Bank is entering into this Agreement on the assumption that certain existing tax laws, rules, and regulations will continue in effect in their current form. If that assumption materially changes and the change has a material detrimental effect on this Agreement, the Bank reserves the right to terminate or modify this Agreement accordingly, subject to the written consent of the Executive, which will not be unreasonably withheld. This section 9.16 is null and void effective immediately after a Change in Control.

12

In Witness Whereof, the Executive and a duly authorized Bank officer executed this Executive Deferred Compensation Agreement as of the date first written above.

Executive:	Bank:
	The Middlefield Banking Company
/s/ Charles O. Moore	By:	/s/ James R. Heslop II
Charles O. Moore	Its:	Executive Vice President and C.O.O.

13

The Middlefield Banking Company

Executive Deferred Compensation Agreement

Beneficiary Designation

I designate the following as beneficiary under this Executive Deferred Compensation Agreement of benefits payable after my death.

Primary:  

Contingent: 

Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature:                                                                                         

Charles O. Moore

Date:         _________, 2016

Received by the Bank this ____ day of __________, 2016

By:                                                                                             

Title:                                                                                     

14

EX-13

Exhibit 13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Middlefield Banc Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Middlefield Banc Corp. and subsidiaries (the “Company”) as of December 31, 2019 and 2018; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 4, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

S.R. Snodgrass, P.C. ● 2009 Mackenzle Way, Suite 340 ● Cranberry Township, Pennsylvania 16066 ● Phone: 724-934-0344 ● Fax: 724-934-0345

1

Basis for Opinion (Continued)

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 1986.

/s/S.R. Snodgrass, P.C.

Cranberry Township, Pennsylvania

March 4, 2020

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Middlefield Banc Corp.

Opinion on Internal Control over Financial Reporting

We have audited Middlefield Banc Corp. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, of the Company; and our report dated March 4, 2020, expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

S.R. Snodgrass, P.C. ● 2009 Mackenzle Way, Suite 340 ● Cranberry Township, Pennsylvania 16066 ● Phone: 724-934-0344 ● Fax: 724-934-0345

3

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/S.R. Snodgrass, P.C.

Cranberry Township, Pennsylvania

March 4, 2020

4

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except shares)

	December 31,
	2019			2018
ASSETS
Cash and cash equivalents	$	35,113		$	107,933
Equity securities, at fair value		710			616
Investment securities available for sale, at fair value		105,733			98,322
Loans held for sale		1,220			597
Loans:
Commercial and industrial		89,527			83,857
Real estate - construction		63,246			56,731
Real estate - mortgage:
Residential		347,047			336,487
Commercial		470,027			498,247
Consumer installment		14,411			16,787
Total loans		984,258			992,109
Less allowance for loan and lease losses		6,768			7,428
Net loans		977,490			984,681
Premises and equipment, net		17,874			13,003
Goodwill		15,071			15,071
Core deposit intangibles		2,056			2,397
Bank-owned life insurance		16,511			16,080
Accrued interest receivable and other assets		10,697			9,698
TOTAL ASSETS	$	1,182,475		$	1,248,398
LIABILITIES
Deposits:
Noninterest-bearing demand	$	191,370		$	203,410
Interest-bearing demand		107,844			92,104
Money market		160,826			196,685
Savings		192,003			222,954
Time		368,800			300,914
Total deposits		1,020,843			1,016,067
Short-term borrowings:
Federal funds purchased		75			398
Federal Home Loan Bank advances		5,000			90,000
Total short-term borrowings		5,075			90,398
Other borrowings		12,750			8,803
Accrued interest payable and other liabilities		6,032			4,840
TOTAL LIABILITIES		1,044,700			1,120,108
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 7,294,792 and 7,260,994 shares issued; 6,423,630 and 6,488,664 shares outstanding		86,617			85,925
Retained earnings		65,063			56,037
Accumulated other comprehensive income (loss)		1,842			(154	)
Treasury stock, at cost; 871,162 and 772,330 shares		(15,747	)		(13,518	)
TOTAL STOCKHOLDERS' EQUITY		137,775			128,290
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,182,475		$	1,248,398

See accompanying notes to the consolidated financial statements.

5

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

	Year Ended December 31,
	2019		2018
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	50,390	$	46,576
Interest-earning deposits in other institutions		673		558
Federal funds sold		78		46
Investment securities:
Taxable interest		796		688
Tax-exempt interest		2,392		2,262
Dividends on stock		196		227
Total interest and dividend income		54,525		50,357
INTEREST EXPENSE
Deposits		12,409		8,631
Short-term borrowings		368		842
Other borrowings		363		436
Total interest expense		13,140		9,909
NET INTEREST INCOME		41,385		40,448
Provision for loan losses		890		840
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		40,495		39,608
NONINTEREST INCOME
Service charges on deposit accounts		2,186		1,914
Investment securities gains on sale, net		194		-
Gain (loss) on equity securities		94		(9	)
Earnings on bank-owned life insurance		431		428
Gain on sale of loans		433		231
Other income		1,503		1,164
Total noninterest income		4,841		3,728
NONINTEREST EXPENSE
Salaries and employee benefits		16,523		15,749
Occupancy expense		2,164		1,933
Equipment expense		1,040		969
Data processing costs		2,208		1,806
Ohio state franchise tax		1,044		823
Federal deposit insurance expense		230		550
Professional fees		1,683		1,482
Advertising expense		733		921
Software amortization expense		638		605
Core deposit intangible amortization		341		352
Other expense		3,429		3,553
Total noninterest expense		30,033		28,743
Income before income taxes		15,303		14,593
Income taxes		2,592		2,162
NET INCOME	$	12,711	$	12,431
EARNINGS PER SHARE
Basic	$	1.96	$	1.92
Diluted		1.95		1.91

See accompanying notes to the consolidated financial statements.

6

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

	Year Ended December 31,
	2019			2018
Net income	$	12,711		$	12,431
Other comprehensive income (loss):
Net unrealized holding gain (loss) on available- for-sale investment securities		2,720			(1,636	)
Tax effect		(571	)		345
Reclassification adjustment for investment securities gains included in net income		(194	)		-
Tax effect		41			-
Total other comprehensive income (loss)		1,996			(1,291	)
Comprehensive income	$	14,707		$	11,140

See accompanying notes to the consolidated financial statements.

7

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollar amounts in thousands, except shares and dividend per share amount)

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2017		7,207,762	$	84,859	$	47,431		$	1,091		$	(13,518	)	$	119,863
Change in accounting principle for adoption of ASU 2016-01						141			(141	)					-
Change in accounting principle for adoption of ASU 2018-02						(187	)		187						-
Net income						12,431									12,431
Other comprehensive loss									(1,291	)					(1,291	)
Dividend reinvestment and purchase plan		24,512		618											618
Stock options exercised		17,600		168											168
Stock-based compensation		11,120		280											280
Cash dividends ($0.59 per share)						(3,779	)								(3,779	)
Balance, December 31, 2018		7,260,994	$	85,925	$	56,037		$	(154	)	$	(13,518	)	$	128,290
Net income						12,711									12,711
Other comprehensive income									1,996						1,996
Dividend reinvestment and purchase plan		17,866		372											372
Stock options exercised		400		4											4
Stock-based compensation, net		15,532		316											316
Treasury shares acquired (98,832 shares)												(2,229	)		(2,229	)
Cash dividends ($0.57 per share)						(3,685	)								(3,685	)
Balance, December 31, 2019		7,294,792	$	86,617	$	65,063		$	1,842		$	(15,747	)	$	137,775

See accompanying notes to the consolidated financial statements.

8

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

	Year Ended December 31,
	2019			2018
OPERATING ACTIVITIES
Net income	$	12,711		$	12,431
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		890			840
Investment securities gains on sale, net		(194	)		-
(Gain) loss on equity securities		(94	)		9
Depreciation and amortization of premises and equipment, net		1,039			951
Software amortization expense		638			605
Financing lease amortization expense		360			-
Amortization of premium and discount on investment securities, net		259			419
Accretion of deferred loan fees, net		(753	)		(868	)
Amortization of core deposit intangibles		341			352
Stock-based compensation expense		644			467
Origination of loans held for sale		(19,845	)		(13,196	)
Proceeds from sale of loans		19,655			13,293
Gain on sale of loans		(433	)		(231	)
Earnings on bank-owned life insurance		(431	)		(428	)
Deferred income tax		327			(241	)
Net gain on other real estate owned		(123	)		(55	)
Decrease (increase) in accrued interest receivable		162			(345	)
Increase in accrued interest payable		173			166
Other, net		(1,867	)		112
Net cash provided by operating activities		13,459			14,281
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		17,687			7,280
Proceeds from sale of securities		12,324			-
Purchases		(34,961	)		(12,999	)
Decrease (increase) in loans, net		6,932			(68,796	)
Proceeds from the sale of other real estate owned		360			163
Purchase of premises and equipment		(1,897	)		(2,101	)
Purchase of restricted stock		(169	)		(90	)
Net cash provided by (used in) investing activities		276			(76,543	)
FINANCING ACTIVITIES
Net increase in deposits		4,776			137,873
(Decrease) increase in short-term borrowings, net		(85,323	)		15,691
Net repayment of other borrowings		(426	)		(20,262	)
Restricted stock cash portion		(44	)		-
Stock options exercised		4			168
Proceeds from dividend reinvestment and purchase plan		372			618
Repurchase of treasury shares		(2,229	)		-
Cash dividends		(3,685	)		(3,779	)
Net cash (used in) provided by financing activities		(86,555	)		130,309
(Decrease) increase in cash and cash equivalents		(72,820	)		68,047
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		107,933			39,886
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	35,113		$	107,933

See accompanying notes to the consolidated financial statements.

9

	Year Ended December 31,
	2019			2018
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	12,967		$	9,743
Income taxes		2,705			2,125
Noncash operating transactions:
Operating lease assets added to other, net	$	(1,071	)	$	-
Operating lease liabilities added to other, net		1,071			-
Noncash investing transactions:
Transfers from loans to other real estate owned	$	122		$	166
Transfer of equity securities from investment securities available for sale, at fair value		-			(625	)
Finance lease assets added to premises and equipment		(4,373	)		-
Noncash financing transactions:
Finance lease liabilities added to borrowed funds	$	4,373		$	-

See accompanying notes to the consolidated financial statements.

10

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 (“MBC”). MBC is a state-chartered bank located in Ohio, whose consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI), established March 13, 2019. Significant intercompany items have been eliminated in preparing MBC’s consolidated financial statements. On October 23, 2009, the Company established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries 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 sixteen full-service locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while MBC 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 subsidiaries, MBC and EMORECO, Inc. 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 from those estimates.

Investment and Equity 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. For 2019 and 2018, this category includes common stocks of public companies that the Company has the positive intent and ability to hold for an indeterminate amount of time. Such securities are reported at fair value with unrealized holding gains and losses included in earnings.

Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers whether the present value of cash flows expected to be collected is less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Bank’s intent to sell the security or whether it is more likely than not that the Bank would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Bank does not intend to sell the security, and it is more likely than not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Bank’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted.

Restricted Stock

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. The FHLB of Cincinnati has reported profits for 2019 and 2018, remains in compliance with regulatory capital and liquidity requirements, and continues to pay dividends on the stock and make redemptions at the par value. With consideration given to these factors, management concluded that the stock was not impaired at December 31, 2019 or 2018.

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Mortgage Banking Activities 

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The Bank sells the loans on a servicing retained basis. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The Bank measures servicing assets using the amortization method. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Loan servicing rights are amortized in proportion to and over the period of estimated net future servicing revenue. The expected period of the estimated net servicing income is based in part on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights is included in accrued interest and other assets on the Consolidated Balance Sheet.

Mortgage servicing rights are periodically evaluated for impairment. Impairment represents the excess of amortized cost over its estimated fair value. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate and original time to maturity. Any impairment is reported as a valuation allowance for an individual tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance will be recorded as an increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material. The Bank is servicing loans for others in the amount of $70.8 million and $59.4 million at December 31, 2019 and 2018, respectively.

Loans 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease 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 or applied against principal according to management’s judgment as to the collectability of such principal.

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 and Lease Losses

The allowance for loan and lease losses represents the amount which management estimates is adequate to provide for probable loan losses inherent in the 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 and lease 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 and lease 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 and lease 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. Loans that experience insignificant payment delays, which are defined as 89 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 and lease 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 used to reduce principal.

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. 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.

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Loans Acquired

Loans acquired, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.

For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

Premises and Equipment

Land is carried at cost. 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.

Leases

The Company has operating and financing leases for several branch locations and office space. Generally, the underlying lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company may also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other maintenance costs). The Company accounts for each component separately based on the standalone price of each component. In addition, there may be operating and financing leases with lease terms of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our right-of-use assets and lease liabilities.

Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management and is based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably certain to exercise the extension option(s), the additional term is included in the calculation of the right-of-use asset and lease liability.

As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments.

Goodwill

The Company accounts for goodwill using a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. No impairment of goodwill was recognized in any of the periods presented.

Intangible Assets

Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to their estimated residual values over their expected useful lives, commonly of ten years. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

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Bank-Owned Life Insurance (“BOLI”)

The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans including healthcare. The cash surrender value of these policies is included as an asset on the Consolidated Balance Sheet and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statement of Income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as tax-free noninterest income.

Other Real Estate Owned

Real estate properties acquired through foreclosure are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of cost or fair value less estimated cost to sell. Revenue and expenses from operations of the properties, gains or losses on sales and additions to the valuation allowance are included in operating results.

Income Taxes

The Company and its subsidiaries 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 is 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. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements. (See Note 20 – Stock Split Disclosure.)

Stock-Based Compensation

The Company accounts for stock compensation based on the grant date fair value of all share-based payment awards that are expected to vest, including employee share options to be recognized as employee compensation expense over the requisite service period.

Compensation cost is recognized for restricted stock issued to employees based on the fair value of these awards at the date of grant. The market price of the Company’s common shares at the date of grant is used to estimate the fair value of restricted stock and stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, and is recorded in "Salaries and employee benefits" expense. (See Note 14-Employee Benefits) The Company’s restricted stock plan allows for a portion of the value to be received in cash by the participant upon vesting, and therefore, the Company records the expense as a liability until the shares vest and the split of the payment between shares and cash can be determined.

Cash Flow Information

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions as “Cash and due from banks” and “Federal funds sold” with original maturities of less than 90 days.

Advertising Costs 

Advertising costs are expensed as incurred.

Reclassification of Comparative Amounts

Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did not affect net income or retained earnings.

Recently Adopted Accounting Pronouncements -

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. Since the guidance scopes out revenue associated with financial instruments, including loan receivables and investment securities, the adoption of the standard and its related amendments did not result in a material change from our current accounting for revenue because the majority of the Company’s revenue is not within the scope of Topic 606. Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 2.

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. On January 1, 2018, the Company adopted ASU 2016-01 which resulted in a reclassification of $141,000 between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity. Additionally, the methods used to calculate the fair value of financial instruments in Note 18 were based on exit pricing assumptions as of December 31, 2019 and 2018.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. On January 1, 2019, the Company adopted ASU 2016-02 which resulted in the recording of finance lease assets and liabilities of $3.8 million and operating lease assets and liabilities of $1.1 million on the Consolidated Balance Sheet. See Note 15 of the financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This Update has not had a significant impact on the Company’s financial position or results of operations.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. On January 1, 2018, the Company adopted this standard which resulted in a reclassification of $187,000 between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting: (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The adoption of this standard and its related amendments did not result in a material impact on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements - 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The CECL model has been completed and runs concurrently with the existing incurred loss model each month. Management will continue to monitor model output throughout the deferral period.

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In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements, OR the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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2. REVENUE RECOGNITION

In accordance with ASC Topic 606, management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise 92.2% of the total revenue of the Company.

The main types of noninterest income within the scope of the standard are as follows:

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. The agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific customer requests or activities that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, which is completion of the requested service/transaction.

Gains (losses) on sale of other real estate owned (“OREO”) - Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset includes transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred and the payment terms, that the contract has a true commercial substance and that amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset. Gain and losses on sale of OREO is reported within other expense in the Consolidated Statement of Income.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the years ended December 31,

Noninterest Income	2019			2018
(Dollar amounts in thousands)
Service charges on deposit accounts:
Overdraft fees	$	841		$	798
ATM banking fees		932			867
Service charges and other fees		413			249
Investment securities gains on sale, net (a)		194			-
Gain (loss) on equity securities (a)		94			(9	)
Earnings on bank-owned life insurance (a)		431			428
Gain on sale of loans (a)		433			231
Revenue from investment services		528			385
Other income		975			779
Total noninterest income	$	4,841		$	3,728
Net gain (loss) on other real estate owned	$	(123	)	$	(55	)

(a) Not within scope of ASC 606

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3. 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 for the year ended December 31:

	2019			2018
Weighted-average common shares issued		7,286,554			7,232,238
Average treasury stock shares		(816,146	)		(772,330	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		6,470,408			6,459,908
Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		32,398			27,906
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		6,502,806			6,487,814

Options to purchase 14,500 shares of common stock at $8.78 a share were outstanding during the year ended December 31, 2019. Also outstanding were 61,040 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

Options to purchase 14,900 shares of common stock at $8.78 a share were outstanding during the year ended December 31, 2018. Also outstanding were 42,350 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of December 31, 2019, the Company held 871,162 of the Company’s shares, which is an increase of 98,832 shares for the twelve months ended December 31, 2019, from the 772,330 shares held as of December 31, 2018.

4. INVESTMENT AND EQUITY SECURITIES

The amortized cost, gross gains and losses and fair values of securities available for sale are as follows:

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value
Subordinated debt	$	4,000	$	126	$	-		$	4,126
Obligations of states and political subdivisions:
Taxable		500		1		-			501
Tax-exempt		80,436		2,065		(25	)		82,476
Mortgage-backed securities in government-sponsored entities		18,465		274		(109	)		18,630
Total	$	103,401	$	2,466	$	(134	)	$	105,733

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	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value
U.S. government agency securities	$	7,442	$	90	$	(61	)	$	7,471
Obligations of states and political subdivisions:
Taxable		502		10		-			512
Tax-exempt		72,387		667		(473	)		72,581
Mortgage-backed securities in government-sponsored entities		18,185		88		(515	)		17,758
Total	$	98,516	$	855	$	(1,049	)	$	98,322

On January 1, 2018, the Company reclassified $625,000 from investment securities available for sale to equity securities in accordance with the adoption of ASU 2016-01. Equity securities totaled $710,000 and $616,000 at December 31, 2019 and 2018, respectively, which incorporates a recognized net gain (loss) on equity investments of $94,000 and ($9,000) for the year ended December 31, 2019 and 2018, respectively. No net gains on sold equity securities were realized from sales during these periods.

The amortized cost and fair value of debt securities at December 31, 2019, 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.

	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	148	$	149
Due after one year through five years		1,324		1,345
Due after five years through ten years		16,613		16,908
Due after ten years		85,316		87,331
Total	$	103,401	$	105,733

Investment securities with an approximate carrying value of $55.6 million and $63.5 million at December 31, 2019 and 2018, respectively, were pledged to secure deposits and other purposes as required by law.

There were no securities sold during the year ended December 31, 2018. Proceeds from the sales of investment securities and the gross realized gains and losses for the year ended December 31, 2019, are as follows (in thousands):

	2019			2018
Proceeds from sales	$	12,324		$	-
Gross realized gains		227			-
Gross realized losses		(33	)		-

The tax expense related to the net realized gains above was $41,000, and $0 for the year ended December 31, 2019 and 2018, respectively.

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The following tables show 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.

	December 31, 2019
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
Obligations of states and political subdivisions
Tax-exempt	$	4,324	$	(25	)	$	-	$	-		$	4,324	$	(25	)
Mortgage-backed securities in government-sponsored entities		1,409		(2	)		8,223		(107	)		9,632		(109	)
Total	$	5,733	$	(27	)	$	8,223	$	(107	)	$	13,956	$	(134	)

	December 31, 2018
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	-	$	-		$	4,105	$	(61	)	$	4,105	$	(61	)
Obligations of states and political subdivisions
Tax-exempt		20,451		(286	)		11,053		(187	)		31,504		(473	)
Mortgage-backed securities in government-sponsored entities		2,068		(9	)		12,257		(506	)		14,325		(515	)
Total	$	22,519	$	(295	)	$	27,415	$	(754	)	$	49,934	$	(1,049	)

There were 17 securities that were considered temporarily impaired at December 31, 2019.

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other than temporary. For equity securities where the fair value has been significantly below cost for one year, the Company’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted.

The Company has asserted that at December 31, 2019 and 2018, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 96.1% of the total available-for-sale portfolio as of December 31, 2019, and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company evaluates credit losses on a quarterly basis. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

● The length of time and the extent to which the fair value has been less than the amortized cost basis.

● Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions.

● The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities.

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● Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation, and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

5. LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s primary business activity is with loan customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with offices in Dublin, Sunbury, Powell, Plain City and Westerville, Ohio. The Northeastern Ohio trade area includes locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at December 31, 2019 and 2018, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

The following tables summarize the primary segments of the loan portfolio and the allowance for loan and lease losses (in thousands):

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	882	$	-	$	1,628	$	10,559	$	1	$	13,070
Collectively evaluated for impairment		88,645		63,246		345,419		459,468		14,410		971,188
Total loans	$	89,527	$	63,246	$	347,047	$	470,027	$	14,411	$	984,258

					Real estate-Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	2,570	$	-	$	1,970	$	9,533	$	2	$	14,075
Collectively evaluated for impairment		81,287		56,731		334,517		488,714		16,785		978,034
Total loans	$	83,857	$	56,731	$	336,487	$	498,247	$	16,787	$	992,109

The amounts above include net deferred loan origination costs of $1.3 million and $1.6 million at December 31, 2019 and December 31, 2018, respectively.

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3	$	-	$	30	$	627	$	-	$	660
Collectively evaluated for impairment		453		97		1,628		3,902		28		6,108
Total ending allowance balance	$	456	$	97	$	1,658	$	4,529	$	28	$	6,768

					Real Estate-Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	667	$	-	$	43	$	643	$	1	$	1,354
Collectively evaluated for impairment		302		100		1,538		4,008		126		6,074
Total ending allowance balance	$	969	$	100	$	1,581	$	4,651	$	127	$	7,428

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate, and Consumer Installment Loans. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

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Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

December 31, 2019
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	747	$	1,524	$	-
Real estate - mortgage:
Residential		979		1,057		-
Commercial		5,617		5,617		-
Consumer installment		1		1		-
Total	$	7,344	$	8,199	$	-
With an allowance recorded:
Commercial and industrial	$	135	$	135	$	3
Real estate - mortgage:
Residential		649		700		30
Commercial		4,942		4,952		627
Total	$	5,726	$	5,787	$	660
Total:
Commercial and industrial	$	882	$	1,659	$	3
Real estate - mortgage:
Residential		1,628		1,757		30
Commercial		10,559		10,569		627
Consumer installment		1		1		-
Total	$	13,070	$	13,986	$	660

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December 31, 2018
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	207	$	413	$	-
Real estate - mortgage:
Residential		1,306		1,462		-
Commercial		1,867		2,186		-
Total	$	3,380	$	4,061	$	-
With an allowance recorded:
Commercial and industrial	$	2,363	$	3,013	$	667
Real estate - mortgage:
Residential		664		715		43
Commercial		7,666		7,676		643
Consumer installment		2		2		1
Total	$	10,695	$	11,406	$	1,354
Total:
Commercial and industrial	$	2,570	$	3,426	$	667
Real estate - mortgage:
Residential		1,970		2,177		43
Commercial		9,533		9,862		643
Consumer installment		2		2		1
Total	$	14,075	$	15,467	$	1,354

The tables above include troubled debt restructuring totaling $3.6 million and $4.4 million as of December 31, 2019 and 2018, respectively.

The following table presents interest income by class, recognized on impaired loans (in thousands):

	As of December 31, 2019				As of December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	1,770	$	141	$	4,210	$	172
Real estate - construction		648		-		9		-
Real estate - mortgage:
Residential		1,803		51		2,531		57
Commercial		10,366		375		6,805		377
Consumer installment		2		-		3		-
Total	$	14,589	$	567	$	13,558	$	606

Troubled Debt Restructuring (TDR) describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:

● reduction in the interest rate to below market rates

● extension of repayment requirements beyond normal terms

● reduction of the principal amount owed

● reduction of accrued interest due

● acceptance of other assets in full or partial payment of a debt

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In each case the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk. The total impact on the ALLL for 2019 and 2018 related to TDRs was $33,000 and $459,000, respectively.

The following tables present the number of loan modifications by class, the corresponding recorded investment, and the subsequently defaulted modifications (in thousands) for the years ended:

	December 31, 2019
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		3		-		3	$	488	$	490
Residential real estate		4		2		6		294		354
							$	782	$	844

	December 31, 2018
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		1		-		1	$	44	$	44
Residential real estate		3		2		5		286		286
Commercial real estate		1		-		1		94		94
							$	424	$	424

	December 31, 2018
Troubled Debt Restructurings	Number of		Recorded
subsequently defaulted	Contracts		Investment
Residential real estate		1	$	19

One loan with a book balance of $36,000 was restructured in 2019 and defaulted by December 31, 2019. There were no subsequent defaults of troubled debt restructurings for the year ended December 31, 2019.

Management uses a nine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard or Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event.  The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $500,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.   The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

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The following tables present the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized categories of Special Mention, Substandard, and Doubtful within the internal risk rating system (in thousands):

			Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans
Commercial and industrial	$	84,136	$	3,619	$	1,772	$	-	$	89,527
Real estate - construction		63,246		-		-		-		63,246
Real estate - mortgage:
Residential		342,988		420		3,639		-		347,047
Commercial		453,170		6,989		9,868		-		470,027
Consumer installment		14,399		-		12		-		14,411
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258

			Special						Total
December 31, 2018	Pass		Mention		Substandard		Doubtful		Loans
Commercial and industrial	$	77,002	$	4,572	$	2,283	$	-	$	83,857
Real estate - construction		55,397		1,334		-		-		56,731
Real estate - mortgage:
Residential		332,475		553		3,459		-		336,487
Commercial		483,516		6,617		8,114		-		498,247
Consumer installment		16,776		-		11		-		16,787
Total	$	965,166	$	13,076	$	13,867	$	-	$	992,109

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of loans and nonaccrual loans (in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial and industrial	$	88,965	$	190	$	66	$	306	$	562		89,527
Real estate - construction		63,246		-		-		-		-		63,246
Real estate - mortgage:
Residential		344,311		1,713		63		960		2,736		347,047
Commercial		465,666		63		-		4,298		4,361		470,027
Consumer installment		13,378		623		216		194		1,033		14,411
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2018	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial and industrial	$	82,770	$	288	$	213	$	586	$	1,087		83,857
Real estate - construction		56,731		-		-		-		-		56,731
Real estate - mortgage:
Residential		331,379		2,612		1,083		1,413		5,108		336,487
Commercial		496,597		664		-		986		1,650		498,247
Consumer installment		16,768		19		-		-		19		16,787
Total	$	984,245	$	3,583	$	1,296	$	2,985	$	7,864		992,109

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The following tables present the classes of the loan portfolio summarized by nonaccrual loans and loans 90 days or more past due and still accruing (in thousands):

December 31, 2019	Nonaccrual		90+ Days Past Due and Accruing
Commercial and industrial	$	946	$	-
Real estate - mortgage:
Residential		3,285		-
Commercial		4,451		-
Consumer installment		197		-
Total	$	8,879	$	-

December 31, 2018	Nonaccrual		90+ Days Past Due and Accruing
Commercial and industrial	$	996	$	91
Real estate - mortgage:
Residential		2,731		754
Commercial		2,864		100
Consumer installment		4		-
Total	$	6,595	$	945

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $342,000 in 2019 and $456,000 in 2018.

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio.  The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance.   The total of the two components represents the Company’s ALLL. Management also performs impairment analysis on TDRs, which may result in specific reserves.

Loans that are collectively evaluated for impairment are analyzed, with general allowances being made as appropriate.  For general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis.  Management tracks the historical net charge-off activity at the purpose code level.  A historical charge-off factor is calculated utilizing the last twelve consecutive historical quarters.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor, because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry, and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

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The following tables summarize the primary segments of the loan portfolio (in thousands):

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428
Charge-offs		(519	)		-			(523	)		(32	)		(735	)		(1,809	)
Recoveries		82			74			78			17			8			259
Provision		(76	)		(77	)		522			(107	)		628			890
ALLL balance at December 31, 2019	$	456		$	97		$	1,658		$	4,529		$	28		$	6,768

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2017	$	999		$	313		$	1,760		$	4,036		$	82		$	7,190
Charge-offs		(610	)		-			(177	)		(111	)		(220	)		(1,118	)
Recoveries		287			63			128			-			38			516
Provision		293			(276	)		(130	)		726			227			840
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428

The provision fluctions during the the year ended December 31, 2019 allocated to:

● commercial and industrial loans are due to the charge-offs of two large relationships totaling $438,000, which had specific reserves allocated at the end of 2018.

● residential portfolio are due to the charge-off of two relationships totalling $360,000 and portfolio growth.

● commercial real estate loans are due to a small charge-off and a declining portfolio balance.

● consumer installments are due to charge-offs in the student loan portfolio totaling $566,000.

The provision fluctions during the the year ended December 31, 2018 allocated to:

● real estate construction loans are due to the historical loss rate for the real estate construction pool changing to -0.127% from 0.775% in the first quarter of 2018 as well as no charge-offs for the year.

● residential real estate are due to a continued decline in historical losses and consistent decreases in the ratio of nonperforming loans to toal loans in this segment over the past few years resulting in a decrease in the reserves required.

● consumer installment loans are primarily due to increases in historical losses for this segment over the prior year.

6. PREMISES AND EQUIPMENT

Major classifications of premises and equipment at December 31: 

(Dollar amounts in thousands)	2019		2018
Land and land improvements	$	2,920	$	2,920
Building and leasehold improvements		15,836		15,377
Furniture, fixtures, and equipment		9,357		8,011
Financing right-of-use assets		4,012		-
Total premises and equipment		32,125		26,308
Less accumulated depreciation and amortization		14,251		13,305
Total premises and equipment, net	$	17,874	$	13,003

Depreciation expense charged to operations was $1.0 million in 2019 and $951,000 in 2018.

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7. GOODWILL AND INTANGIBLE ASSETS

Goodwill totaled $15.1 million for both years ended December 31, 2019, and 2018. Core deposit intangible carrying amount was $2.1 million and $2.4 million for the years ended December 31, 2019, and 2018, respectively. Core deposit accumulated amortization was $1.4 million and $1.0 million for the years ended December 31, 2019, and 2018. Amortization expense totaled $341,000 and $352,000 in 2019 and 2018, respectively.

Core deposit intangible assets are amortized to their estimated residual values over their expected useful lives, commonly of ten years. The estimated aggregate future amortization expense for core deposit intangible assets as of December 31, 2019 is as follows:

2020	$	332
2021		321
2022		309
2023		296
2024		281
Thereafter		517
Total	$	2,056

8. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

The components of accrued interest receivable and other assets at the years ended December 31:

(Dollar amounts in thousands)	2019		2018
Restricted stock	$	3,848	$	3,679
Accrued interest receivable on investment securities		753		794
Accrued interest receivable on loans		2,718		2,839
Deferred tax asset, net		374		1,232
Other real estate owned		155		270
Operating right-of-use assets		903		-
Other		1,946		884
Total	$	10,697	$	9,698

9. DEPOSITS

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 as of December 31, 2019 and 2018, were $126.6 million and $75.8 million, respectively.

Scheduled maturities of time deposits as of December 31, 2019 are as follows:

(Dollar amounts in thousands)
2020	$	251,291
2021		62,523
2022		25,195
2023		16,868
2024		12,923
Total	$	368,800

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10. SHORT-TERM BORROWINGS

For the year ended December 31, outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase and short-term borrowings from other banks, are summarized as follows:

(Dollar amounts in thousands)	2019			2018			2017
Balance at year-end	$	5,075		$	90,398		$	74,707
Average balance outstanding		14,808			42,231			63,910
Maximum month-end balance		92,000			101,857			114,025
Weighted-average rate at year-end		1.66	%		2.53	%		1.36	%
Weighted-average rate during the year		2.49	%		1.99	%		1.18	%

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 $6.0 million line of credit at an adjustable rate, currently 5.00%, a $10.0 million line of credit at an adjustable rate, currently at 4.93%, and a $4.0 million line of credit at an adjustable rate, currently 5.51%. At December 31, 2019, and 2018, there were no outstanding borrowings under these lines of credit. The additional borrowing capacity on FHLB advances was $87.0 million and $27.0 million at December 31, 2019 and 2018, respectively.

11. OTHER BORROWINGS

Other borrowings consist of advances from the FHLB and subordinated debt as follows:

				Weighted-			Stated interest
(Dollar amounts in thousands)	Maturity range			average			rate range
Description	from		to	interest rate			from			to			2019		2018
Fixed-rate amortizing	07/01/25	10/01/28			4.06	%		4.02	%	4.47	%	$	404	$	555
Finance lease liabilities	12/31/21	06/01/40			3.29	%		2.70	%	3.51	%		4,098		-
Junior subordinated debt	12/21/37	12/21/37			4.10	%		3.61	%	4.42	%		8,248		8,248
Total												$	12,750	$	8,803

The scheduled maturities of other borrowings are as follows:

(Dollar amounts in thousands)
			Weighted-
Year Ending December 31,	Amount		Average Rate
2020	$	445		3.36	%
2021		442		3.36	%
2022		434		3.36	%
2023		433		3.36	%
2024		430		3.36	%
Beyond 2024		10,566		3.87	%
Total	$	12,750		3.84	%

Fixed-rate amortizing advances from the FHLB require monthly principal and interest payments and an annual 20 percent pay-down of outstanding principal. Monthly principal and interest payments are adjusted after each 20 percent pay-down. Under the terms of a blanket agreement, FHLB borrowings are secured by certain qualifying assets of the Company which consist principally of first mortgage loans or mortgage-backed securities. Under this credit arrangement, the Company has a remaining borrowing capacity of approximately $273.4 million at December 31, 2019. At December 31, 2019, the Company also had available a $10.0 million letter of credit with FHLB, which expired January 23, 2020. At December 31, 2019, there was no outstanding borrowings on this letter of credit.

The Company formed a special purpose entity (“Entity”) to issue $8.0 million of floating rate, obligated mandatorily redeemable securities, and $248,000 in common securities as part of a pooled offering. The rate adjusts quarterly, equal to LIBOR plus 1.67%. The Entity may redeem them, in whole or in part, at face value. The Company borrowed the proceeds of the issuance from the Entity in December 2006 in the form of an $8.3 million note payable, which matures in December 2037, and is included in the other borrowings on the Company’s Consolidated Balance Sheet.

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On January 1, 2019, the Company adopted ASU 2016-02 which resulted in the recording of finance lease liabilities of $3.8 million on the Consolidated Balance Sheet. See Note 15 of the financial statements.

12. ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES

The components of accrued interest payable and other liabilities are as follows at December 31:

	2019		2018
(Dollar amounts in thousands)
Accrued interest payable	$	917	$	744
Accrued directors' benefits		1,470		1,346
Accrued salary and benefits expense		1,451		1,058
Operating lease liabilities		906		-
Other		1,288		1,692
Total	$	6,032	$	4,840

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13. INCOME TAXES

The provision for federal income taxes for the years ended December 31, consists of:

(Dollar amounts in thousands)	2019		2018
Current payable	$	2,265	$	2,403
Deferred		327		(241	)
Total provision	$	2,592	$	2,162

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 at December 31:

(Dollar amounts in thousands)	2019		2018
Deferred tax assets:
Allowance for loan and lease losses	$	1,288	$	1,327
Supplemental retirement plan		469		454
Investment security basis adjustment		18		18
Nonaccrual interest income		297		389
Accrued compensation		244		222
Deferred origination fees, net		30		-
Net unrealized loss on AFS securities		-		41
Lease liability		1,051		-
Gross deferred tax assets		3,397		2,451
Deferred tax liabilities:
Premises and equipment		583		328
Net unrealized gain on AFS securities		490		-
Net unrealized gain on equity securities		62		1
FHLB stock dividends		139		139
Intangibles		378		342
Mortgage servicing rights		82		75
Deferred origination fees, net		-		13
Acquisition fair value adjustments		253		275
Right of use assets		1,032		-
Other		4		5
Gross deferred tax liabilities		3,023		1,178
Net deferred tax assets	$	374	$	1,273

No valuation allowance was established at December 31, 2019 and 2018, in view of the Company’s tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

31

The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate for the years ended December 31, is as follows:

(Dollar amounts in thousands)	2019						2018
				% of						% of
				Pretax						Pretax
	Amount			Income			Amount			Income
Provision at statutory rate	$	3,214			21.0	%	$	3,065			21.0	%
Tax-exempt income		(647	)		(4.2	)%		(622	)		(4.3	)%
Nondeductible interest expense		32			0.2	%		27			0.2	%
Stock-based compensation		-			-	%		(37	)		(0.3	)%
Other		(7	)		(0.1	)%		(271	)		(1.8	)%
Actual tax expense and effective rate	$	2,592			16.9	%	$	2,162			14.8	%

ASC 740-10 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

At December 31, 2019 and December 31, 2018, the Company had no ASC 740-10 unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next 12 months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.

The Company and the Bank are subject to U.S. federal income tax as well as an income tax in the states of Ohio and Florida, and the Bank is subject to a capital-based franchise tax in the state of Ohio. The Company and the Bank are no longer subject to examination by taxing authorities for years before December 31, 2016.

14. EMPLOYEE BENEFITS

Employee Retirement Plan

The Bank maintains section 401(k) employee savings and investment plans for all full-time employees and officers of the Bank who are at least 21 years of age. The Bank’s contributions to the plans are discretionary, and were based on 50% matching of voluntary contributions up to 6% of compensation for the years ended December 31, 2019 and 2018. Employee contributions are vested at all times, and MBC contributions are fully vested after six years beginning at the second year in 20% increments. Special vesting provisions are in place for legacy Liberty employees with 3 or more years of service. Contributions for 2019 and 2018 to these plans amounted to $319,000 and $306,000, respectively.

Executive Deferred Compensation Plans

The Company maintains executive deferred compensation plans to provide post-retirement payments to members of senior management. The plan agreements are noncontributory, defined contribution arrangements that provide supplemental retirement income benefits to several officers, with contributions made solely by the Bank. Accrued executive deferred compensation amounted to $615,000 and $504,000 as of December 31, 2019 and 2018, respectively. During 2019 and 2018, the Company recognized nonqualified deferred compensation expense of $85,000 and $98,000, respectively, to the plans.

Stock Option and Restricted Stock Plan

In 2007, the Company adopted the 2007 Omnibus Equity Plan (the “2007 Plan”) for granting incentive stock options, nonqualified stock options, and restricted stock to key officers and employees and nonemployee directors of the Company. A total of 320,000 shares of authorized and unissued or issued common stock were reserved for issuance under the 2007 Plan, which expired ten years from the date of board approval of the plan. Although the 2007 Plan expired in 2017, there remain outstanding 14,500 shares in incentive stock options awards granted under the 2007 Plan. The per share exercise price of an option granted is not less than the fair value of a share of common stock on the date the option was granted.

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In 2017, the Company adopted the 2017 Omnibus Equity Plan (the “2017 Plan”) for granting incentive stock options, nonqualified stock options, restricted stock and other equity awards to key officers and employees and nonemployee directors of the Company. The Company’s stockholders approved the 2017 Plan at the annual meeting of the stockholders held on May 10, 2017. A total of 448,000 shares of authorized and unissued or issued common stock are reserved for issuance under the 2017 Plan, which expires ten years from the date of board approval of the plan. 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. Remaining available shares that can be issued under the Plan were 386,188 at December 31, 2019.

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

	Shares			Weighted- average Exercise Price Per Share
Outstanding, January 1, 2019		14,900		$	8.78
Exercised		(400	)		8.78
Outstanding, December 31, 2019		14,500		$	8.78
Exercisable, December 31, 2019		14,500		$	8.78

The total intrinsic value of outstanding in-the-money exercisable stock options was $251,068 and $185,356 at December 31, 2019 and 2018, respectively.

No options were granted for the years ended December 31, 2019 and 2018. The Company recognizes compensation expense in the amount of fair value of the options at the grant date and as an addition to stockholders’ equity.

For the years ended December 31, 2019 and 2018, the Company recorded $265,000 and $215,000, respectively, of compensation cost related to vested stock options. As of December 31, 2019, there was no unrecognized compensation cost related to vested stock options.

For the years ended December 31, 2019 and 2018, 400 and 24,600 options were exercised resulting in net proceeds to the participant of $0 and $85,000, respectively.

During 2019 and 2018, the Compensation Committee of the Board of Directors of the Company granted awards of restricted stock for an aggregate amount of 29,130 and 22,702 shares, respectively, to certain employees of the Bank. The expense recognized as a result of these awards was $184,000 and $191,000 for the years ended 2019 and 2018, respectively. The number of restricted stock shares earned or settled will depend on certain conditions and are also subject to service period-based vesting. The award recipient must maintain service with Middlefield Banc Corp. and affiliates until the third anniversary of the award to satisfy the service condition. The performance condition will be satisfied if the average total shareholder annual return on Middlefield Banc Corp. stock for the three subsequent years is at least 10.00% for 2019 and 8.00% for 2018.

The Company recognized restricted stock forfeitures in the period they occur.

The following table presents the activity during 2019 related to awards of restricted stock:

	Units			Weighted- average Grant Date Fair Value Per Unit
Nonvested at January 1, 2019		42,350		$	20.98
Granted		29,130			20.95
Vested		(10,440	)		16.56
Nonvested at December 31, 2019		61,040		$	21.72
Expected to vest at December 31, 2019		41,136		$	20.57

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As of December 31, 2019, there was $715,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.83 years. The total fair value of shares vested during the years ended December 31, 2019 and 2018 was $265,000, and $205,000, respectively.

15. 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 at December 31:

(Dollar amounts in thousands)	2019		2018
Commitments to extend credit	$	260,579	$	228,427
Standby letters of credit		1,616		1,656
Total	$	262,195	$	230,083

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. 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.

Leasing Commitments

The Company leases seven of its branch locations and one loan production office. As of December 31, 2019, net assets recorded under leases amounted to $4.9 million and have remaining lease terms of 1 year to 20 years. As of December 31, 2019, finance lease assets included in premises and equipment, net, totaled $4.0 million and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled $903,000. As of December 31, 2019, finance lease obligations included in other borrowings totaled $4.1 million and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled $906,000.

On April 17, 2019, the Company purchased a building to relocate the Mantua branch which is and has been at a leased location as of December 31, 2019. The relocation is planned for 2020, and the Company entered into an amended lease agreement with the Mantua lessor which does not exceed 12 months. As such, the lease for the Mantua location is not considered a capitalized lease as of December 31, 2019.

Lease costs incurred are as follows:

	For the Twelve
	Months Ended
	December 31, 2019
Lease Costs:
Finance lease cost:
Amortization of right-of-use asset	$	360
Interest Expense		132
Other		57
Operating lease cost		245
Total lease cost	$	794

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The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of December 31, 2019:

	Operating			Finance
Weighted-average term (years)		6.5			13.7
Weighted-average discount rate		2.9	%		3.3	%

The following table displays the undiscounted cash flows due related to operating and finance leases as of December 31, 2019, along with a reconciliation to the discounted amount recorded on the December 31, 2019 balance sheet:

	Operating			Finance
Undiscounted cash flows due within:
2020	$	185		$	458
2021		169			476
2022		169			478
2023		169			478
2024		133			478
2025 and thereafter		174			2,749
Total undiscounted cash flows		999			5,117
Impact of present value discount		(93	)		(1,019	)
Amount reported on balance sheet	$	906		$	4,098

16. REGULATORY RESTRICTIONS

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the State of Ohio, Division of Financial Institutions.

Cash Requirements

The Federal Reserve Bank of Cleveland requires the Company to maintain certain average reserve balances. As of December 31, 2019 and 2018, the Bank had required reserves of $16.5 million and $17.3 million comprised of vault cash and a depository amount held with the Federal Reserve Bank.

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% of the Bank’s common stock and capital surplus.

Dividends

MBC is subject to dividend restrictions that generally limit 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 for 2019 approximates $20.5 million plus 2020 profits retained up to the date of the dividend declaration.

17. REGULATORY CAPITAL

The Bank and Company are subject to regulatory capital requirements administered by banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. As of December 31, 2019, the Bank and Company have met all capital adequacy requirements to which they are subject.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is adequately capitalized, regulatory approval is required before the institution may accept brokered deposits. If an institution is undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

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The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following tables present actual and required capital ratios as of December 31, 2019 and 2018, under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

	As of December 31, 2019
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.35	%		12.12	%		12.12	%		12.79	%
Middlefield Banc Corp.		10.23	%		12.56	%		11.77	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

	As of December 31, 2018
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		9.60	%		11.09	%		11.09	%		11.83	%
Middlefield Banc Corp.		10.35	%		11.83	%		11.04	%		12.57	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

18. FAIR VALUE DISCLOSURE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgement or estimation.

This hierarchy requires the use of observable market data when available.

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The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,126	$	-	$	4,126
Obligations of states and political subdivisions		-		82,977		-		82,977
Mortgage-backed securities in government- sponsored entities		-		18,630		-		18,630
Total debt securities		-		105,733		-		105,733
Equity securities in financial institutions		710		-		-		710
Total	$	710	$	105,733	$	-	$	106,443

			December 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	7,471	$	-	$	7,471
Obligations of states and political subdivisions		-		73,093		-		73,093
Mortgage-backed securities in government- sponsored entities		-		17,758		-		17,758
Total debt securities		-		98,322		-		98,322
Equity securities in financial institutions		616		-		-		616
Total	$	616	$	98,322	$	-	$	98,938

Investment Securities Available for Sale – The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy.

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The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement. No such devaluation occurred during the year ended December 31, 2019.

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,166	$	5,166

			December 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	1,075	$	1,075

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above tables include estimated selling costs of $2.1 million and $492,000 at December 31, 2019 and 2018, respectively.

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2019
Impaired loans	$	5,166	Appraisal of collateral (1)	Appraisal adjustments (2)	40.3%	to	47.4%	(41.8%)

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2018
Impaired loans	$	1,075	Appraisal of collateral (1)	Appraisal adjustment (2)	0.0%	to	100.0%	(40.6%)

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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The estimated fair value of the Company’s financial instruments not measured at fair value on a recurring basis is as follows:

	December 31, 2019
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	35,113	$	35,113	$	-	$	-	$	35,113
Loans held for sale		1,220		-		1,220		-		1,220
Net loans		977,490		-		-		974,213		974,213
Bank-owned life insurance		16,511		16,511		-		-		16,511
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848
Accrued interest receivable		3,471		3,471		-		-		3,471
Financial liabilities:
Deposits	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236
Short-term borrowings		5,075		5,075		-		-		5,075
Other borrowings		12,750		-		-		12,783		12,783
Accrued interest payable		917		917		-		-		917

	December 31, 2018
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	107,933	$	107,933	$	-	$	-	$	107,933
Loans held for sale		597		-		597		-		597
Net loans		984,681		-		-		973,124		973,124
Bank-owned life insurance		16,080		16,080		-		-		16,080
Federal Home Loan Bank stock		3,679		3,679		-		-		3,679
Accrued interest receivable		3,633		3,633		-		-		3,633
Financial liabilities:
Deposits	$	1,016,067	$	715,153	$	-	$	298,891	$	1,014,044
Short-term borrowings		90,398		90,398		-		-		90,398
Other borrowings		8,803		-		-		8,827		8,827
Accrued interest payable		744		744		-		-		744

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instruments.

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19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax:

	Unrealized gains/(losses) on
	available-for-sale
(Dollars in thousands)	securities (a)
Balance as of December 31, 2017	$	1,091
Other comprehensive loss		(1,291	)
Change in accounting principle, ASC 2016-01 (b)		(141	)
Change in accounting principle, ASC 2018-02 (b)		187
Period change		(1,245	)
Balance at December 31, 2018	$	(154	)
Balance as of December 31, 2018	$	(154	)
Other comprehensive income		2,149
Amount reclassified from accumulated other comprehensive income		(153	)
Period change		1,996
Balance at December 31, 2019	$	1,842

(a) All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.

(b) Reclassifications are the result of the adoption of ASUs 2016-01 and 2018-02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders’ Equity for the affected transitional periods.

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income for the year ended December 31, 2019:

	Amount Reclassified from			Affected Line Item in
	Accumulated Other			the Statement Where
(Dollars in thousands)	Comprehensive Income			Net Income is
Details about other comprehensive income	December 31, 2019			Presented
Unrealized gains on available-for-sale securities (a)
	$	194		Investment securities gains on sale, net
		(41	)	Income taxes
	$	153

(a) Amounts in parentheses indicate expenses and other amounts indicate income.

There were no other reclassifications of amounts from accumulated other comprehensive income for the year ended December 31, 2018.

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20. STOCK SPLIT DISCLOSURE

On October 9, 2019, the Board of Directors of Middlefield Banc Corp. authorized a two-for-one stock split. Each shareholder of record at the close of business on October 25, 2019, received one additional share for every outstanding share held on the record date. The additional shares were paid on November 8, 2019. As a result, all share and earnings per share information have been retroactively adjusted to reflect the stock split.

With respect to the December 31, 2019 and 2018 financial statements, the effect of the stock split on December 31, 2018 amounts was recognized retroactively in the stockholders’ equity accounts in the Consolidated Balance Sheets, and in all share data in the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effect of the stock split on per share amounts and weighted average common shares outstanding for the year ended December 31, 2018 is as follows:

	For the year ended
	December 31, 2018
Restated net income per common share - basic	$	1.92
Restated net income per common share - diluted	$	1.91
Restated weighted-average common shares issued		7,232,238
Restated average treasury stock shares		(772,330	)
Restated average shares outstanding - basic		6,459,908
Restated stock options and restricted stock		27,906
Restated average shares outstanding - diluted		6,487,814
Restated period ending shares oustanding		6,488,664
Restated treasury shares outstanding		772,330

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21. PARENT COMPANY

Following are condensed financial statements for the Company.

CONDENSED BALANCE SHEET

(Dollar amounts in thousands)	December 31,
	2019		2018
ASSETS
Cash and due from banks	$	2,577	$	1,582
Equity securities, at fair value		710		616
Investment in nonbank subsidiary		1,400		2,364
Investment in subsidiary bank		141,104		128,366
Other assets		977		4,080
TOTAL ASSETS	$	146,768	$	137,008
LIABILITIES
Trust preferred debt	$	8,248	$	8,248
Other liabilities		745		470
TOTAL LIABILITIES		8,993		8,718
STOCKHOLDERS' EQUITY		137,775		128,290
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	146,768	$	137,008

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

	Year Ended December 31,
(Dollar amounts in thousands)	2019			2018
INCOME
Dividends from subsidiary bank	$	4,450		$	4,650
Dividends from nonbank subsidiary		1,000			-
Gain (loss) on equity securities		94			(9	)
Other		12			9
Total income		5,556			4,650
EXPENSES
Interest expense		343			325
Other		2,949			2,119
Total expenses		3,292			2,444
Income before income tax benefit		2,264			2,206
Income tax benefit		(669	)		(513	)
Income before equity in undistributed net income of subsidiaries		2,933			2,719
Equity in undistributed net income of subsidiaries		9,778			9,712
NET INCOME	$	12,711		$	12,431
Comprehensive Income	$	14,707		$	11,140

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CONDENSED STATEMENT OF CASH FLOWS

	Year Ended December 31,
(Dollar amounts in thousands)	2019			2018
OPERATING ACTIVITIES
Net income	$	12,711		$	12,431
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Middlefield Banking Company		(10,742	)		(9,711	)
Equity in undistributed net loss of EMORECO		964			(1	)
Stock-based compensation		548			371
(Gain) loss on equity securities		(94	)		9
Other, net		3,095			(382	)
Net cash provided by operating activities		6,482			2,717
FINANCING ACTIVITIES
Proceeds from issuance of common stock		95			92
Restricted stock cash portion		(44	)		-
Stock options exercised		4			168
Proceeds from dividend reinvestment plan		372			618
Repurchase of treasury shares		(2,229	)		-
Cash dividends		(3,685	)		(3,779	)
Net cash (used in) financing activities		(5,487	)		(2,901	)
Increase (decrease) in cash		995			(184	)
CASH AT BEGINNING OF YEAR		1,582			1,766
CASH AT END OF YEAR	$	2,577		$	1,582
SUPPLEMENTAL INFORMATION
Increase in common stock through increase in other, net	$	265		$	183

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22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2019		2019		2019		2019
Total interest and dividend income	$	13,484	$	13,720	$	13,885	$	13,436
Total interest expense		3,254		3,451		3,307		3,128
Net interest income		10,230		10,269		10,578		10,308
Provision for loan losses		240		110		80		460
Net interest income after provision for loan losses		9,990		10,159		10,498		9,848
Total noninterest income		1,132		1,299		1,105		1,305
Total noninterest expense		7,500		7,482		7,673		7,378
Income before income taxes		3,622		3,976		3,930		3,775
Income taxes		611		686		661		634
Net income	$	3,011	$	3,290	$	3,269	$	3,141
Per share data:
Net income
Basic	$	0.46	$	0.51	$	0.51	$	0.48
Diluted		0.46		0.50		0.50		0.49
Average shares outstanding:
Basic		6,498,278		6,502,508		6,458,258		6,423,543
Diluted		6,510,568		6,514,946		6,479,066		6,455,387

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(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2018		2018		2018		2018
Total interest and dividend income	$	11,940	$	12,129	$	12,829	$	13,459
Total interest expense		2,040		2,287		2,584		2,998
Net interest income		9,900		9,842		10,245		10,461
Provision for loan losses		210		210		210		210
Net interest income after provision for loan losses		9,690		9,632		10,035		10,251
Total noninterest income		788		1,009		954		977
Total noninterest expense		7,345		7,063		7,092		7,243
Income before income taxes		3,133		3,578		3,897		3,985
Income taxes		528		481		593		560
Net income	$	2,605	$	3,097	$	3,304	$	3,425
Per share data:
Net income
Basic	$	0.41	$	0.48	$	0.51	$	0.53
Diluted		0.40		0.48		0.51		0.53
Average shares outstanding:
Basic		6,440,524		6,451,452		6,468,786		6,478,360
Diluted		6,476,138		6,480,658		6,496,652		6,500,298

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

This information should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements.

This Management’s Discussion and Analysis section of the Annual Report contains 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 the Company's control. Although the Company 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 the Company 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.

Overview

During 2019, the Company reported net income of $12.7 million, or $1.95 per diluted share, compared with $12.4 million, or $1.91 per diluted share, in 2018. The Company’s net income as a percentage of average assets for 2019 and 2018 was 1.05% and 1.09%, respectively, while the Company’s net income as a percentage of average shareholders’ equity was 9.35% and 9.94%, respectively.

Highlights of the Company’s performance in 2019 (on a year-over-year basis unless noted) include the following⁽⁴⁾:

● Net income increased 2.3% to a record $12.7 million

● Earnings per diluted share increased 2.1% to a record $1.95 per share

● Return on average common equity was 9.35%, compared to 9.94%

● Return on average tangible common equity⁽¹⁾⁽²⁾ was 10.72%, compared to 11.57%

● Book value per share was up 8.5% to a record $21.45 per share

● Tangible book value⁽¹⁾⁽³⁾ per share was up 10.0% to a record $18.78 per share

● Total net loans decreased 0.7% to $977.5 million

● Net interest income improved 2.3% to $41.4 million

● Total noninterest income was up 29.9% to $4.8 million

● Noninterest expense was up only 4.5%

● Equity to assets strengthened to 11.65%, compared to 10.28%

⁽¹⁾ A reconciliation of Non-GAAP financial measures can be found in the following tables.

⁽²⁾ Calculated by dividing net income by average tangible common equity

⁽³⁾ Calculated by dividing tangible common equity by shares outstanding

⁽⁴⁾ All per share data has been adjusted to reflect the November 8, 2019 two-for-one stock split

Reconciliation of Common Stockholders' Equity to Tangible Common Equity *	For the Twelve Months Ended
(Dollar amounts in thousands)	December 31,		December 31,
	2019		2018
Stockholders' Equity	$	137,775	$	128,290
Less Goodwill and other intangibles		17,127		17,468
Tangible Common Equity	$	120,648	$	110,822
Shares outstanding		6,423,630		6,488,664
Tangible book value per share	$	18.78	$	17.08

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Reconciliation of Average Equity to Return on Average Tangible Common Equity	For the Twelve Months Ended
	December 31,			December 31,
	2019			2018
Average Stockholders' Equity	$	135,900		$	125,074
Less Average Goodwill and other intangibles		17,296			17,641
Average Tangible Common Equity	$	118,604		$	107,433
Net income	$	12,711			12,431
Return on average tangible common equity (annualized)		10.72	%		11.57	%

*All share and per share information has been adjusted for a two-for-one stock split completed on November 8, 2019.

Significant Factors Affecting Financial Results

Nonperforming and classified assets held by the banking industry have decreased from previous elevated levels. Because of uncertainty about economic sustainability and the potential for other factors to have an adverse impact on the prospects for the banking industry, such as national and global economic and political factors, the bank regulatory agencies have insisted that banks increase the size of the buffer that protects a bank from unknown potential adverse events and circumstances: regulatory capital.

The total number of banks and savings associations as of the end of 2019 is less than half the number at the end of 1990. Nevertheless, a large percentage of the institutions that remain are small, community-oriented institutions, although the share of total banking assets that they control continues to decline. We believe a strong incentive exists for growth through industry consolidation as a defense to pressure from competitors. We therefore believe that industry consolidation is likely to continue.

The trend toward consolidation would be most advantageous for financial institution organizations that have a surplus of capital, a strategy for growth, a strong financial profile, and few if any regulatory supervisory concerns. Our goal is to maintain that advantage, although we give no assurance that our efforts to do so will succeed. We continue to commit significant resources to increase operational effectiveness in The Middlefield Banking Company.

Critical Accounting Policies

Allowance for loan and lease losses. Arriving at an appropriate level of allowance for loan and lease losses involves a high degree of judgment. The Company’s allowance for loan and lease 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 and lease 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” of this Annual Report.

Valuation of Securities. Investment securities are classified as held to maturity or available for sale on the date of purchase. Only those securities classified as held to maturity are reported at amortized cost. Available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income, net of related deferred income taxes, on the Consolidated Balance Sheet. The majority of all of the Company’s securities are valued based on prices compiled by third party vendors using observable market data. However, certain securities are less actively traded and do not always have quoted market prices. The determination of fair value for less actively traded securities, therefore, requires judgment, with such determination requiring benchmarking to similar instruments or analyzing default and recovery rates. Examples include certain collateralized mortgage and debt obligations and high-yield debt securities. Realized securities gains or losses are reported within noninterest income in the Consolidated Statement of Income. The cost of securities sold is based on the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation Investments in debt securities are generally evaluated for OTTI under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments — Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. government-sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 96.1% of the total available-for-sale portfolio as of December 31, 2019, and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

● The length of time and the extent to which the fair value has been less than the amortized cost basis.

● Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions.

● The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and,

● Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

Refer to Note 4 in the consolidated financial statements.

Income Taxes

The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Company conducts business. On a quarterly basis, management assesses the reasonableness of the Company’s effective tax rate based upon management’s current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Consolidated Statement of Income.

Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in accrued taxes, interest and expenses in the Consolidated Balance Sheet. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management’s judgment that realization is more likely than not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest and expenses in the Consolidated Balance Sheet. The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with management’s evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current period’s income tax expense and can be significant to the operating results of the Company.

Goodwill and Other Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the assets acquired in connection with business acquisitions accounted for as purchases. Other intangible assets consist of branch acquisition core deposit premiums. Initially, an assessment of qualitative factors is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary.  However, if we conclude otherwise, then we are required to perform the impairment test by calculating the fair value of the reporting unit and comparing against the carrying amount of the reporting unit.  If the fair value is less than the carrying value, an expense may be required to write down the goodwill to the proper carrying value. 

48

The Company must assess goodwill and other intangible assets each year for impairment. The Company evaluates goodwill using financial data as of September 30. Based on the analysis performed as of September 30, 2019, the Company determined that goodwill was not impaired.

Changes in Financial Condition

General The Company’s total assets decreased $65.9 million or 5.3% to $1.18 billion at December 31, 2019 from $1.25 billion at December 31, 2018. This decrease was mostly due to a decrease in cash and cash equivalents and net loans of $72.8 million and $7.2 million, respectively.       

The decrease in the Company’s total assets reflects a related decrease in total liabilities of $75.4 million or 6.7% to a total balance of $1.04 billion at December 31, 2019 from $1.12 billion at December 31, 2018. The Company experienced an increase in total stockholders’ equity of $9.5 million. The decrease in total liabilities was due to a decrease in short-term borrowings for the year of $85.3 million.

Total deposits increased $4.8 million or 0.5% to $1.02 billion at December 31, 2019 from $1.02 billion as of December 31, 2018. Short-term borrowings decreased $85.3 million or 94.4% to $5.1 million at December 31, 2019 from $90.4 million as of December 31, 2018. The net increase in total stockholders’ equity can be attributed to an increase in common stock, retained earnings, and accumulated other comprehensive income (loss) of $692,000, $9.0 million, and $2.0 million, respectively, partially offset by an increase in treasury stock of $2.2 million or 16.5%, which is due to the Company repurchasing 98,832 of its outstanding shares during the year ended December 31, 2019.

On October 9, 2019, the Board of Directors of Middlefield Bank Corp. authorized a two-for-one stock split. Each shareholder of record at the close of business on October 25, 2019, received one additional share for every outstanding share held on the record date. The additional shares were paid on November 8, 2019.

Cash and cash equivalents Cash and due from banks and federal funds sold represent cash and cash equivalents which decreased $72.8 million or 67.5% to $35.1 million at December 31, 2019 from $107.9 million at December 31, 2018. This decrease resulted from the repayment of short-term borrowings. The Company tested a line of credit as of December 31, 2018 by borrowing $70.0 from the FHLB and repaying the following business day.  This testing was not done as of December 31, 2019, resulting in the large variance. 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.    

Investment securities Management's objective in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. The balance of investment securities available for sale increased $7.4 million, or 7.5%, as compared to 2018. This increase includes purchases of investment securities available for sale of $35.0 million during the year ended December 31, 2019. The ratio of securities to total assets increased to 8.9% at December 31, 2019, compared to 7.9% at December 31, 2018.

The Company benefits from owning municipal bonds, which totaled $83.0 million or 78.5% of the Company's total investment portfolio at December 31, 2019. The weighted-average federal tax equivalent (FTE) yield on all debt securities at year-end 2019 increased to 3.77% from 3.67% at year-end 2018. While the Company's focus is to generate interest revenue primarily through loan growth, management will continue to invest excess funds in securities when opportunities arise.

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 commercial loans to finance the business operations and to a lesser extent construction and consumer loans. The portfolio is well disbursed, geographically, with the five branches in the central Ohio market comprising 24.6% of the Company’s total loans. Since December 31, 2018, the central OH footprint’s total loans increased by 1.9%, compared to the Company’s total loan decrease of 0.8%. Net loans receivable decreased $7.2 million or 0.7% to $977.5 million at December 31, 2019 from $984.7 million at December 31, 2018. Included in the total decrease of loans receivable were decreases in the commercial real estate and consumer installment portfolios of $28.2 million and $2.4 million, respectively. Also included in the total decrease of loans receivable were increases in the residential real estate, real estate-construction, and commercial and industrial portfolios of $10.6 million, $6.5 million, and $5.7 million, respectively.

The product mix in the loan portfolio consists of commercial real estate loans equaling 47.8% of total loans, residential real estate loans, 35.3%, commercial and industrial loans, 9.1%, construction loans, 6.4%, and consumer loans, 1.5% at December 31, 2019 compared with 50.2%, 33.9%, 8.5%, 5.7%, and 1.7%, respectively, at December 31, 2018.

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Loans contributed 92.4% of total interest income in 2019 and 92.5% in 2018. The loan portfolio yield of 5.06% in 2019 was 23 basis points higher than the average yield for total interest-earning assets. Management recognizes that while the loan portfolio holds some of the Company’s highest yielding assets, it is inherently the riskiest portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the approval process. Management follows additional procedures to obtain current borrower financial information annually throughout the life of the loan obligation.

To minimize risks associated with changes in the borrower’s future repayment capacity, the Company generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

The Company will continue to monitor the size of its loan portfolio growth. The Company expects loan growth to be minimal, while steadfastly adhering to sound underwriting standards. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio.

Restricted stock. The Company’s investment in restricted stock increased $168,000, or 4.6%, to $3.8 million as of December 31, 2019, compared to $3.7 million as of December 31, 2018.

Premises and equipment, net. The Company’s investment in premises and equipment, net increased $4.9 million, or 37.5%, to $17.9 million as of December 31, 2019, compared to $13.0 million as of December 31, 2018. This increase was mostly due to the recording of finance lease right of use assets, totaling $4.0 million as of December 31, 2019, due to the adoption of ASU 2016-02, Leases (Topic 84), effective January 1, 2019 (see Note 15). Other increases include an increase in equipment from new ATMs purchased for all locations, an increase in buildings and related furniture and fixtures representing the new Plain City branch opened in the fourth quarter of 2019, and the relocation of the Mantua branch to be in operation in the first quarter 2020.         

Goodwill and other intangibles. Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed annually for impairment and any such impairment is recognized in the period identified by a charge to earnings.

The process of evaluating goodwill for impairment requires management to make significant estimates and judgments. The use of different estimates, judgments or approaches to estimate fair value could result in a different conclusion regarding impairment of goodwill. Based on the analysis, management has determined that there is no goodwill impairment.

The Company monitors the ongoing value of core deposit intangibles and goodwill on an annual basis. As of December 31, 2019, the Company recorded a decrease in core deposit intangibles of $341,000, and no change in the goodwill asset.

Bank-owned life insurance. Bank-owned life insurance (BOLI) is universal life insurance, purchased by the Company, on the lives of the Company’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 Company as the owner of the policies. BOLI increased by $431,000 to $16.5 million as of December 31, 2019 from $16.1 million at the end of 2018 as a result of increases in cash surrender value.

Deposits. Interest-earning assets are funded generally by both interest-bearing and noninterest-bearing core deposits. Deposits are influenced by changes in interest rates, economic conditions and competition from other banks. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which represented 98.3% of the Company’s total funding sources at December 31, 2019. The deposit base consists of demand deposits, savings, money market accounts and time deposits. Total deposits increased $4.8 million or 0.5% to $1.02 billion at December 31, 2019 from $1.02 billion at December 31, 2018.

Savings and time deposits are the largest sources of funding for the Company's earning assets, making up a combined 54.9% of total deposits. The total increase in deposits is the result of increases in time deposits and interest-bearing demand deposits of $67.9 million or 22.6%, and $15.7 million or 17.1%, respectively. This increase is net of decreases in noninterest-bearing demand, savings, and money market deposits of $12.0 million or 5.9%, $31.0 million or 13.9%, and $35.9 million or 18.2%, respectively, at December 31, 2019.

The Company avails itself of certain deposit brokers and listing services in an effort to facilitate growth. Although they are often priced favorably relative to FHLB advances, these deposits typically cost more than core deposits. Therefore, an effort is made to minimize them when prudent. Brokered and listing service deposits decreased $31.7 million from $148.8 million at December 31, 2018 to $117.1 million at December 31, 2019.

The Company will continue to experience increased competition for deposits in its market areas, which could challenge net growth in its deposit balances. The Company will continue to evaluate its deposit portfolio mix to properly employ both retail and wholesale funds to support earning assets and minimize interest costs.

50

Borrowed funds. The Company uses short and long-term borrowings as another source of funding to benefit asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, and lines of credit from other banks. Borrowed funds decreased $81.4 million or 82.0% to $17.8 million at December 31, 2019 from $99.2 million at December 31, 2018. The net decrease is a result of a partial shift of funding from FHLB to brokered deposits as well as the repayment of overnight short-term borrowings. The Company tested a line of credit as of December 31, 2018 by borrowing $70.0 million from the FHLB and repaying the following business day.  This testing was not done as of December 31, 2019, resulting in the large variance.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis will not be guaranteed after 2021. The Company formed a special purpose entity to issue $8.0 million of floating rate mandatorily redeemable trust preferred securities (“TruPS”). The rate on the TruPS adjusts quarterly, equal to LIBOR plus 1.67%. The cessation of LIBOR quotes in 2021 and the uncertainty over possible replacement rates for LIBOR will affect our TruPS. The Company expects a consensus as to what rate or rates may become accepted alternatives to LIBOR in 2020.

Stockholders’ equity. The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. All of the capital ratios exceeded the regulatory well-capitalized guidelines.

Stockholders’ equity totaled $137.8 million at December 31, 2019, compared to $128.3 million at December 31, 2018, which represents an increase of $9.5 million or 7.4%. Retained earnings increased $9.0 million resulting from net income of $12.7 million, less cash dividends paid of $3.7 million, or $0.57 per share, year-to-date. Common stock increased $692,000, or 0.8%, to $86.6 million at December 31, 2019 from $85.9 million at December 31, 2018. The Company maintains a dividend reinvestment and stock purchase plan. The plan allows shareholders to purchase additional shares of Company stock. A benefit of the plan is to permit the shareholders to reinvest cash dividends as well as make supplemental purchases without the usual payment of brokerage commissions. During 2019, shareholders invested $372,000 through the dividend reinvestment and stock purchase plan. These proceeds resulted in the issuance of 17,866 new shares at a weighted average price of $20.80. Accumulated other comprehensive income (loss) increased by $2.0 million during 2019 primarily due to an increase in the value of the Company’s available for sale securities. Treasury stock increased by $2.2 million due to the Company repurchasing 98,832 of its outstanding shares during the year ended December 31, 2019 at a weighted average price of $22.55 per share.

51

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 nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax-exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21% for the years ended December 31, 2019 and 2018, and 34% for the year ended December 31, 2017, respectively. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

	For the Twelve Months Ended December 31,
	2019							2018							2017
	Average				Average			Average				Average			Average				Average
(Dollar amounts in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable (3)	$	997,744	$	50,390		5.06	%	$	950,455	$	46,576		4.91	%	$	857,361	$	40,235		4.69	%
Investment securities (3)		101,381		3,188		3.77	%		96,856		2,950		3.67	%		104,444		3,168		4.22	%
Interest-earning deposits with other banks (4)		44,943		947		2.11	%		43,701		831		1.90	%		47,168		592		1.26	%
Total interest-earning assets		1,144,068		54,525		4.83	%		1,091,012		50,357		4.68	%		1,008,973		43,995		4.48	%
Noninterest-earning assets		61,596							53,964							60,683
Total assets	$	1,205,664						$	1,144,976						$	1,069,656
Interest-bearing liabilities:
Interest-bearing demand deposits	$	102,550		374		0.36	%	$	120,191		280		0.23	%	$	113,054		236		0.21	%
Money market deposits		167,187		2,438		1.46	%		158,364		1,754		1.11	%		158,159		980		0.62	%
Savings deposits		199,515		1,399		0.70	%		217,270		1,421		0.65	%		193,003		608		0.32	%
Certificates of deposit		369,006		8,198		2.22	%		282,602		5,176		1.83	%		241,195		3,526		1.46	%
Short-term borrowings		14,808		368		2.49	%		42,231		842		1.99	%		63,910		753		1.18	%
Other borrowings		12,986		363		2.80	%		15,914		436		2.74	%		32,244		544		1.69	%
Total interest-bearing liabilities		866,052		13,140		1.52	%		836,572		9,909		1.18	%		801,565		6,647		0.83	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		199,672							181,067							153,300
Other liabilities		4,040							2,263							3,825
Stockholders' equity		135,900							125,074							110,966
Total liabilities and stockholders' equity	$	1,205,664						$	1,144,976						$	1,069,656
Net interest income			$	41,385						$	40,448						$	37,348
Interest rate spread (1)						3.31	%						3.49	%						3.65	%
Net interest margin (2)						3.68	%						3.77	%						3.82	%
Ratio of average interest-earning assets to average interest-bearing liabilities						132.10	%						130.41	%						125.88	%

(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 interest margin represents net interest income as a percentage of average interest-earning assets.

(3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were $720, $682, and $1,239, for 2019, 2018, and 2017, respectively.

(4) Includes dividends received on restriced stock.

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Interest Rates and Interest Differential

	2019 versus 2018									2018 versus 2017
	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest-earning assets:
Loans receivable	$	2,357		$	1,457		$	3,814		$	4,469		$	1,872		$	6,341
Investment securities		168			70			238			(299	)		81			(218	)
Interest-bearing deposits with other banks		25			91			116			(55	)		294			239
Total interest-earning assets		2,550			1,618			4,168			4,115			2,247			6,362
Interest-bearing liabilities:
Interest-bearing demand deposits		(52	)		146			94			16			28			44
Money market deposits		113			571			684			2			772			774
Savings deposits		(120	)		98			(22	)		118			695			813
Certificates of deposit		1,750			1,272			3,022			682			968			1,650
Short-term borrowings		(615	)		141			(474	)		(344	)		433			89
Other borrowings		(81	)		8			(73	)		(361	)		253			(108	)
Total interest-bearing liabilities		995			2,236			3,231			113			3,149			3,262
Net interest income	$	1,555		$	(618	)	$	937		$	4,002		$	(902	)	$	3,100

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The ratio of net income to average shareholders’ equity and average total assets and certain other ratios are as follows for periods ended December 31:

(Dollars in thousands)	2019			2018			2017
Average total assets	$	1,205,664		$	1,144,976		$	1,069,656
Average shareholders' equity	$	135,900		$	125,074		$	110,966
Net income	$	12,711		$	12,431		$	9,455
Cash dividends declared per share	$	0.57		$	0.59		$	0.54
Return on average total assets		1.05	%		1.09	%		0.88	%
Return on average shareholders' equity		9.35	%		9.94	%		8.52	%
Dividend payout ratio (1)		28.99	%		30.40	%		35.52	%
Average shareholders' equity to average assets		11.27	%		10.92	%		10.37	%

(1) Cash dividends declared on common shares divided by net income

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Allowance for Loan and Lease Losses. The allowance for loan and lease losses (“ALLL”) 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 credited to it. The ALLL 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 ALLL, taking into account the overall risk characteristics of the various portfolio segments, the Company's loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the ALLL, 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 ALLL is a combination of a specific allowance for identified problem loans and a general allowance for homogeneous loan pools.

The allowance for loan and lease loss balance as of December 31, 2019 totaled $6.8 million representing a $660,000 decrease from the end of 2018. For the year of 2019, the provision for loan losses was $890,000 which represented an increase of $50,000 from the $840,000 provided during 2018. Asset quality is a high priority in our overall business plan as it relates to long-term asset growth projections. During 2019, net charge-offs increased by $948,000 to $1.6 million compared to $602,000 in 2018. Two key ratios to monitor asset quality performance are net charge-offs to average loans and the allowance for loan and lease losses to nonperforming loans. At year-end 2019, these ratios were 0.16% and 76.22%, respectively, compared to 0.06% and 98.51% in 2018. During the 2019 fourth quarter, charge-offs were higher as a result of charging off $566,000 of acquired student loans during the quarter. The Company believes this was a one-time issue, and, as the nonperforming assets at December 31, 2019 indicate, the Company expects charge-offs will return to more historical levels during the 2020 first quarter.

The specific allowance incorporates the results of measuring 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 non-specific allowance is determined based upon management's evaluation of existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends, collateral values, unique industry conditions within portfolio segments that existed as of the balance sheet date, and the impact of those conditions on the collectability of the loan portfolio. Management reviews these conditions quarterly. The non-specific 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 uses the best information available to make the determination of the adequacy of the ALLL at December 31, 2019, 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 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 ALLL. 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.

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The following table sets forth information concerning the Company's ALLL at the dates and for the periods presented:

	For the Years Ended
	December 31,
(Dollars in thousands)	2019			2018			2017			2016			2015
Allowance balance at beginning of period	$	7,428		$	7,190		$	6,598		$	6,385		$	6,846
Loans charged off:
Commercial and industrial		(519	)		(610	)		(536	)		(237	)		(280	)
Real estate-construction		-			-			-			-			(385	)
Real estate-mortgage:
Residential		(523	)		(177	)		(117	)		(414	)		(425	)
Commercial		(32	)		(111	)		(39	)		(70	)		(92	)
Consumer installment		(735	)		(220	)		(462	)		(22	)		(15	)
Total loans charged off		(1,809	)		(1,118	)		(1,154	)		(743	)		(1,197	)
Recoveries of loans previously charged-off:
Commercial and industrial		82			287			234			90			207
Real estate-construction		74			63			34			-			-
Real estate-mortgage:
Residential		78			128			241			141			186
Commercial		17			-			111			140			5
Consumer installment		8			38			81			15			23
Total recoveries		259			516			701			386			421
Net loans charged off		(1,550	)		(602	)		(453	)		(357	)		(776	)
Provision for loan losses		890			840			1,045			570			315
Allowance balance at end of period	$	6,768		$	7,428		$	7,190		$	6,598		$	6,385
Loans outstanding:
Average	$	997,744		$	950,455		$	857,361		$	565,223		$	494,931
End of period	$	984,258		$	992,109		$	923,213		$	609,140		$	533,710
Ratio of allowance for loan and lease losses to loans outstanding at end of period		0.69	%		0.75	%		0.78	%		1.08	%		1.20	%
Net charge-offs to average loans		0.16	%		0.06	%		0.05	%		0.06	%		0.16	%

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The following table illustrates the allocation of the Company's allowance for 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,
	2019					2018					2017					2016					2015
			Percent of					Percent of					Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
(Dollars in Thousands)
Type of Loans:
Commercial and industrial	$	456		9.10	%	$	969		8.45	%	$	999		10.98	%	$	448		9.95	%	$	448		7.97	%
Real estate construction		97		6.43			100		5.72			313		5.09			172		3.89			172		4.15
Mortgage:
Residential		1,658		35.26			1,581		33.92			1,760		34.46			2,818		44.46			2,818		43.56
Commercial		4,529		47.75			4,651		50.22			4,036		47.44			3,135		40.96			3,135		43.41
Consumer installment		28		1.46			127		1.69			82		2.03			25		0.74			25		0.91
Total	$	6,768		100.0	%	$	7,428		100.0	%	$	7,190		100.0	%	$	6,598		100.0	%	$	6,598		100.0	%

Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, OREO, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. 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 principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.

Nonperforming loans exclude TDRs that are perfoming in accordance with their terms over a prescribed period of time. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 37 TDRs accruing interest with a balance of $3.6 million as of December 31, 2019, compared to 43 TDRs with a balance of $4.4 million as of December 31, 2018. Non-performing loans amounted to $8.9 million or 0.9% of total loans and $7.5 million or 0.8% of total loans at December 31, 2019 and December 31, 2018, respectively.

A major factor in determining the appropriateness of the ALLL is the type of collateral which secures the loans. Although this does not insure against all losses, real estate collateral provides substantial recovery, even in a distressed-sale and declining-value environment. The Bank’s objective is to work with the borrower to minimize the burden of the debt service and to minimize the future loss exposure to the Company.

The following table summarizes nonperforming loans by category:

	At December 31,
	2019		2018		2017		2016		2015
	(Dollars in Thousands)
Loans accounted for on a nonaccrual basis
Commercial and industrial	$	946	$	996	$	1,120	$	454	$	1,450
Real estate - construction		-		-		-		-		130
Real estate-mortgage:
Residential		3,285		2,731		4,002		4,034		4,122
Commercial		4,451		2,864		3,311		1,409		1,842
Consumer installment		197		4		-		6		1
Total nonaccrual loans	$	8,879	$	6,595	$	8,433	$	5,903	$	7,545
Accruing loans which are contractually past due ninety days or more	$	-	$	945	$	-	$	-	$	2

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 collectability 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, including all troubled debt restructurings. 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. Management evaluates all loans identified as impaired individually. 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 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 and lease loss is maintained for estimated losses.

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Interest income that would have been recorded had these loans not been placed on nonaccrual status was $257,000 in 2019, and $456,000 in 2018. 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.

Changes in Results of Operations 

2019 Results Compared to 2018 Results

General The Company posted net income of $12.7 million, compared to $12.4 million for the year ended December 31, 2018. On a per share basis, 2019 earnings were $1.95 per diluted share, representing an increase from the $1.92 per diluted share for the year ended December 31, 2018. The return on average equity for the year ended December 31, 2019, was 9.35% and the Company’s return on average assets was 1.05%, compared to 9.94% and 1.09%, respectively, for the year ended December 31, 2018.

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 interest-bearing liabilities. Net interest income increased by $937,000 in 2019 to $41.4 million compared to $40.5 million for 2018. This increase is the result of a $4.2 million increase in interest and dividend income with only a $3.2 million increase in interest expense. Interest-earning assets averaged $1.14 billion during 2019, a year-over-year increase of $53.1 million from $1.09 billion for 2018. The Company’s average interest-bearing liabilities increased from $836.6 million in 2018 to $866.1 million in 2019.

Net interest margin, a key performance indicator, is net interest income as a percentage of total interest-earning assets. For 2019 the net interest margin, measured on a fully taxable equivalent basis, decreased to 3.68%, compared to 3.77% in 2018. The decline in the net interest margin is attributable to a 34 basis points increase in the yield on total interest-bearing liabilities partially offset by an increase of 15 basis points in the yield on total interest-earning assets for the year ended December 31, 2019.

Interest and dividend income Interest and dividend income increased $4.2 million to $54.5 million for 2019 which is attributable to a $3.8 million increase in interest and fees on loans. This change was the result of an increase in the average balance of loans receivable, accompanied by a higher yield on the portfolio. The average balance of loans receivable increased by $47.3 million or 4.98% to $997.7 million for the year ended December 31, 2019 as compared to $950.5 million for the year ended December 31, 2018. The loans receivable yield increased to 5.06% for 2019, from 4.91% in 2018.

Interest on investment securities increased $238,000 to $3.2 million for 2019, compared to $3.0 million for 2018. The average balance of investment securities increased $4.5 million to $101.4 million for the year ended December 31, 2019 as compared to $96.9 million for the year ended December 31, 2018. The investment securities yield increased 10 basis points to 3.77% for 2019, compared to 3.67% for 2018.

Interest expense Interest expense increased $3.2 million or 32.6% to $13.1 million for 2019, compared with $9.9 million for 2018. This change in interest expense can be partially attributed to an increase in the average balance of interest-bearing liabilities. For the year ended December 31, 2019 the average balance of interest-bearing liabilities increased by $29.5 million to $866.1 million as compared to $836.6 million for the year ended December 31, 2018. Interest incurred on deposits increased by $3.8 million for the year from $8.6 million in 2018 to $12.4 million for year-end 2019. The change in deposit expense was due to an increase in the average balance as well as a 30 basis point increase in the cost of deposits during the year. Interest expense incurred on FHLB advances, junior subordinated debt and other borrowings decreased 42.8% from 2018. The decrease was due to a $30.4 million decrease in the average balance, partially offset by 43 basis points increase in the cost to borrow.     

Provision for loan losses The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan and lease losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses for the year ended December 31, 2019 was $890,000 compared to $840,000 in 2018. 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, collectability 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 and lease losses, actual loan losses could exceed the amounts that have been charged to operations.

The ratio of nonperforming loans to total loans was 0.90% at December 31, 2019, an increase from 0.76% at December 31, 2018. The ratio of the allowance for loan and lease losses to total loans decreased to 0.69% of total loans at December 31, 2019 compared to 0.75% at December 31, 2018. Generally, historical loss rates have decreased during 2019 and the pooled reserve is 93.6% qualitative. In addition, the specific reserves are about half as much as year-end 2018. One nonperforming loan relationship of $3.2 million fell into a nonpayment status during the first quarter of 2019. This loan is a one-time event unrelated to any trend in the portfolio and has a specific reserve that accounts for the risk of this credit.    

58

Noninterest income Noninterest income increased $1.1 million or 29.9% to $4.8 million for 2019 compared to $3.7 million for 2018. This increase was largely the result of increases in service charges on deposit accounts of $272,000, gain on sale of loans of $202,000, and other income of $339,000, which includes an increase in revenue from investment services of $143,000 from the prior year.

Noninterest expense Operating expenses increased $1.3 million, or 4.5% to $30.0 million for 2019 compared to $28.7 million for 2018. The increase was largely the result of increases in salaries and employee benefits expense and data processing costs of $774,000 and $402,000, respectively. The salary increase is mostly due to annual pay adjustments and an increase in employees. The increase in data processing costs is due to new and increased costs of processing agreements. This increase was partially offset by a decrease in federal deposit insurance expense of $320,000, which is due to the Company being determined to be eligible for small bank assessment credits.

Provision for income taxes The provision for income taxes increased by $430,000, or 19.9%, to $2.6 million for 2019 from $2.2 million for 2018. The Company’s effective federal income tax rate in 2019 was 16.9% compared to 14.8% in 2018.

Asset and Liability Management

The primary objective of the Company’s asset and liability management function is to maximize net interest income while 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 re-pricing or maturity of interest-earning assets and the re-pricing 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 a strong asset/liability management process in order to insulate the Company from material and prolonged increases in interest rates.

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 asset and liability management policies and strategies.

Liquidity and Capital Resources

Liquidity. Liquidity management involves monitoring the ability to meet the cash flow needs of bank customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, the ability to borrow funds under line of credit agreements with correspondent banks, a borrowing agreement with the Federal Home Loan Bank of Cincinnati, brokered deposits, and the adjustment of interest rates to obtain deposits. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

Liquidity is managed based on factors including core deposits as a percentage of total deposits, the degree of funding source diversification, the allocation and amount of deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets readily converted to cash without undue loss, the amount of cash and liquid securities we hold, and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities and other factors.

The Company's liquid assets consist of cash and cash equivalents, which include investments in very short-term investments (i.e., federal funds sold), equity securities, and investment securities classified as available for sale. The level of these assets is dependent on the Company's operating, investing, and financing activities during any given period. At December 31, 2019, cash and cash equivalents totaled $35.1 million or 3.0% of total assets, equity securities totaled $710,000 or 0.1% of total assets, and investment securities classified as available for sale totaled $105.7 million or 8.9% of total assets. Management believes that the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, junior subordinated debt, brokered deposits, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.

Operating activities provided net cash of $13.5 million and $14.3 million for 2019 and 2018, respectively, generated principally from net income of $12.7 million and $12.4 million in these respective periods.

59

Investing activities provided net cash of $276,000 which consisted primarily of investment activity. The cash provided primarily consisted of proceeds from repayments and maturities of investments and the sale of securities of $17.7 million, and $12.3 million, respectively. Partially offsetting the proceeds is the usage from investment purchases of $35.0 million. For the same period ended 2018, investing activities used $76.5 million which consisted primarily of loan originations and investment activity. The cash usages primarily consisted of loan increases of $68.8 million and investment purchases of $13.0 million. Partially offsetting the usage are proceeds from repayments and maturities of $7.3 million.

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments and the payment of dividends. During 2019, net cash used in financing activities totaled $86.6 million, principally derived from a decrease in short-term borrowings, net, of $85.3 million. Partially offsetting the usage are proceeds from the net increase in deposits of $4.8 million. During 2018, net cash provided by financing activities totaled $130.3 million, principally derived from increases in deposit accounts, and increase in short-term borrowings, net, of $137.9 million, and $15.7 million, respectively. Partially offsetting the proceeds are repayments of other borrowings and the payment of cash dividends of $20.3 million and $3.8 million, respectively.

Liquidity may be adversely affected by many circumstances, including unexpected deposit outflows and increased draws on lines of credit. Management monitors projected liquidity needs and determines the desirable level based in part on the Company's commitment to make loans and management's assessment of the Company's ability to generate funds. The Company anticipates having sufficient liquidity to satisfy estimated short and long-term funding needs.

Capital Resources. The Company's primary source of capital is retained earnings. Historically, the Company has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to not only ensure regulatory compliance but capital adequacy for future expansion.

Registrant's Common Equity and Related Stockholder Matters

The Company had approximately 1,002 stockholders of record as of December 31, 2019. The Company’s common stock is traded and authorized for quotation on NASDAQ under the symbol “MBCN.” The Company currently expects consistency in the payout of future cash dividends.

60

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management believes that, as of December 31, 2019, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm, S.R. Snodgrass, P.C., that audited the consolidated financial statements has issued an audit report on the effective operation of the Company’s internal control over financial reporting as of December 31, 2019.

/s/ Thomas G. Caldwell

By: Thomas G. Caldwell

President and Chief Executive Officer

(Principal Executive Officer)

Date: March 4, 2020

/s/ Donald L. Stacy

By: Donald L. Stacy

Treasurer

(Principal Financial & Accounting Officer)

Date: March 4, 2020

61

EX-21

Exhibit 21

Middlefield Banc Corp. Subsidiaries

1 The Middlefield Banking Company (“MBC”), an Ohio-chartered commercial bank that began operations in 1901, engages in general commercial banking in northeastern and central Ohio. MBC’s consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI), established March 13, 2019. The principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-0035.

2 On October 23, 2009 Middlefield received approval from the Federal Reserve Bank of Cleveland to establish an asset resolution subsidiary. Organized as an Ohio corporation under the name EMORECO, Inc. and wholly owned by Middlefield Banc Corp, the purpose of the asset resolution subsidiary is to maintain, manage, and ultimately dispose of nonperforming loans and real estate acquired by the subsidiary bank as the result of borrower default on real estate-secured loans.

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements File Nos. 333-213607 and 333-219313 on Form S-3; File No. 333-218859 on Form S-8; and File No. 333-183497 on Form S-3D and Form S-3DPOS, effective September 13, 2012, of Middlefield Banc Corp., of our report dated March 4, 2020, relating to our audit of the consolidated financial statements and internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K of Middlefield Banc Corp. for the year ended December 31, 2019.

/s/S.R. Snodgrass, P.C.

Cranberry Township, Pennsylvania

March 4, 2020

S.R. Snodgrass, P.C. ● 2009 Mackenzle Way, Suite 340 ● Cranberry Township, Pennsylvania 16066 ● Phone: 724-934-0344 ● Fax: 724-934-0345

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

I, Thomas G. Caldwell, certify that:

1.  I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(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: March 4, 2020	/s/ Thomas G. Caldwell
	Thomas G. Caldwell.
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Principal Financial and Accounting Officer

I, Donald L. Stacy, certify that:

1.  I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(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: March 4, 2020	/s/ Donald L. Stacy
	Donald L. Stacy
	Principal Financial and Accounting Officer

EX-32

Exhibit 32

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, 2019 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., Section 1350, as adopted pursuant to Section 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 and Chief Executive Officer	Principal Financial and Accounting Officer

Date: March 4, 2020

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

XML

Note 20 - Stock Split Disclosure (Details Textual)	Oct. 09, 2019
Stockholders' Equity Note, Stock Split, Conversion Ratio	2

XML

Note 18 - Fair Value Disclosure Measurements - Additional Quantitative Information About Assets Measured at Fair Value on Non-recurring Basis (Details) - Fair Value, Nonrecurring [Member] - Fair Value, Inputs, Level 3 [Member] - Appraisal of Collateral [Member] $ in Thousands		Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Impaired loans, fair value estimate	[1]	$ 5,166	$ 1,075
Minimum [Member] | Measurement Input, Discount Rate [Member]
Impaired loans, discount rate	[2]	0.403	0
Impaired loans, discount rate	[2]	0.403	0
Maximum [Member] | Measurement Input, Discount Rate [Member]
Impaired loans, discount rate	[2]	0.474	1
Impaired loans, discount rate	[2]	0.474	1
Weighted Average [Member] | Measurement Input, Discount Rate [Member]
Impaired loans, discount rate	[2]	(0.418)	(0.406)
Impaired loans, discount rate	[2]	(0.418)	(0.406)

[1] Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.

[2] Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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Note 1 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Significant Accounting Policies [Text Block]

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 Presenta

tion

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio, whose consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI), established

March 13, 2019.

Significant intercompany items have been eliminated in preparing MBC’s consolidated financial statements. On

October 23, 2009,

the Company established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries 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

sixteen

full-service locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while MBC 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 subsidiaries, MBC and EMORECO, Inc. 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 from those estimates.

Investment

and Equity

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. For

2019

and

2018,

this category includes common stocks of public companies that the Company has the positive intent and ability to hold for an indeterminate amount of time. Such securities are reported at fair value with unrealized holding gains and losses included in earnings.

Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers whether the present value of cash flows expected to be collected is less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Bank’s intent to sell the security or whether it is more likely than

not

that the Bank would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Bank does

not

intend to sell the security, and it is more likely than

not

that it will

not

be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for

one

year, the Bank’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is

not

other than temporary and a recovery period can be predicted.

Restricted Stock

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. The FHLB of Cincinnati has reported profits for

2019

and

2018,

remains in compliance with regulatory capital and liquidity requirements, and continues to pay dividends on the stock and make redemptions at the par value. With consideration given to these factors, management concluded that the stock was

not

impaired at

December 31, 2019

or

2018.

Mortgage Banking Activities

 

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The Bank sells the loans on a servicing retained basis. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The Bank measures servicing assets using the amortization method. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Loan servicing rights are amortized in proportion to and over the period of estimated net future servicing revenue. The expected period of the estimated net servicing income is based in part on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights is included in accrued interest and other assets on the Consolidated Balance Sheet.

Mortgage servicing rights are periodically evaluated for impairment. Impairment represents the excess of amortized cost over its estimated fair value. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate and original time to maturity. Any impairment is reported as a valuation allowance for an individual tranche. If the Company later determines that all or a portion of the impairment

no

longer exists for a particular grouping, a reduction of the allowance will be recorded as an increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are

not

material. The Bank is servicing loans for others in the amount of

$70.8

million and

$59.4

million at

December 31, 2019

and

2018,

respectively.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease 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 or applied against principal according to management’s judgment as to the collectability of such principal.

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

and Lease

Losses

The allowance for loan and lease losses represents the amount which management estimates is adequate to provide for probable loan losses inherent in the 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 and lease 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 and lease 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 and lease 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. Loans that experience insignificant payment delays, which are defined as

89

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 and lease 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 used to reduce principal.

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. 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.

Loans Acquired

Loans acquired, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with

no

valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are

not

recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.

For purchased loans acquired that are

not

deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

Premises and Equipment

Land is carried at cost. 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.

Leases

The Company has operating and financing leases for several branch locations and office space. Generally, the underlying lease agreements do

not

contain any material residual value guarantees or material restrictive covenants. The Company

may

also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other maintenance costs). The Company accounts for each component separately based on the standalone price of each component. In addition, there

may

be operating and financing leases with lease terms of less than

one

year and therefore, we have elected the practical expedient to exclude these short-term leases from our right-of-use assets and lease liabilities.

Most leases include

one

or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management and is based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably certain to exercise the extension option(s), the additional term is included in the calculation of the right-of-use asset and lease liability.

As most of our leases do

not

provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments.

Goodwill

The Company accounts for goodwill using a

two

-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts.

No

impairment of goodwill was recognized in any of the periods presented.

Intangible Assets

Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to their estimated residual values over their expected useful lives, commonly of

ten

years. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

Bank-Owned Life Insurance (“BOLI”)

The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans including healthcare. The cash surrender value of these policies is included as an asset on the Consolidated Balance Sheet and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statement of Income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as tax-free noninterest income.

Other Real Estate Owned

Real estate properties acquired through foreclosure are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of cost or fair value less estimated cost to sell. Revenue and expenses from operations of the properties, gains or losses on sales and additions to the valuation allowance are included in operating results.

Income Taxes

The Company and its subsidiaries 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 is 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. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements. (See Note

20

– Stock Split Disclosure.)

Stock-Based Compensation

The Company accounts for stock compensation based on the grant date fair value of all share-based payment awards that are expected to vest, including employee share options to be recognized as employee compensation expense over the requisite service period.

Compensation cost is recognized for restricted stock issued to employees based on the fair value of these awards at the date of grant. The market price of the Company’s common shares at the date of grant is used to estimate the fair value of restricted stock and stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, and is recorded in "Salaries and employee benefits" expense. (See Note

14

-Employee Benefits) The Company’s restricted stock plan allows for a portion of the value to be received in cash by the participant upon vesting, and therefore, the Company records the expense as a liability until the shares vest and the split of the payment between shares and cash can be determined.

Cash Flow Information

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions as “Cash and due from banks” and “Federal funds sold” with original maturities of less than

90

days.

Advertising Costs

Advertising costs are expensed as incurred.

Reclassification of Comparative Amounts

Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did

not

affect net income or retained earnings.

Recently Adopted Accounting Pronouncements

-

In

May 2014,

the FASB issued ASU

2014

-

09,

Revenue from Contracts with Customers

(a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. Since the guidance scopes out revenue associated with financial instruments, including loan receivables and investment securities, the adoption of the standard and its related amendments did

not

result in a material change from our current accounting for revenue because the majority of the Company’s revenue is

not

within the scope of Topic

606.

Upon adoption on

January 1, 2018,

we have included the related new disclosure requirements in Note

2.

In

January 2016,

the FASB issued ASU

2016

-

01,

Financial Instruments – Overall (Subtopic

825

-

10

): Recognition and Measurement of Financial Assets and Financial Liabilities

. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are

not

public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. On

January 1, 2018,

the Company adopted ASU

2016

-

01

which resulted in a reclassification of

$141,000

between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity. Additionally, the methods used to calculate the fair value of financial instruments in Note

18

were based on exit pricing assumptions as of

December 31, 2019

and

2018.

In

February 2016,

the FASB issued ASU

2016

-

02,

Leases (Topic

842

)

. The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as

one

in which (a) the lease term is

12

months or less and (b) there is

not

an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees

may

elect to recognize lease payments over the lease term on a straight-line basis. On

January 1, 2019,

the Company adopted ASU

2016

-

02

which resulted in the recording of finance lease assets and liabilities of

$

3.8

million and operating lease assets and liabilities of

$

1.1

million on the Consolidated Balance Sheet. See Note

15

of the financial statements.

In

March 2017,

the FASB issued ASU

2017

-

08,

Receivables – Nonrefundable Fees and Other Costs (Subtopic

310

-

20

)

. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do

not

require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This Update has

not

had a significant impact on the Company’s financial position or results of operations.

In

February 2018,

the FASB issued ASU

2018

-

02,

Income Statement – Reporting Comprehensive Income (Topic

220

)

, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. On

January 1, 2018,

the Company adopted this standard which resulted in a reclassification of

$187,000

between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity.

In

June 2018,

the FASB issued ASU

2018

-

07,

Compensation – Stock Compensation (Topic

718

)

, which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic

718

to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting: (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The adoption of this standard and its related amendments did

not

result in a material impact on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements -

In

June 2016,

the FASB issued ASU

2016

-

13,

Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments

(“CECL”)

, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU

2016

-

13

is effective for annual and interim periods beginning after

December 15, 2019,

and early adoption is permitted for annual and interim periods beginning after

December 15, 2018.

With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the

first

reporting period in which the guidance is adopted. In

November 2019,

the FASB issued ASU

2019

-

10,

Financial Instruments ‒ Credit Losses (Topic

326

), Derivatives and Hedging (Topic

815

)

, and

Leases (Topic

842

).

This Update defers the effective date of ASU

2016

-

13

for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after

December 15, 2022,

including interim periods within those fiscal years. The CECL model has been completed and runs concurrently with the existing incurred loss model each month. Management will continue to monitor model output throughout the deferral period.

In

January 2017,

the FASB issued ASU

2017

-

04,

Simplifying the Test for Goodwill Impairment

. To simplify the subsequent measurement of goodwill, the FASB eliminated Step

2

from the goodwill impairment test. In computing the implied fair value of goodwill under Step

2,

an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after

December 15, 2019.

A public business entity that is

not

an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after

December 15, 2020.

All other entities, including

not

-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after

December 15, 2021.

In

November 2019,

the FASB issued ASU

2019

-

10,

Financial Instruments ‒ Credit Losses (Topic

326

)

,

Derivatives and Hedging (Topic

815

)

, and

Leases (Topic

842

)

, which deferred the effective date for ASC

350,

Intangibles – Goodwill and Other

, for smaller reporting companies to fiscal years beginning after

December 15, 2022,

and interim periods within those fiscal years. This Update is

not

expected to have a significant impact on the Company’s financial statements, OR the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In

August 2018,

the FASB issued ASU

2018

-

13,

Fair Value Measurement (Topic

820

): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements

. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In

November 2019,

the FASB issued ASU

2019

-

11,

Codification Improvements to Topic

326,

Financial Instruments – Credit Losses

, to clarify its new credit impairment guidance in ASC

326,

based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU

2019

-

10.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In

December 2019,

the FASB issued ASU

2019

-

12,

Income Taxes (Topic

740

)

, to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to

not

allocate consolidated income taxes when a member of a consolidated tax return is

not

subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after

December 15, 2020.

For all other entities, the amendments are effective for fiscal years beginning after

December 15, 2021,

and interim periods within fiscal years beginning after

December 15, 2022.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

XML

Note 4 - Investment and Equity Securities - Amortized Cost and Fair Values of Securities Available for Sale (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Amortized cost	$ 103,401	$ 98,516
Gross unrealized gains	2,466	855
Gross unrealized losses	(134)	(1,049)
Investment securities available for sale, at fair value	105,733	98,322
Subordinated Debt Securities [Member]
Amortized cost	4,000
Gross unrealized gains	126
Gross unrealized losses
Investment securities available for sale, at fair value	4,126
US Government Agencies Debt Securities [Member]
Amortized cost		7,442
Gross unrealized gains		90
Gross unrealized losses		(61)
Investment securities available for sale, at fair value		7,471
Taxable Municipal Bonds [Member]
Amortized cost	500	502
Gross unrealized gains	1	10
Gross unrealized losses
Investment securities available for sale, at fair value	501	512
Nontaxable Municipal Bonds [Member]
Amortized cost	80,436	72,387
Gross unrealized gains	2,065	667
Gross unrealized losses	(25)	(473)
Investment securities available for sale, at fair value	82,476	72,581
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Amortized cost	18,465	18,185
Gross unrealized gains	274	88
Gross unrealized losses	(109)	(515)
Investment securities available for sale, at fair value	$ 18,630	$ 17,758

XML

Document And Entity Information - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2019	Mar. 04, 2020	Jun. 30, 2019
Document Information [Line Items]
Entity Registrant Name	Middlefield Banc Corp.
Entity Central Index Key	0000836147
Trading Symbol	mbcn
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		6,427,667
Entity Public Float			$ 123.9
Entity Shell Company	false
Document Type	10-K
Document Period End Date	Dec. 31, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	FY
Amendment Flag	false
Title of 12(b) Security	Common Stock, Without Par Value

XML

Note 21 - Parent Company (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Condensed Balance Sheet [Table Text Block]

(Dollar amounts in thousands)	December 31,
	2019		2018
ASSETS
Cash and due from banks	$	2,577	$	1,582
Equity securities, at fair value		710		616
Investment in nonbank subsidiary		1,400		2,364
Investment in subsidiary bank		141,104		128,366
Other assets		977		4,080
TOTAL ASSETS	$	146,768	$	137,008
LIABILITIES
Trust preferred debt	$	8,248	$	8,248
Other liabilities		745		470
TOTAL LIABILITIES		8,993		8,718
STOCKHOLDERS' EQUITY		137,775		128,290
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	146,768	$	137,008

Condensed Income Statement [Table Text Block]

	Year Ended December 31,
(Dollar amounts in thousands)	2019			2018
INCOME
Dividends from subsidiary bank	$	4,450		$	4,650
Dividends from nonbank subsidiary		1,000			-
Gain (loss) on equity securities		94			(9	)
Other		12			9
Total income		5,556			4,650
EXPENSES
Interest expense		343			325
Other		2,949			2,119
Total expenses		3,292			2,444
Income before income tax benefit		2,264			2,206
Income tax benefit		(669	)		(513	)
Income before equity in undistributed net income of subsidiaries		2,933			2,719
Equity in undistributed net income of subsidiaries		9,778			9,712
NET INCOME	$	12,711		$	12,431
Comprehensive Income	$	14,707		$	11,140

Condensed Cash Flow Statement [Table Text Block]

	Year Ended December 31,
(Dollar amounts in thousands)	2019			2018
OPERATING ACTIVITIES
Net income	$	12,711		$	12,431
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Middlefield Banking Company		(10,742	)		(9,711	)
Equity in undistributed net loss of EMORECO		964			(1	)
Stock-based compensation		548			371
(Gain) loss on equity securities		(94	)		9
Other, net		3,095			(382	)
Net cash provided by operating activities		6,482			2,717
FINANCING ACTIVITIES
Proceeds from issuance of common stock		95			92
Restricted stock cash portion		(44	)		-
Stock options exercised		4			168
Proceeds from dividend reinvestment plan		372			618
Repurchase of treasury shares		(2,229	)		-
Cash dividends		(3,685	)		(3,779	)
Net cash (used in) financing activities		(5,487	)		(2,901	)
Increase (decrease) in cash		995			(184	)
CASH AT BEGINNING OF YEAR		1,582			1,766
CASH AT END OF YEAR	$	2,577		$	1,582
SUPPLEMENTAL INFORMATION
Increase in common stock through increase in other, net	$	265		$	183

XML

Note 2 - Revenue Recognition - Disaggregation of Revenue (Details) - USD ($)		3 Months Ended								12 Months Ended
		Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Investment securities gains on sale, net	[1]									$ 194,000
Gain on equity securities	[1]									94,000	(9,000)
Earnings on bank-owned life insurance	[1]									431,000	428,000
Gain on sale of loans	[1]									433,000	231,000
Revenue from investment services										528,000	385,000
Other income										975,000	779,000
Total noninterest income		$ 1,305,000	$ 1,105,000	$ 1,299,000	$ 1,132,000	$ 977,000	$ 954,000	$ 1,009,000	$ 788,000	4,841,000	3,728,000
Net gain (loss) on other real estate owned										(123,000)	(55,000)
Overdraft Fees [Member]
Noninterest income revenue										841,000	798,000
ATM Banking Fees [Member]
Noninterest income revenue										932,000	867,000
Service Charge and Other Fees [Member]
Noninterest income revenue										$ 413,000	$ 249,000

[1] Not within scope of ASC 606

XML

Consolidated Statement of Comprehensive Income - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Net income	$ 12,711,000	$ 12,431,000
Net unrealized holding gain (loss) on available- for-sale investment securities	2,720,000	(1,636,000)
Tax effect	(571,000)	345,000
Reclassification adjustment for investment securities gains included in net income	(194,000)
Tax effect	41,000	0
Total other comprehensive income (loss)	1,996,000	(1,291,000)
Comprehensive income	$ 14,707,000	$ 11,140,000

XML

Note 13 - Income Taxes - Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Deferred tax assets:
Allowance for loan and lease losses	$ 1,288	$ 1,327
Supplemental retirement plan	469	454
Investment security basis adjustment	18	18
Nonaccrual interest income	297	389
Accrued compensation	244	222
Deferred origination fees, net	30
Net unrealized loss on AFS securities		41
Lease liability	1,051
Gross deferred tax assets	3,397	2,451
Deferred tax liabilities:
Premises and equipment	583	328
Net unrealized gain on AFS securities	490
Net unrealized gain on equity securities	62	1
FHLB stock dividends	139	139
Intangibles	378	342
Mortgage servicing rights	82	75
Deferred origination fees, net		13
Acquisition fair value adjustments	253	275
Right of use assets	1,032
Other	4	5
Gross deferred tax liabilities	3,023	1,178
Net deferred tax assets	$ 374	$ 1,273

XML

Note 9 - Deposits (Details Textual) - USD ($) $ in Millions	Dec. 31, 2019	Dec. 31, 2018
Time Deposits, at or Above FDIC Insurance Limit	$ 126.6	$ 75.8

XML

Note 6 - Premises and Equipment - Major Classifications of Premises and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Land and land improvements	$ 2,920	$ 2,920
Building and leasehold improvements	15,836	15,377
Furniture, fixtures, and equipment	9,357	8,011
Financing right-of-use assets	4,012
Total premises and equipment	32,125	26,308
Less accumulated depreciation and amortization	14,251	13,305
Total premises and equipment, net	$ 17,874	$ 13,003

XML

Note 11 - Other Borrowings - Maturities of Other Borrowings (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
2020, amount	$ 445
2020, weighted-average interest rate	3.36%
2021, amount	$ 442
2021, weighted-average interest rate	3.36%
2022, amount	$ 434
2022, weighted-average interest rate	3.36%
2023, amount	$ 433
2023, weighted-average interest rate	3.36%
2024	$ 430
2024	3.36%
Beyond 2023, amount	$ 10,566
Beyond 2023, weighted-average interest rate	3.87%
Total, amount	$ 12,750	$ 8,803
Total, weighted-average interest rate	3.84%

XML

Note 4 - Investment and Equity Securities

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

4. INVESTME NT AND EQUITY SECURITIES

The amortized cost, gross gains and losses and fair values of securities available for sale are as follows:

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value
Subordinated debt	$	4,000	$	126	$	-		$	4,126
Obligations of states and political subdivisions:
Taxable		500		1		-			501
Tax-exempt		80,436		2,065		(25	)		82,476
Mortgage-backed securities in government-sponsored entities		18,465		274		(109	)		18,630
Total	$	103,401	$	2,466	$	(134	)	$	105,733

	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value
U.S. government agency securities	$	7,442	$	90	$	(61	)	$	7,471
Obligations of states and political subdivisions:
Taxable		502		10		-			512
Tax-exempt		72,387		667		(473	)		72,581
Mortgage-backed securities in government-sponsored entities		18,185		88		(515	)		17,758
Total	$	98,516	$	855	$	(1,049	)	$	98,322

On

January 1, 2018,

the Company reclassified

$625,000

from investment securities available for sale to equity securities in accordance with the adoption of ASU

2016

-

01.

Equity securities totaled

$710,000

and

$616,000

at

December 31, 2019

and

2018,

respectively, which incorporates a recognized net gain (loss) on equity investments of

$94,000

and (

$9,000

) for the year ended

December 31, 2019

and

2018,

respectively.

No

net gains on sold equity securities were realized from sales during these periods.

The amortized cost and fair value of debt securities at

December 31, 2019,

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.

	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	148	$	149
Due after one year through five years		1,324		1,345
Due after five years through ten years		16,613		16,908
Due after ten years		85,316		87,331
Total	$	103,401	$	105,733

Investment securities with an approximate carrying value of

$55.6

million and

$63.5

million at

December 31, 2019

and

2018,

respectively, were pledged to secure deposits and other purposes as required by law.

There were

no

securities sold during the year ended

December 31, 2018.

Proceeds from the sales of investment securities and the gross realized gains and losses for the year ended

December 31, 2019,

are as follows (in thousands):

	2019			2018
Proceeds from sales	$	12,324		$	-
Gross realized gains		227			-
Gross realized losses		(33	)		-

The tax expense related to the net realized gains above was

$41,000,

and

$0

for the year ended

December 31, 2019

and

2018,

respectively.

The following tables show 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.

	December 31, 2019
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
Obligations of states and political subdivisions
Tax-exempt	$	4,324	$	(25	)	$	-	$	-		$	4,324	$	(25	)
Mortgage-backed securities in government-sponsored entities		1,409		(2	)		8,223		(107	)		9,632		(109	)
Total	$	5,733	$	(27	)	$	8,223	$	(107	)	$	13,956	$	(134	)

	December 31, 2018
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	-	$	-		$	4,105	$	(61	)	$	4,105	$	(61	)
Obligations of states and political subdivisions
Tax-exempt		20,451		(286	)		11,053		(187	)		31,504		(473	)
Mortgage-backed securities in government-sponsored entities		2,068		(9	)		12,257		(506	)		14,325		(515	)
Total	$	22,519	$	(295	)	$	27,415	$	(754	)	$	49,934	$	(1,049	)

There were

17

securities that were considered temporarily impaired at

December 31, 2019.

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other than temporary. For equity securities where the fair value has been significantly below cost for

one

year, the Company’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is

not

other than temporary and a recovery period can be predicted.

The Company has asserted that at

December 31, 2019

and

2018,

the declines outlined in the above table represent temporary declines and the Company does

not

intend to sell and does

not

believe it will be required to sell these securities before recovery of their cost basis, which

may

be at maturity. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is

not

other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are

not

expected to result in the non-collection of principal and interest during the period.

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for

96.1%

of the total available-for-sale portfolio as of

December 

31,

2019,

and

no

credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company evaluates credit losses on a quarterly basis. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

● The length of time and the extent to which the fair value has been less than the amortized cost basis.

● Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions.

● The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities.

● Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation, and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

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Note 8 - Accrued Interest Receivable and Other Assets

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Other Assets Disclosure [Text Block]

8. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

The components of accrued interest receivable and other assets at the years ended

December 31:

(Dollar amounts in thousands)	2019		2018
Restricted stock	$	3,848	$	3,679
Accrued interest receivable on investment securities		753		794
Accrued interest receivable on loans		2,718		2,839
Deferred tax asset, net		374		1,232
Other real estate owned		155		270
Operating right-of-use assets		903		-
Other		1,946		884
Total	$	10,697	$	9,698

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Note 5 - Loans and Related Allowance for Loan and Lease Losses (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule Of Financing Receivable By Segment [Table Text Block]

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	882	$	-	$	1,628	$	10,559	$	1	$	13,070
Collectively evaluated for impairment		88,645		63,246		345,419		459,468		14,410		971,188
Total loans	$	89,527	$	63,246	$	347,047	$	470,027	$	14,411	$	984,258

					Real estate-Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	2,570	$	-	$	1,970	$	9,533	$	2	$	14,075
Collectively evaluated for impairment		81,287		56,731		334,517		488,714		16,785		978,034
Total loans	$	83,857	$	56,731	$	336,487	$	498,247	$	16,787	$	992,109

Financing Receivable, Current, Allowance for Credit Loss [Table Text Block]

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3	$	-	$	30	$	627	$	-	$	660
Collectively evaluated for impairment		453		97		1,628		3,902		28		6,108
Total ending allowance balance	$	456	$	97	$	1,658	$	4,529	$	28	$	6,768

					Real Estate-Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	667	$	-	$	43	$	643	$	1	$	1,354
Collectively evaluated for impairment		302		100		1,538		4,008		126		6,074
Total ending allowance balance	$	969	$	100	$	1,581	$	4,651	$	127	$	7,428

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428
Charge-offs		(519	)		-			(523	)		(32	)		(735	)		(1,809	)
Recoveries		82			74			78			17			8			259
Provision		(76	)		(77	)		522			(107	)		628			890
ALLL balance at December 31, 2019	$	456		$	97		$	1,658		$	4,529		$	28		$	6,768

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2017	$	999		$	313		$	1,760		$	4,036		$	82		$	7,190
Charge-offs		(610	)		-			(177	)		(111	)		(220	)		(1,118	)
Recoveries		287			63			128			-			38			516
Provision		293			(276	)		(130	)		726			227			840
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428

Impaired Financing Receivables [Table Text Block]

December 31, 2019
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	747	$	1,524	$	-
Real estate - mortgage:
Residential		979		1,057		-
Commercial		5,617		5,617		-
Consumer installment		1		1		-
Total	$	7,344	$	8,199	$	-
With an allowance recorded:
Commercial and industrial	$	135	$	135	$	3
Real estate - mortgage:
Residential		649		700		30
Commercial		4,942		4,952		627
Total	$	5,726	$	5,787	$	660
Total:
Commercial and industrial	$	882	$	1,659	$	3
Real estate - mortgage:
Residential		1,628		1,757		30
Commercial		10,559		10,569		627
Consumer installment		1		1		-
Total	$	13,070	$	13,986	$	660

December 31, 2018
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	207	$	413	$	-
Real estate - mortgage:
Residential		1,306		1,462		-
Commercial		1,867		2,186		-
Total	$	3,380	$	4,061	$	-
With an allowance recorded:
Commercial and industrial	$	2,363	$	3,013	$	667
Real estate - mortgage:
Residential		664		715		43
Commercial		7,666		7,676		643
Consumer installment		2		2		1
Total	$	10,695	$	11,406	$	1,354
Total:
Commercial and industrial	$	2,570	$	3,426	$	667
Real estate - mortgage:
Residential		1,970		2,177		43
Commercial		9,533		9,862		643
Consumer installment		2		2		1
Total	$	14,075	$	15,467	$	1,354

Schedule of Additional Information Related to Impaired Loans [Table Text Block]

	As of December 31, 2019				As of December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	1,770	$	141	$	4,210	$	172
Real estate - construction		648		-		9		-
Real estate - mortgage:
Residential		1,803		51		2,531		57
Commercial		10,366		375		6,805		377
Consumer installment		2		-		3		-
Total	$	14,589	$	567	$	13,558	$	606

Financing Receivable, Troubled Debt Restructuring [Table Text Block]

	December 31, 2019
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		3		-		3	$	488	$	490
Residential real estate		4		2		6		294		354
							$	782	$	844

	December 31, 2018
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		1		-		1	$	44	$	44
Residential real estate		3		2		5		286		286
Commercial real estate		1		-		1		94		94
							$	424	$	424

Financing Receivable Credit Quality Indicators [Table Text Block]

			Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans
Commercial and industrial	$	84,136	$	3,619	$	1,772	$	-	$	89,527
Real estate - construction		63,246		-		-		-		63,246
Real estate - mortgage:
Residential		342,988		420		3,639		-		347,047
Commercial		453,170		6,989		9,868		-		470,027
Consumer installment		14,399		-		12		-		14,411
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258

			Special						Total
December 31, 2018	Pass		Mention		Substandard		Doubtful		Loans
Commercial and industrial	$	77,002	$	4,572	$	2,283	$	-	$	83,857
Real estate - construction		55,397		1,334		-		-		56,731
Real estate - mortgage:
Residential		332,475		553		3,459		-		336,487
Commercial		483,516		6,617		8,114		-		498,247
Consumer installment		16,776		-		11		-		16,787
Total	$	965,166	$	13,076	$	13,867	$	-	$	992,109

Financing Receivable, Past Due [Table Text Block]

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial and industrial	$	88,965	$	190	$	66	$	306	$	562		89,527
Real estate - construction		63,246		-		-		-		-		63,246
Real estate - mortgage:
Residential		344,311		1,713		63		960		2,736		347,047
Commercial		465,666		63		-		4,298		4,361		470,027
Consumer installment		13,378		623		216		194		1,033		14,411
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2018	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial and industrial	$	82,770	$	288	$	213	$	586	$	1,087		83,857
Real estate - construction		56,731		-		-		-		-		56,731
Real estate - mortgage:
Residential		331,379		2,612		1,083		1,413		5,108		336,487
Commercial		496,597		664		-		986		1,650		498,247
Consumer installment		16,768		19		-		-		19		16,787
Total	$	984,245	$	3,583	$	1,296	$	2,985	$	7,864		992,109

Financing Receivable, Nonaccrual [Table Text Block]

December 31, 2019	Nonaccrual		90+ Days Past Due and Accruing
Commercial and industrial	$	946	$	-
Real estate - mortgage:
Residential		3,285		-
Commercial		4,451		-
Consumer installment		197		-
Total	$	8,879	$	-

December 31, 2018	Nonaccrual		90+ Days Past Due and Accruing
Commercial and industrial	$	996	$	91
Real estate - mortgage:
Residential		2,731		754
Commercial		2,864		100
Consumer installment		4		-
Total	$	6,595	$	945

Subsequently Defaulted [Member]

Notes Tables

Financing Receivable, Troubled Debt Restructuring [Table Text Block]

	December 31, 2018
Troubled Debt Restructurings	Number of		Recorded
subsequently defaulted	Contracts		Investment
Residential real estate		1	$	19

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Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Nature of Operations and Basis of Presenta

tion

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio, whose consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI), established

March 13, 2019.

Significant intercompany items have been eliminated in preparing MBC’s consolidated financial statements. On

October 23, 2009,

the Company established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries 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

sixteen

full-service locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while MBC 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 subsidiaries, MBC and EMORECO, Inc. 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 from those estimates.

Marketable Securities, Policy [Policy Text Block]

Investment

and Equity

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. For

2019

and

2018,

this category includes common stocks of public companies that the Company has the positive intent and ability to hold for an indeterminate amount of time. Such securities are reported at fair value with unrealized holding gains and losses included in earnings.

Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers whether the present value of cash flows expected to be collected is less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Bank’s intent to sell the security or whether it is more likely than

not

that the Bank would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Bank does

not

intend to sell the security, and it is more likely than

not

that it will

not

be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for

one

year, the Bank’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is

not

other than temporary and a recovery period can be predicted.

Stockholders' Equity, Policy [Policy Text Block]

Restricted Stock

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. The FHLB of Cincinnati has reported profits for

2019

and

2018,

remains in compliance with regulatory capital and liquidity requirements, and continues to pay dividends on the stock and make redemptions at the par value. With consideration given to these factors, management concluded that the stock was

not

impaired at

December 31, 2019

or

2018.

Mortgage Banking Activity [Policy Text Block]

Mortgage Banking Activities

 

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The Bank sells the loans on a servicing retained basis. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The Bank measures servicing assets using the amortization method. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Loan servicing rights are amortized in proportion to and over the period of estimated net future servicing revenue. The expected period of the estimated net servicing income is based in part on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights is included in accrued interest and other assets on the Consolidated Balance Sheet.

Mortgage servicing rights are periodically evaluated for impairment. Impairment represents the excess of amortized cost over its estimated fair value. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate and original time to maturity. Any impairment is reported as a valuation allowance for an individual tranche. If the Company later determines that all or a portion of the impairment

no

longer exists for a particular grouping, a reduction of the allowance will be recorded as an increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are

not

material. The Bank is servicing loans for others in the amount of

$70.8

million and

$59.4

million at

December 31, 2019

and

2018,

respectively.

Financing Receivable [Policy Text Block]

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease 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 or applied against principal according to management’s judgment as to the collectability of such principal.

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.

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

Allowance for Loan

and Lease

Losses

The allowance for loan and lease losses represents the amount which management estimates is adequate to provide for probable loan losses inherent in the 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 and lease 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 and lease 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 and lease 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. Loans that experience insignificant payment delays, which are defined as

89

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 and lease 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 used to reduce principal.

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. 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.

Certain Loans and Debt Securities Acquired in Transfer, Recognizing Interest Income on Impaired Loans, Policy [Policy Text Block]

Loans Acquired

Loans acquired, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with

no

valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are

not

recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.

For purchased loans acquired that are

not

deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

Property, Plant and Equipment, Policy [Policy Text Block]

Premises and Equipment

Land is carried at cost. 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.

Lessee, Leases [Policy Text Block]

Leases

The Company has operating and financing leases for several branch locations and office space. Generally, the underlying lease agreements do

not

contain any material residual value guarantees or material restrictive covenants. The Company

may

also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other maintenance costs). The Company accounts for each component separately based on the standalone price of each component. In addition, there

may

be operating and financing leases with lease terms of less than

one

year and therefore, we have elected the practical expedient to exclude these short-term leases from our right-of-use assets and lease liabilities.

Most leases include

one

or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management and is based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably certain to exercise the extension option(s), the additional term is included in the calculation of the right-of-use asset and lease liability.

As most of our leases do

not

provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments.

Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block]

Goodwill

The Company accounts for goodwill using a

two

-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts.

No

impairment of goodwill was recognized in any of the periods presented.

Goodwill and Intangible Assets, Intangible Assets, Policy [Policy Text Block]

Intangible Assets

Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to their estimated residual values over their expected useful lives, commonly of

ten

years. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

Life Insurance Corporate or Bank Owned [Policy Text Block]

Bank-Owned Life Insurance (“BOLI”)

The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans including healthcare. The cash surrender value of these policies is included as an asset on the Consolidated Balance Sheet and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statement of Income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as tax-free noninterest income.

Real Estate, Policy [Policy Text Block]

Other Real Estate Owned

Real estate properties acquired through foreclosure are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of cost or fair value less estimated cost to sell. Revenue and expenses from operations of the properties, gains or losses on sales and additions to the valuation allowance are included in operating results.

Income Tax, Policy [Policy Text Block]

Income Taxes

The Company and its subsidiaries 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, Policy [Policy Text Block]

Earnings Per Share

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is 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. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements. (See Note

20

– Stock Split Disclosure.)

Share-based Payment Arrangement [Policy Text Block]

Stock-Based Compensation

The Company accounts for stock compensation based on the grant date fair value of all share-based payment awards that are expected to vest, including employee share options to be recognized as employee compensation expense over the requisite service period.

Compensation cost is recognized for restricted stock issued to employees based on the fair value of these awards at the date of grant. The market price of the Company’s common shares at the date of grant is used to estimate the fair value of restricted stock and stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, and is recorded in "Salaries and employee benefits" expense. (See Note

14

-Employee Benefits) The Company’s restricted stock plan allows for a portion of the value to be received in cash by the participant upon vesting, and therefore, the Company records the expense as a liability until the shares vest and the split of the payment between shares and cash can be determined.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash Flow Information

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions as “Cash and due from banks” and “Federal funds sold” with original maturities of less than

90

days.

Advertising Cost [Policy Text Block]

Advertising Costs

Advertising costs are expensed as incurred.

Reclassification, Policy [Policy Text Block]

Reclassification of Comparative Amounts

Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did

not

affect net income or retained earnings.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Pronouncements

-

In

May 2014,

the FASB issued ASU

2014

-

09,

Revenue from Contracts with Customers

(a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. Since the guidance scopes out revenue associated with financial instruments, including loan receivables and investment securities, the adoption of the standard and its related amendments did

not

result in a material change from our current accounting for revenue because the majority of the Company’s revenue is

not

within the scope of Topic

606.

Upon adoption on

January 1, 2018,

we have included the related new disclosure requirements in Note

2.

In

January 2016,

the FASB issued ASU

2016

-

01,

Financial Instruments – Overall (Subtopic

825

-

10

): Recognition and Measurement of Financial Assets and Financial Liabilities

. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are

not

public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. On

January 1, 2018,

the Company adopted ASU

2016

-

01

which resulted in a reclassification of

$141,000

between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity. Additionally, the methods used to calculate the fair value of financial instruments in Note

18

were based on exit pricing assumptions as of

December 31, 2019

and

2018.

In

February 2016,

the FASB issued ASU

2016

-

02,

Leases (Topic

842

)

. The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as

one

in which (a) the lease term is

12

months or less and (b) there is

not

an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees

may

elect to recognize lease payments over the lease term on a straight-line basis. On

January 1, 2019,

the Company adopted ASU

2016

-

02

which resulted in the recording of finance lease assets and liabilities of

$3.8

million and operating lease assets and liabilities of

$1.1

million on the Consolidated Balance Sheet. See Note

15

of the financial statements.

In

March 2017,

the FASB issued ASU

2017

-

08,

Receivables – Nonrefundable Fees and Other Costs (Subtopic

310

-

20

)

. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do

not

require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This Update has

not

had a significant impact on the Company’s financial position or results of operations.

In

February 2018,

the FASB issued ASU

2018

-

02,

Income Statement – Reporting Comprehensive Income (Topic

220

)

, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. On

January 1, 2018,

the Company adopted this standard which resulted in a reclassification of

$187,000

between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity.

In

June 2018,

the FASB issued ASU

2018

-

07,

Compensation – Stock Compensation (Topic

718

)

, which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic

718

to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting: (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The adoption of this standard and its related amendments did

not

result in a material impact on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements -

In

June 2016,

the FASB issued ASU

2016

-

13,

Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments

(“CECL”)

, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU

2016

-

13

is effective for annual and interim periods beginning after

December 15, 2019,

and early adoption is permitted for annual and interim periods beginning after

December 15, 2018.

With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the

first

reporting period in which the guidance is adopted. In

November 2019,

the FASB issued ASU

2019

-

10,

Financial Instruments ‒ Credit Losses (Topic

326

), Derivatives and Hedging (Topic

815

)

, and

Leases (Topic

842

).

This Update defers the effective date of ASU

2016

-

13

for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after

December 15, 2022,

including interim periods within those fiscal years. The CECL model has been completed and runs concurrently with the existing incurred loss model each month. Management will continue to monitor model output throughout the deferral period.

In

January 2017,

the FASB issued ASU

2017

-

04,

Simplifying the Test for Goodwill Impairment

. To simplify the subsequent measurement of goodwill, the FASB eliminated Step

2

from the goodwill impairment test. In computing the implied fair value of goodwill under Step

2,

an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after

December 15, 2019.

A public business entity that is

not

an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after

December 15, 2020.

All other entities, including

not

-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after

December 15, 2021.

In

November 2019,

the FASB issued ASU

2019

-

10,

Financial Instruments ‒ Credit Losses (Topic

326

)

,

Derivatives and Hedging (Topic

815

)

, and

Leases (Topic

842

)

, which deferred the effective date for ASC

350,

Intangibles – Goodwill and Other

, for smaller reporting companies to fiscal years beginning after

December 15, 2022,

and interim periods within those fiscal years. This Update is

not

expected to have a significant impact on the Company’s financial statements, OR the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In

August 2018,

the FASB issued ASU

2018

-

13,

Fair Value Measurement (Topic

820

): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements

. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In

November 2019,

the FASB issued ASU

2019

-

11,

Codification Improvements to Topic

326,

Financial Instruments – Credit Losses

, to clarify its new credit impairment guidance in ASC

326,

based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU

2019

-

10.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In

December 2019,

the FASB issued ASU

2019

-

12,

Income Taxes (Topic

740

)

, to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to

not

allocate consolidated income taxes when a member of a consolidated tax return is

not

subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after

December 15, 2020.

For all other entities, the amendments are effective for fiscal years beginning after

December 15, 2021,

and interim periods within fiscal years beginning after

December 15, 2022.

The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

XML

Note 9 - Deposits (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Time Deposit Maturities [Table Text Block]

(Dollar amounts in thousands)
2020	$	251,291
2021		62,523
2022		25,195
2023		16,868
2024		12,923
Total	$	368,800

XML

Note 20 - Stock Split Disclosure

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Stock Split Disclosure [Text Block]

20. STOCK SPLIT DISCLOSURE

On

October 9, 2019,

the Board of Directors of Middlefield Banc Corp. authorized a

two

-for-

one

stock split. Each shareholder of record at the close of business on

October 25, 2019,

received

one

additional share for every outstanding share held on the record date. The additional shares were paid on

November 8, 2019.

As a result, all share and earnings per share information have been retroactively adjusted to reflect the stock split.

With respect to the

December 31, 2019

and

2018

financial statements, the effect of the stock split on

December 31, 2018

amounts was recognized retroactively in the stockholders’ equity accounts in the Consolidated Balance Sheets, and in all share data in the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effect of the stock split on per share amounts and weighted average common shares outstanding for the year ended

December 31, 2018

is as follows:

	For the year ended
	December 31, 2018
Restated net income per common share - basic	$	1.92
Restated net income per common share - diluted	$	1.91
Restated weighted-average common shares issued		7,232,238
Restated average treasury stock shares		(772,330	)
Restated average shares outstanding - basic		6,459,908
Restated stock options and restricted stock		27,906
Restated average shares outstanding - diluted		6,487,814
Restated period ending shares oustanding		6,488,664
Restated treasury shares outstanding		772,330

XML

Note 12 - Accrued Interest Payable and Other Liabilities

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Other Liabilities Disclosure [Text Block]

12. ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES

The components of accrued interest payable and other liabilities are as follows at

December 31:

	2019		2018
(Dollar amounts in thousands)
Accrued interest payable	$	917	$	744
Accrued directors' benefits		1,470		1,346
Accrued salary and benefits expense		1,451		1,058
Operating lease liabilities		906		-
Other		1,288		1,692
Total	$	6,032	$	4,840

XML

Note 16 - Regulatory Restrictions

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Banking and Thrift Disclosure [Text Block]

16. REGULATORY RESTRICTIONS

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the State of Ohio, Division of Financial Institutions.

Cash Requirements

The Federal Reserve Bank of Cleveland requires the Company to maintain certain average reserve balances. As of

December 31, 2019

and

2018,

the Bank had required reserves of

$16.5

million and

$17.3

million comprised of vault cash and a depository amount held with the Federal Reserve Bank.

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%

of the Bank’s common stock and capital surplus.

Dividends

MBC is subject to dividend restrictions that generally limit 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 for

2019

approximates

$20.5

million plus

2020

profits retained up to the date of the dividend declaration.

XML

Note 15 - Commitments (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Other Commitments [Table Text Block]

(Dollar amounts in thousands)	2019		2018
Commitments to extend credit	$	260,579	$	228,427
Standby letters of credit		1,616		1,656
Total	$	262,195	$	230,083

Lease, Cost [Table Text Block]

	For the Twelve
	Months Ended
	December 31, 2019
Lease Costs:
Finance lease cost:
Amortization of right-of-use asset	$	360
Interest Expense		132
Other		57
Operating lease cost		245
Total lease cost	$	794

Lease, Term and Discount Rate [Table Text Block]

	Operating			Finance
Weighted-average term (years)		6.5			13.7
Weighted-average discount rate		2.9	%		3.3	%

Operating and Finance Lease, Liability, Maturity [Table Text Block]

	Operating			Finance
Undiscounted cash flows due within:
2020	$	185		$	458
2021		169			476
2022		169			478
2023		169			478
2024		133			478
2025 and thereafter		174			2,749
Total undiscounted cash flows		999			5,117
Impact of present value discount		(93	)		(1,019	)
Amount reported on balance sheet	$	906		$	4,098

XML

Note 11 - Other Borrowings (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Debt [Table Text Block]

				Weighted-			Stated interest
(Dollar amounts in thousands)	Maturity range			average			rate range
Description	from		to	interest rate			from			to			2019		2018
Fixed-rate amortizing	07/01/25	10/01/28			4.06	%		4.02	%	4.47	%	$	404	$	555
Finance lease liabilities	12/31/21	06/01/40			3.29	%		2.70	%	3.51	%		4,098		-
Junior subordinated debt	12/21/37	12/21/37			4.10	%		3.61	%	4.42	%		8,248		8,248
Total												$	12,750	$	8,803

Schedule of Maturities of Long-term Debt [Table Text Block]

(Dollar amounts in thousands)
			Weighted-
Year Ending December 31,	Amount		Average Rate
2020	$	445		3.36	%
2021		442		3.36	%
2022		434		3.36	%
2023		433		3.36	%
2024		430		3.36	%
Beyond 2024		10,566		3.87	%
Total	$	12,750		3.84	%

XML

Note 20 - Stock Split Disclosure (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Effect of Stock Split [Table Text Block]

	For the year ended
	December 31, 2018
Restated net income per common share - basic	$	1.92
Restated net income per common share - diluted	$	1.91
Restated weighted-average common shares issued		7,232,238
Restated average treasury stock shares		(772,330	)
Restated average shares outstanding - basic		6,459,908
Restated stock options and restricted stock		27,906
Restated average shares outstanding - diluted		6,487,814
Restated period ending shares oustanding		6,488,664
Restated treasury shares outstanding		772,330

XML

Note 15 - Commitments (Details Textual)	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Number of Branch Locations by Utilized Leases	7
Number of Production Offices by Utilized Leases	1
Lease, Right-of-Use Asset, Net	$ 4,900,000
Finance Lease, Right-of-Use Asset	4,012,000
Operating Lease, Right-of-Use Asset	903,000
Finance Lease, Liability, Total	4,098,000
Premises and Equipment, Net [Member]
Finance Lease, Right-of-Use Asset	4,000,000
Accrued Interest Receivable and Other Assets [Member]
Operating Lease, Right-of-Use Asset	903,000
Other Borrowings [Member]
Finance Lease, Liability, Total	4,100,000
Accrued Interest Payable and Other Liabilities [Member]
Operating Lease, Liability, Total	$ 906,000
Minimum [Member]
Lessee, Operating Lease, Remaining Term	1 year
Maximum [Member]
Lessee, Operating Lease, Remaining Term	20 years

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses (Details Textual)	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017
Loans and Leases Receivable, Deferred Income, Total		$ 1,300,000	$ 1,600,000
Financing Receivable, Troubled Debt Restructuring		3,600,000	4,400,000
Financing Receivable, Allowance for Credit Loss, Writeoff		33,000	$ 459,000
Financing Receivable, Troubled Debt Restructuring, Subsequent Default		$ 36,000
Financing Receivable, Troubled Debt Restructuring, Subsequent Default, Number of Contracts		0	0
Number of Days Past Due		90 days
Loans and Leases Receivable, Impaired, Interest Lost on Nonaccrual Loans		$ 342,000	$ 456,000
Allowance for Loan and Lease Losses, Write-offs		1,809,000	1,118,000
Commercial And Industrial [Member]
Allowance for Loan and Lease Losses, Write-offs		519,000	610,000
Consumer Portfolio Segment [Member]
Allowance for Loan and Lease Losses, Write-offs		735,000	220,000
Real Estate Construction Porfolio Segment [Member]
Allowance for Loan and Lease Losses, Write-offs
Loans and Leases Receivable, Historical Loss Rate	(0.127%)			0.775%
Threshold For Loans Evaluated For Impairment [Member]
Loans and Leases Receivable, before Fees, Gross		500,000
Threshold For Loans Evaluated For Impairment [Member] | Outside Consultant [Member]
Loans and Leases Receivable, before Fees, Gross		250,000
Threshold For Loans Evaluated For Impairment [Member] | Criticized Relationships [Member]
Loans and Leases Receivable, before Fees, Gross		125,000
Provision Fluctuation [Member] | Commercial And Industrial [Member]
Allowance for Loan and Lease Losses, Write-offs		438,000
Provision Fluctuation [Member] | Real Estate Mortgage Portfolio Segment [Member]
Allowance for Loan and Lease Losses, Write-offs		360,000
Provision Fluctuation [Member] | Consumer Portfolio Segment [Member]
Allowance for Loan and Lease Losses, Write-offs		$ 566,000

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses - Additional Information on Impaired Loans (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Average recorded investment	$ 14,589	$ 13,558
Interest income recognized	567	606
Commercial And Industrial [Member]
Average recorded investment	1,770	4,210
Interest income recognized	141	172
Real Estate Construction Porfolio Segment [Member]
Average recorded investment	648	9
Interest income recognized
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Average recorded investment	1,803	2,531
Interest income recognized	51	57
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Average recorded investment	10,366	6,805
Interest income recognized	375	377
Consumer Portfolio Segment [Member]
Average recorded investment	2	3
Interest income recognized

XML

Note 15 - Commitments - Maturities of Lease liabilities (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
2020	$ 185,000
2020	458,000
2021	169,000
2021	476,000
2022	169,000
2022	478,000
2023	169,000
2023	478,000
2024	133,000
2024	478,000
2025 and thereafter	174,000
2025 and thereafter	2,749,000
Total undiscounted cash flows	999,000
Total undiscounted cash flows	5,117,000
Impact of present value discount	(93,000)
Impact of present value discount	(1,019,000)
Finance Lease, Liability, Total	4,098,000
Accrued Interest Payable and Other Liabilities [Member]
Operating Lease, Liability, Total	$ 906,000

XML

Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

13. INCOME TAXES

The provision for federal income taxes for the years ended

December 31,

consists of:

(Dollar amounts in thousands)	2019		2018
Current payable	$	2,265	$	2,403
Deferred		327		(241	)
Total provision	$	2,592	$	2,162

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 at

December 31:

(Dollar amounts in thousands)	2019		2018
Deferred tax assets:
Allowance for loan and lease losses	$	1,288	$	1,327
Supplemental retirement plan		469		454
Investment security basis adjustment		18		18
Nonaccrual interest income		297		389
Accrued compensation		244		222
Deferred origination fees, net		30		-
Net unrealized loss on AFS securities		-		41
Lease liability		1,051		-
Gross deferred tax assets		3,397		2,451
Deferred tax liabilities:
Premises and equipment		583		328
Net unrealized gain on AFS securities		490		-
Net unrealized gain on equity securities		62		1
FHLB stock dividends		139		139
Intangibles		378		342
Mortgage servicing rights		82		75
Deferred origination fees, net		-		13
Acquisition fair value adjustments		253		275
Right of use assets		1,032		-
Other		4		5
Gross deferred tax liabilities		3,023		1,178
Net deferred tax assets	$	374	$	1,273

No

valuation allowance was established at

December 31, 2019

and

2018,

in view of the Company’s 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 for the years ended

December 31,

is as follows:

(Dollar amounts in thousands)	2019						2018
				% of						% of
				Pretax						Pretax
	Amount			Income			Amount			Income
Provision at statutory rate	$	3,214			21.0	%	$	3,065			21.0	%
Tax-exempt income		(647	)		(4.2	)%		(622	)		(4.3	)%
Nondeductible interest expense		32			0.2	%		27			0.2	%
Stock-based compensation		-			-	%		(37	)		(0.3	)%
Other		(7	)		(0.1	)%		(271	)		(1.8	)%
Actual tax expense and effective rate	$	2,592			16.9	%	$	2,162			14.8	%

ASC

740

-

10

prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than

not

that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-

not

recognition threshold is measured at the largest amount of benefit that is greater than

50

percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-

not

recognition threshold should be recognized in the

first

subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that

no

longer meet the more-likely-than-

not

recognition threshold should be derecognized in the

first

subsequent financial reporting period in which that threshold is

no

longer met.

At

December 31, 2019

and

December 31, 2018,

the Company had

no

ASC

740

-

10

unrecognized tax benefits. The Company does

not

expect the total amount of unrecognized tax benefits to significantly increase within the next

12

months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.

The Company and the Bank are subject to U.S. federal income tax as well as an income tax in the states of Ohio and Florida, and the Bank is subject to a capital-based franchise tax in the state of Ohio. The Company and the Bank are

no

longer subject to examination by taxing authorities for years before

December 31, 2016.

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Note 17 - Regulatory Capital

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

17. REGULATORY CAPITAL

The Bank and Company are subject to regulatory capital requirements administered by banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. As of

December 31, 2019,

the Bank and Company have met all capital adequacy requirements to which they are subject.

The prompt corrective action regulations provide

five

classifications, including well capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized, although these terms are

not

used to represent overall financial condition. If an institution is adequately capitalized, regulatory approval is required before the institution

may

accept brokered deposits. If an institution is undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier

1

capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following tables present actual and required capital ratios as of

December 31, 2019

and

2018,

under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

	As of December 31, 2019
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.35	%		12.12	%		12.12	%		12.79	%
Middlefield Banc Corp.		10.23	%		12.56	%		11.77	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

	As of December 31, 2018
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		9.60	%		11.09	%		11.09	%		11.83	%
Middlefield Banc Corp.		10.35	%		11.83	%		11.04	%		12.57	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

XML

Note 21 - Parent Company

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Condensed Financial Information of Parent Company Only Disclosure [Text Block]

21. PARENT COMPANY

Following are condensed financial statements for the Company.

CONDENSED BALANCE SHEET

(Dollar amounts in thousands)	December 31,
	2019		2018
ASSETS
Cash and due from banks	$	2,577	$	1,582
Equity securities, at fair value		710		616
Investment in nonbank subsidiary		1,400		2,364
Investment in subsidiary bank		141,104		128,366
Other assets		977		4,080
TOTAL ASSETS	$	146,768	$	137,008
LIABILITIES
Trust preferred debt	$	8,248	$	8,248
Other liabilities		745		470
TOTAL LIABILITIES		8,993		8,718
STOCKHOLDERS' EQUITY		137,775		128,290
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	146,768	$	137,008

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

	Year Ended December 31,
(Dollar amounts in thousands)	2019			2018
INCOME
Dividends from subsidiary bank	$	4,450		$	4,650
Dividends from nonbank subsidiary		1,000			-
Gain (loss) on equity securities		94			(9	)
Other		12			9
Total income		5,556			4,650
EXPENSES
Interest expense		343			325
Other		2,949			2,119
Total expenses		3,292			2,444
Income before income tax benefit		2,264			2,206
Income tax benefit		(669	)		(513	)
Income before equity in undistributed net income of subsidiaries		2,933			2,719
Equity in undistributed net income of subsidiaries		9,778			9,712
NET INCOME	$	12,711		$	12,431
Comprehensive Income	$	14,707		$	11,140

CONDENSED STATEMENT OF CASH FLOWS

	Year Ended December 31,
(Dollar amounts in thousands)	2019			2018
OPERATING ACTIVITIES
Net income	$	12,711		$	12,431
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Middlefield Banking Company		(10,742	)		(9,711	)
Equity in undistributed net loss of EMORECO		964			(1	)
Stock-based compensation		548			371
(Gain) loss on equity securities		(94	)		9
Other, net		3,095			(382	)
Net cash provided by operating activities		6,482			2,717
FINANCING ACTIVITIES
Proceeds from issuance of common stock		95			92
Restricted stock cash portion		(44	)		-
Stock options exercised		4			168
Proceeds from dividend reinvestment plan		372			618
Repurchase of treasury shares		(2,229	)		-
Cash dividends		(3,685	)		(3,779	)
Net cash (used in) financing activities		(5,487	)		(2,901	)
Increase (decrease) in cash		995			(184	)
CASH AT BEGINNING OF YEAR		1,582			1,766
CASH AT END OF YEAR	$	2,577		$	1,582
SUPPLEMENTAL INFORMATION
Increase in common stock through increase in other, net	$	265		$	183

XML

Note 19 - Accumulated Other Comprehensive Income (Loss) (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]

	Unrealized gains/(losses) on
	available-for-sale
(Dollars in thousands)	securities (a)
Balance as of December 31, 2017	$	1,091
Other comprehensive loss		(1,291	)
Change in accounting principle, ASC 2016-01 (b)		(141	)
Change in accounting principle, ASC 2018-02 (b)		187
Period change		(1,245	)
Balance at December 31, 2018	$	(154	)
Balance as of December 31, 2018	$	(154	)
Other comprehensive income		2,149
Amount reclassified from accumulated other comprehensive income		(153	)
Period change		1,996
Balance at December 31, 2019	$	1,842

Schedule of Amounts Recognized in Other Comprehensive Income (Loss) [Table Text Block]

	Amount Reclassified from			Affected Line Item in
	Accumulated Other			the Statement Where
(Dollars in thousands)	Comprehensive Income			Net Income is
Details about other comprehensive income	December 31, 2019			Presented
Unrealized gains on available-for-sale securities (a)
	$	194		Investment securities gains on sale, net
		(41	)	Income taxes
	$	153

XML

Note 14 - Employee Benefits (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Share-based Payment Arrangement, Option, Activity [Table Text Block]

	Shares			Weighted- average Exercise Price Per Share
Outstanding, January 1, 2019		14,900		$	8.78
Exercised		(400	)		8.78
Outstanding, December 31, 2019		14,500		$	8.78
Exercisable, December 31, 2019		14,500		$	8.78

Share-based Payment Arrangement, Restricted Stock Unit, Activity [Table Text Block]

	Units			Weighted- average Grant Date Fair Value Per Unit
Nonvested at January 1, 2019		42,350		$	20.98
Granted		29,130			20.95
Vested		(10,440	)		16.56
Nonvested at December 31, 2019		61,040		$	21.72
Expected to vest at December 31, 2019		41,136		$	20.57

XML

Note 10 - Short-term Borrowings (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Short-term Debt [Table Text Block]

(Dollar amounts in thousands)	2019			2018			2017
Balance at year-end	$	5,075		$	90,398		$	74,707
Average balance outstanding		14,808			42,231			63,910
Maximum month-end balance		92,000			101,857			114,025
Weighted-average rate at year-end		1.66	%		2.53	%		1.36	%
Weighted-average rate during the year		2.49	%		1.99	%		1.18	%

XML

Note 15 - Commitments - Outstanding Commitments and Contingent Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Commitments	$ 262,195	$ 230,083
Commitments to Extend Credit [Member]
Commitments	260,579	228,427
Financial Standby Letter of Credit [Member]
Commitments	$ 1,616	$ 1,656

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses - Primary Segments of the Loan Portfolio (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Individually evaluated for impairment	$ 13,070	$ 14,075
Collectively evaluated for impairment	971,188	978,034
Total loans	984,258	992,109
Commercial And Industrial [Member]
Individually evaluated for impairment	882	2,570
Collectively evaluated for impairment	88,645	81,287
Total loans	89,527	83,857
Real Estate Construction Porfolio Segment [Member]
Individually evaluated for impairment
Collectively evaluated for impairment	63,246	56,731
Total loans	63,246	56,731
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Individually evaluated for impairment	1,628	1,970
Collectively evaluated for impairment	345,419	334,517
Total loans	347,047	336,487
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Individually evaluated for impairment	10,559	9,533
Collectively evaluated for impairment	459,468	488,714
Total loans	470,027	498,247
Consumer Portfolio Segment [Member]
Individually evaluated for impairment	1	2
Collectively evaluated for impairment	14,410	16,785
Total loans	$ 14,411	$ 16,787

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses - Troubled Debt Restructurings (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Number of contracts
Pre-modification outstanding recorded investment	$ 782	$ 424
Post-modification outstanding recorded investment	$ 844	$ 424
Commercial And Industrial [Member]
Number of contracts	3	1
Pre-modification outstanding recorded investment	$ 488	$ 44
Post-modification outstanding recorded investment	$ 490	$ 44
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Number of contracts	6	5
Pre-modification outstanding recorded investment	$ 294	$ 286
Post-modification outstanding recorded investment	$ 354	$ 286
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Number of contracts		1
Pre-modification outstanding recorded investment		$ 94
Post-modification outstanding recorded investment		$ 94
Extended Maturity [Member]
Number of contracts
Extended Maturity [Member] | Commercial And Industrial [Member]
Number of contracts	3	1
Extended Maturity [Member] | Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Number of contracts	4	3
Extended Maturity [Member] | Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Number of contracts		1
Other Restructurings [Member]
Number of contracts
Other Restructurings [Member] | Commercial And Industrial [Member]
Number of contracts
Other Restructurings [Member] | Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Number of contracts	2	2
Other Restructurings [Member] | Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Number of contracts

XML

Note 16 - Regulatory Restrictions (Details Textual) - USD ($) $ in Millions	Dec. 31, 2019	Dec. 31, 2018
Reserves Required by Federal Reserve Bank	$ 16.5	$ 17.3
Percent of Common Stock		10.00%
Amount Available for Payment of Dividends	$ 20.5

XML

Note 22 - Selected Quarterly Financial Data (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Quarterly Financial Information [Table Text Block]

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2019		2019		2019		2019
Total interest and dividend income	$	13,484	$	13,720	$	13,885	$	13,436
Total interest expense		3,254		3,451		3,307		3,128
Net interest income		10,230		10,269		10,578		10,308
Provision for loan losses		240		110		80		460
Net interest income after provision for loan losses		9,990		10,159		10,498		9,848
Total noninterest income		1,132		1,299		1,105		1,305
Total noninterest expense		7,500		7,482		7,673		7,378
Income before income taxes		3,622		3,976		3,930		3,775
Income taxes		611		686		661		634
Net income	$	3,011	$	3,290	$	3,269	$	3,141
Per share data:
Net income
Basic	$	0.46	$	0.51	$	0.51	$	0.48
Diluted		0.46		0.50		0.50		0.49
Average shares outstanding:
Basic		6,498,278		6,502,508		6,458,258		6,423,543
Diluted		6,510,568		6,514,946		6,479,066		6,455,387

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2018		2018		2018		2018
Total interest and dividend income	$	11,940	$	12,129	$	12,829	$	13,459
Total interest expense		2,040		2,287		2,584		2,998
Net interest income		9,900		9,842		10,245		10,461
Provision for loan losses		210		210		210		210
Net interest income after provision for loan losses		9,690		9,632		10,035		10,251
Total noninterest income		788		1,009		954		977
Total noninterest expense		7,345		7,063		7,092		7,243
Income before income taxes		3,133		3,578		3,897		3,985
Income taxes		528		481		593		560
Net income	$	2,605	$	3,097	$	3,304	$	3,425
Per share data:
Net income
Basic	$	0.41	$	0.48	$	0.51	$	0.53
Diluted		0.40		0.48		0.51		0.53
Average shares outstanding:
Basic		6,440,524		6,451,452		6,468,786		6,478,360
Diluted		6,476,138		6,480,658		6,496,652		6,500,298

XML

Note 3 - Earnings Per Share (Details Textual) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	14,500	14,900
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance	$ 8.78	$ 8.78	$ 8.78
Treasury Stock, Shares, Ending Balance	871,162	772,330
Treasury Stock, Shares, Acquired	98,832
Employee Stock Option and Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	0	0
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number, Ending Balance	61,040	42,350

XML

Consolidated Statement of Income - USD ($)		12 Months Ended
		Dec. 31, 2019	Dec. 31, 2018
INTEREST AND DIVIDEND INCOME
Interest and fees on loans		$ 50,390,000	$ 46,576,000
Interest-earning deposits in other institutions		673,000	558,000
Federal funds sold		78,000	46,000
Investment securities:
Taxable interest		796,000	688,000
Tax-exempt interest		2,392,000	2,262,000
Dividends on stock		196,000	227,000
Total interest and dividend income		54,525,000	50,357,000
INTEREST EXPENSE
Deposits		12,409,000	8,631,000
Short-term borrowings		368,000	842,000
Other borrowings		363,000	436,000
Total interest expense		13,140,000	9,909,000
NET INTEREST INCOME		41,385,000	40,448,000
Provision for loan losses		890,000	840,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		40,495,000	39,608,000
NONINTEREST INCOME
Investment securities gains on sale, net	[1]	194,000
Gain (loss) on equity securities	[1]	94,000	(9,000)
Earnings on bank-owned life insurance	[1]	431,000	428,000
Gain on sale of loans	[1]	433,000	231,000
Total noninterest income		4,841,000	3,728,000
NONINTEREST EXPENSE
Salaries and employee benefits		16,523,000	15,749,000
Occupancy expense		2,164,000	1,933,000
Equipment expense		1,040,000	969,000
Data processing costs		2,208,000	1,806,000
Ohio state franchise tax		1,044,000	823,000
Federal deposit insurance expense		230,000	550,000
Professional fees		1,683,000	1,482,000
Advertising expense		733,000	921,000
Software amortization expense		638,000	605,000
Core deposit intangible amortization		341,000	352,000
Other expense		3,429,000	3,553,000
Total noninterest expense		30,033,000	28,743,000
Income before income taxes		15,303,000	14,593,000
Income taxes		2,592,000	2,162,000
NET INCOME		$ 12,711,000	$ 12,431,000
EARNINGS PER SHARE
Basic (in dollars per share)		$ 1.96	$ 1.92
Diluted (in dollars per share)		$ 1.95	$ 1.91
Deposit Account [Member]
NONINTEREST INCOME
Noninterest income revenue		$ 2,186,000	$ 1,914,000
Financial Service, Other [Member]
NONINTEREST INCOME
Noninterest income revenue		$ 1,503,000	$ 1,164,000

[1] Not within scope of ASC 606

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Note 20 - Stock Split Disclosure - Effect of Stock Split (Details) - $ / shares	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Restated net income per common share - basic (in dollars per share)	$ 0.48	$ 0.51	$ 0.51	$ 0.46	$ 0.53	$ 0.51	$ 0.48	$ 0.41	$ 1.96	$ 1.92
Restated net income per common share - diluted (in dollars per share)	$ 0.49	$ 0.50	$ 0.50	$ 0.46	$ 0.53	$ 0.51	$ 0.48	$ 0.40	$ 1.95	$ 1.91
Restated weighted-average common shares issued (in shares)									7,286,554	7,232,238
Restated average treasury stock shares (in shares)									816,146	772,330
Restated average shares outstanding - basic (in shares)	6,423,543	6,458,258	6,502,508	6,498,278	6,478,360	6,468,786	6,451,452	6,440,524	6,470,408	6,459,908
Restated stock options and restricted stock (in shares)									32,398	27,906
Restated average shares outstanding - diluted (in shares)	6,455,387	6,479,066	6,514,946	6,510,568	6,500,298	6,496,652	6,480,658	6,476,138	6,502,806	6,487,814
Restated period ending shares oustanding (in shares)	6,423,630				6,488,664				6,423,630	6,488,664
Restated treasury shares outstanding (in shares)	871,162				772,330				871,162	772,330

XML

Consolidated Statement of Cash Flows - USD ($)		12 Months Ended
		Dec. 31, 2019	Dec. 31, 2018
OPERATING ACTIVITIES
Net income		$ 12,711,000	$ 12,431,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		890,000	840,000
Investment securities gains on sale, net	[1]	(194,000)
(Gain) loss on equity securities	[1]	(94,000)	9,000
Depreciation and amortization of premises and equipment, net		1,039,000	951,000
Software amortization expense		638,000	605,000
Financing lease amortization expense		360,000
Amortization of premium and discount on investment securities, net		259,000	419,000
Accretion of deferred loan fees, net		(753,000)	(868,000)
Amortization of core deposit intangibles		341,000	352,000
Stock-based compensation expense		644,000	467,000
Origination of loans held for sale		(19,845,000)	(13,196,000)
Proceeds from sale of loans		19,655,000	13,293,000
Gain on sale of loans		(433,000)	(231,000)
Earnings on bank-owned life insurance	[1]	(431,000)	(428,000)
Deferred income tax		327,000	(241,000)
Net gain on other real estate owned		(123,000)	(55,000)
Decrease (increase) in accrued interest receivable		162,000	(345,000)
Increase in accrued interest payable		173,000	166,000
Other, net		(1,867,000)	112,000
Net cash provided by operating activities		13,459,000	14,281,000
INVESTING ACTIVITIES
Proceeds from repayments and maturities		17,687,000	7,280,000
Proceeds from sale of securities		12,324,000	0
Purchases		(34,961,000)	(12,999,000)
Decrease (increase) in loans, net		6,932,000	(68,796,000)
Proceeds from the sale of other real estate owned		360,000	163,000
Purchase of premises and equipment		(1,897,000)	(2,101,000)
Purchase of restricted stock		(169,000)	(90,000)
Net cash provided by (used in) investing activities		276,000	(76,543,000)
FINANCING ACTIVITIES
Net increase in deposits		4,776,000	137,873,000
(Decrease) increase in short-term borrowings, net		(85,323,000)	15,691,000
Net repayment of other borrowings		(426,000)	(20,262,000)
Restricted stock cash portion		(44,000)
Stock options exercised		4,000	168,000
Proceeds from dividend reinvestment and purchase plan		372,000	618,000
Repurchase of treasury shares		(2,229,000)
Cash dividends		(3,685,000)	(3,779,000)
Net cash (used in) provided by financing activities		(86,555,000)	130,309,000
(Decrease) increase in cash and cash equivalents		(72,820,000)	68,047,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		107,933,000	39,886,000
CASH AND CASH EQUIVALENTS AT END OF YEAR		35,113,000	107,933,000
Cash paid during the year for:
Interest on deposits and borrowings		12,967,000	9,743,000
Income taxes		2,705,000	2,125,000
Noncash operating transactions:
Operating lease assets added to other, net		(1,071,000)
Operating lease liabilities added to other, net		1,071,000
Noncash investing transactions:
Transfers from loans to other real estate owned		122,000	166,000
Transfer of equity securities from investment securities available for sale, at fair value			(625,000)
Finance lease assets added to premises and equipment		(4,373,000)
Noncash financing transactions:
Finance lease liabilities added to borrowed funds		$ 4,373,000

[1] Not within scope of ASC 606

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Note 18 - Fair Value Disclosure Measurements - Estimated Fair Value of the Company's Financial Instruments (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Reported Value Measurement [Member]
Financial assets:
Cash and cash equivalents	$ 35,113	$ 107,933
Loans held for sale	1,220	597
Net loans	977,490	984,681
Bank-owned life insurance	16,511	16,080
Federal Home Loan Bank stock	3,848	3,679
Accrued interest receivable	3,471	3,633
Financial liabilities:
Deposits	1,020,843	1,016,067
Short-term borrowings	5,075	90,398
Other borrowings	12,750	8,803
Accrued interest payable	917	744
Estimate of Fair Value Measurement [Member]
Financial assets:
Cash and cash equivalents	35,113	107,933
Loans held for sale	1,220	597
Net loans	974,213	973,124
Bank-owned life insurance	16,511	16,080
Federal Home Loan Bank stock	3,848	3,679
Accrued interest receivable	3,471	3,633
Financial liabilities:
Deposits	1,023,236	1,014,044
Short-term borrowings	5,075	90,398
Other borrowings	12,783	8,827
Accrued interest payable	917	744
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 1 [Member]
Financial assets:
Cash and cash equivalents	35,113	107,933
Loans held for sale
Net loans
Bank-owned life insurance	16,511	16,080
Federal Home Loan Bank stock	3,848	3,679
Accrued interest receivable	3,471	3,633
Financial liabilities:
Deposits	652,043	715,153
Short-term borrowings	5,075	90,398
Other borrowings
Accrued interest payable	917	744
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 2 [Member]
Financial assets:
Cash and cash equivalents
Loans held for sale	1,220	597
Net loans
Bank-owned life insurance
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities:
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 3 [Member]
Financial assets:
Cash and cash equivalents
Loans held for sale
Net loans	974,213	973,124
Bank-owned life insurance
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities:
Deposits	371,193	298,891
Short-term borrowings
Other borrowings	12,783	8,827
Accrued interest payable

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Note 4 - Investment and Equity Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Due in one year or less, amortized costs	$ 148
Due in one year or less, fair value	149
Due after one year through five years, amortized costs	1,324
Due after one year through five years, fair value	1,345
Due after five years through ten years, amortized costs	16,613
Due after five years through ten years, fair value	16,908
Due after ten years, amortized costs	85,316
Due after ten years, fair value	87,331
Amortized costs	103,401	$ 98,516
Fair Value	$ 105,733	$ 98,322

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Note 13 - Income Taxes - The Provision (Benefit) for Federal Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Current payable									$ 2,265	$ 2,403
Deferred income tax									327	(241)
Total provision	$ 634	$ 661	$ 686	$ 611	$ 560	$ 593	$ 481	$ 528	$ 2,592	$ 2,162

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Note 8 - Accrued Interest Receivable and Other Assets - Components of Accrued Interest Receivable and Other Assets (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Restricted stock	$ 3,848	$ 3,679
Deferred tax asset, net	374	1,232
Other real estate owned	155	270
Operating right-of-use assets	903
Other	1,946	884
Total	10,697	9,698
Investment Securities [Member]
Accrued interest	753	794
Loans [Member]
Accrued interest	$ 2,718	$ 2,839

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Note 6 - Premises and Equipment (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Depreciation, Total	$ 1,000,000	$ 951,000

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Note 11 - Other Borrowings - Other Borrowings (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Maturity range, maximum
Other borrowings	$ 12,750	$ 8,803
Minimum [Member]
Stated interest rate
Maximum [Member]
Stated interest rate
Fixed Rate Amortizing [Member]
Maturity range, minimum	Jul. 01, 2025
Maturity range, maximum	Oct. 01, 2028
Weighted-average interest rate	4.06%
Other borrowings	$ 404	555
Fixed Rate Amortizing [Member] | Minimum [Member]
Stated interest rate	4.02%
Fixed Rate Amortizing [Member] | Maximum [Member]
Stated interest rate	4.47%
Finance Lease Liabilities [Member]
Maturity range, minimum	Dec. 31, 2021
Maturity range, maximum	Jun. 01, 2040
Weighted-average interest rate	3.29%
Other borrowings	$ 4,098
Finance Lease Liabilities [Member] | Minimum [Member]
Stated interest rate	2.70%
Finance Lease Liabilities [Member] | Maximum [Member]
Stated interest rate	3.51%
Junior Subordinated Debt [Member]
Maturity range, minimum	Dec. 21, 2037
Maturity range, maximum	Dec. 21, 2037
Weighted-average interest rate	4.10%
Other borrowings	$ 8,248	$ 8,248
Junior Subordinated Debt [Member] | Minimum [Member]
Stated interest rate	3.61%
Junior Subordinated Debt [Member] | Maximum [Member]
Stated interest rate	4.42%

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Note 5 - Loans and Related Allowance for Loan and Lease Losses

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

5. LOANS AND RELATED ALL OWANCE FOR LOAN AND LEASE LOSSES

The Company’s primary business activity is with loan customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with offices in Dublin, Sunbury, Powell, Plain City and Westerville, Ohio. The Northeastern Ohio trade area includes locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at

December 31, 2019

and

2018,

loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

The following tables summarize the primary segments of the loan portfolio and the allowance for loan and lease losses (in thousands):

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	882	$	-	$	1,628	$	10,559	$	1	$	13,070
Collectively evaluated for impairment		88,645		63,246		345,419		459,468		14,410		971,188
Total loans	$	89,527	$	63,246	$	347,047	$	470,027	$	14,411	$	984,258

					Real estate-Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	2,570	$	-	$	1,970	$	9,533	$	2	$	14,075
Collectively evaluated for impairment		81,287		56,731		334,517		488,714		16,785		978,034
Total loans	$	83,857	$	56,731	$	336,487	$	498,247	$	16,787	$	992,109

The amounts above include net deferred loan origination costs of

$1.3

million and

$1.6

million at

December 31, 2019

and

December 31, 2018,

respectively.

					Real Estate-Mortgage
December 31, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3	$	-	$	30	$	627	$	-	$	660
Collectively evaluated for impairment		453		97		1,628		3,902		28		6,108
Total ending allowance balance	$	456	$	97	$	1,658	$	4,529	$	28	$	6,768

					Real Estate-Mortgage
December 31, 2018	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	667	$	-	$	43	$	643	$	1	$	1,354
Collectively evaluated for impairment		302		100		1,538		4,008		126		6,074
Total ending allowance balance	$	969	$	100	$	1,581	$	4,651	$	127	$	7,428

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate, and Consumer Installment Loans. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does

not

separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using

one

of

three

methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does

not

differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was

not

necessary (in thousands):

December 31, 2019
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	747	$	1,524	$	-
Real estate - mortgage:
Residential		979		1,057		-
Commercial		5,617		5,617		-
Consumer installment		1		1		-
Total	$	7,344	$	8,199	$	-
With an allowance recorded:
Commercial and industrial	$	135	$	135	$	3
Real estate - mortgage:
Residential		649		700		30
Commercial		4,942		4,952		627
Total	$	5,726	$	5,787	$	660
Total:
Commercial and industrial	$	882	$	1,659	$	3
Real estate - mortgage:
Residential		1,628		1,757		30
Commercial		10,559		10,569		627
Consumer installment		1		1		-
Total	$	13,070	$	13,986	$	660

December 31, 2018
Impaired Loans
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	207	$	413	$	-
Real estate - mortgage:
Residential		1,306		1,462		-
Commercial		1,867		2,186		-
Total	$	3,380	$	4,061	$	-
With an allowance recorded:
Commercial and industrial	$	2,363	$	3,013	$	667
Real estate - mortgage:
Residential		664		715		43
Commercial		7,666		7,676		643
Consumer installment		2		2		1
Total	$	10,695	$	11,406	$	1,354
Total:
Commercial and industrial	$	2,570	$	3,426	$	667
Real estate - mortgage:
Residential		1,970		2,177		43
Commercial		9,533		9,862		643
Consumer installment		2		2		1
Total	$	14,075	$	15,467	$	1,354

The tables above include troubled debt restructuring totaling

$3.6

million and

$4.4

million as of

December 31, 2019

and

2018,

respectively.

The following table presents interest income by class, recognized on impaired loans (in thousands):

	As of December 31, 2019				As of December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	1,770	$	141	$	4,210	$	172
Real estate - construction		648		-		9		-
Real estate - mortgage:
Residential		1,803		51		2,531		57
Commercial		10,366		375		6,805		377
Consumer installment		2		-		3		-
Total	$	14,589	$	567	$	13,558	$	606

Troubled Debt Restructuring (TDR) describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions

may

include

one

or more of the following:

● reduction in the interest rate to below market rates

● extension of repayment requirements beyond normal terms

● reduction of the principal amount owed

● reduction of accrued interest due

● acceptance of other assets in full or partial payment of a debt

In each case the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk. The total impact on the ALLL for

2019

and

2018

related to TDRs was

$33,000

and

$459,000,

respectively.

The following tables present the number of loan modifications by class, the corresponding recorded investment, and the subsequently defaulted modifications (in thousands) for the years ended:

	December 31, 2019
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		3		-		3	$	488	$	490
Residential real estate		4		2		6		294		354
							$	782	$	844

	December 31, 2018
	Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Commercial and industrial		1		-		1	$	44	$	44
Residential real estate		3		2		5		286		286
Commercial real estate		1		-		1		94		94
							$	424	$	424

	December 31, 2018
Troubled Debt Restructurings	Number of		Recorded
subsequently defaulted	Contracts		Investment
Residential real estate		1	$	19

One loan with a book balance of

$36,000

was restructured in

2019

and defaulted by

December 31, 2019.

There were

no

subsequent defaults of troubled debt restructurings for the year ended

December 31, 2019.

Management uses a

nine

-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The

first

five

categories are considered

not

criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but

not

to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are

not

corrected.  All loans greater than

90

days past due are considered Substandard or Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event.  The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of

$500,000

or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.   The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than

$250,000

and/or criticized relationships greater than

$125,000.

 Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following tables present the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized categories of Special Mention, Substandard, and Doubtful within the internal risk rating system (in thousands):

			Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans
Commercial and industrial	$	84,136	$	3,619	$	1,772	$	-	$	89,527
Real estate - construction		63,246		-		-		-		63,246
Real estate - mortgage:
Residential		342,988		420		3,639		-		347,047
Commercial		453,170		6,989		9,868		-		470,027
Consumer installment		14,399		-		12		-		14,411
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258

			Special						Total
December 31, 2018	Pass		Mention		Substandard		Doubtful		Loans
Commercial and industrial	$	77,002	$	4,572	$	2,283	$	-	$	83,857
Real estate - construction		55,397		1,334		-		-		56,731
Real estate - mortgage:
Residential		332,475		553		3,459		-		336,487
Commercial		483,516		6,617		8,114		-		498,247
Consumer installment		16,776		-		11		-		16,787
Total	$	965,166	$	13,076	$	13,867	$	-	$	992,109

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of loans and nonaccrual loans (in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial and industrial	$	88,965	$	190	$	66	$	306	$	562		89,527
Real estate - construction		63,246		-		-		-		-		63,246
Real estate - mortgage:
Residential		344,311		1,713		63		960		2,736		347,047
Commercial		465,666		63		-		4,298		4,361		470,027
Consumer installment		13,378		623		216		194		1,033		14,411
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2018	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial and industrial	$	82,770	$	288	$	213	$	586	$	1,087		83,857
Real estate - construction		56,731		-		-		-		-		56,731
Real estate - mortgage:
Residential		331,379		2,612		1,083		1,413		5,108		336,487
Commercial		496,597		664		-		986		1,650		498,247
Consumer installment		16,768		19		-		-		19		16,787
Total	$	984,245	$	3,583	$	1,296	$	2,985	$	7,864		992,109

The following tables present the classes of the loan portfolio summarized by nonaccrual loans and loans

90

days or more past due and still accruing (in thousands):

December 31, 2019	Nonaccrual		90+ Days Past Due and Accruing
Commercial and industrial	$	946	$	-
Real estate - mortgage:
Residential		3,285		-
Commercial		4,451		-
Consumer installment		197		-
Total	$	8,879	$	-

December 31, 2018	Nonaccrual		90+ Days Past Due and Accruing
Commercial and industrial	$	996	$	91
Real estate - mortgage:
Residential		2,731		754
Commercial		2,864		100
Consumer installment		4		-
Total	$	6,595	$	945

Interest income that would have been recorded had these loans

not

been placed on nonaccrual status was

$342,000

in

2019

and

$456,000

in

2018.

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio.  The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section

310

-

10

-

35

for loans individually evaluated for impairment (discussed above) and ASC Subtopic

450

-

20

for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance.   The total of the

two

components represents the Company’s ALLL. Management also performs impairment analysis on TDRs, which

may

result in specific reserves.

Loans that are collectively evaluated for impairment are analyzed, with general allowances being made as appropriate.  For general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis.  Management tracks the historical net charge-off activity at the purpose code level.  A historical charge-off factor is calculated utilizing the last

twelve

consecutive historical quarters.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor, because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry, and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following tables summarize the primary segments of the loan portfolio (in thousands):

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428
Charge-offs		(519	)		-			(523	)		(32	)		(735	)		(1,809	)
Recoveries		82			74			78			17			8			259
Provision		(76	)		(77	)		522			(107	)		628			890
ALLL balance at December 31, 2019	$	456		$	97		$	1,658		$	4,529		$	28		$	6,768

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2017	$	999		$	313		$	1,760		$	4,036		$	82		$	7,190
Charge-offs		(610	)		-			(177	)		(111	)		(220	)		(1,118	)
Recoveries		287			63			128			-			38			516
Provision		293			(276	)		(130	)		726			227			840
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428

The provision fluctions during the the year ended

December 31, 2019

allocated to:

● commercial and industrial loans are due to the charge-offs of two large relationships totaling $438,000, which had specific reserves allocated at the end of 2018.

● residential portfolio are due to the charge-off of two relationships totalling $360,000 and portfolio growth.

● commercial real estate loans are due to a small charge-off and a declining portfolio balance.

● consumer installments are due to charge-offs in the student loan portfolio totaling $566,000.

The provision fluctions during the the year ended

December 31, 2018

allocated to:

● real estate construction loans are due to the historical loss rate for the real estate construction pool changing to - 0.127% from 0.775% in the first quarter of 2018 as well as no charge-offs for the year.

● residential real estate are due to a continued decline in historical losses and consistent decreases in the ratio of nonperforming loans to toal loans in this segment over the past few years resulting in a decrease in the reserves required.

● consumer installment loans are primarily due to increases in historical losses for this segment over the prior year.

XML

Note 9 - Deposits

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Deposit Liabilities Disclosures [Text Block]

9. DEPOSITS

Time deposits that meet or exceed the FDIC Insurance limit of

$250,000

as of

December 31, 2019

and

2018,

were

$126.6

million and

$75.8

million, respectively.

Scheduled maturities of time deposits as of

December 31, 2019

are as follows:

(Dollar amounts in thousands)
2020	$	251,291
2021		62,523
2022		25,195
2023		16,868
2024		12,923
Total	$	368,800

XML

Note 8 - Accrued Interest Receivable and Other Assets (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Other Assets [Table Text Block]

(Dollar amounts in thousands)	2019		2018
Restricted stock	$	3,848	$	3,679
Accrued interest receivable on investment securities		753		794
Accrued interest receivable on loans		2,718		2,839
Deferred tax asset, net		374		1,232
Other real estate owned		155		270
Operating right-of-use assets		903		-
Other		1,946		884
Total	$	10,697	$	9,698

XML

Note 4 - Investment and Equity Securities (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Available-for-sale Securities Reconciliation [Table Text Block]

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value
Subordinated debt	$	4,000	$	126	$	-		$	4,126
Obligations of states and political subdivisions:
Taxable		500		1		-			501
Tax-exempt		80,436		2,065		(25	)		82,476
Mortgage-backed securities in government-sponsored entities		18,465		274		(109	)		18,630
Total	$	103,401	$	2,466	$	(134	)	$	105,733

	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value
U.S. government agency securities	$	7,442	$	90	$	(61	)	$	7,471
Obligations of states and political subdivisions:
Taxable		502		10		-			512
Tax-exempt		72,387		667		(473	)		72,581
Mortgage-backed securities in government-sponsored entities		18,185		88		(515	)		17,758
Total	$	98,516	$	855	$	(1,049	)	$	98,322

Investments Classified by Contractual Maturity Date [Table Text Block]

	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	148	$	149
Due after one year through five years		1,324		1,345
Due after five years through ten years		16,613		16,908
Due after ten years		85,316		87,331
Total	$	103,401	$	105,733

Realized Gain (Loss) on Investments [Table Text Block]

	2019			2018
Proceeds from sales	$	12,324		$	-
Gross realized gains		227			-
Gross realized losses		(33	)		-

Schedule of Unrealized Loss on Investments [Table Text Block]

	December 31, 2019
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
Obligations of states and political subdivisions
Tax-exempt	$	4,324	$	(25	)	$	-	$	-		$	4,324	$	(25	)
Mortgage-backed securities in government-sponsored entities		1,409		(2	)		8,223		(107	)		9,632		(109	)
Total	$	5,733	$	(27	)	$	8,223	$	(107	)	$	13,956	$	(134	)

	December 31, 2018
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	-	$	-		$	4,105	$	(61	)	$	4,105	$	(61	)
Obligations of states and political subdivisions
Tax-exempt		20,451		(286	)		11,053		(187	)		31,504		(473	)
Mortgage-backed securities in government-sponsored entities		2,068		(9	)		12,257		(506	)		14,325		(515	)
Total	$	22,519	$	(295	)	$	27,415	$	(754	)	$	49,934	$	(1,049	)

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Note 22 - Selected Quarterly Financial Data (Unaudited)

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Quarterly Financial Information [Text Block]

22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2019		2019		2019		2019
Total interest and dividend income	$	13,484	$	13,720	$	13,885	$	13,436
Total interest expense		3,254		3,451		3,307		3,128
Net interest income		10,230		10,269		10,578		10,308
Provision for loan losses		240		110		80		460
Net interest income after provision for loan losses		9,990		10,159		10,498		9,848
Total noninterest income		1,132		1,299		1,105		1,305
Total noninterest expense		7,500		7,482		7,673		7,378
Income before income taxes		3,622		3,976		3,930		3,775
Income taxes		611		686		661		634
Net income	$	3,011	$	3,290	$	3,269	$	3,141
Per share data:
Net income
Basic	$	0.46	$	0.51	$	0.51	$	0.48
Diluted		0.46		0.50		0.50		0.49
Average shares outstanding:
Basic		6,498,278		6,502,508		6,458,258		6,423,543
Diluted		6,510,568		6,514,946		6,479,066		6,455,387

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2018		2018		2018		2018
Total interest and dividend income	$	11,940	$	12,129	$	12,829	$	13,459
Total interest expense		2,040		2,287		2,584		2,998
Net interest income		9,900		9,842		10,245		10,461
Provision for loan losses		210		210		210		210
Net interest income after provision for loan losses		9,690		9,632		10,035		10,251
Total noninterest income		788		1,009		954		977
Total noninterest expense		7,345		7,063		7,092		7,243
Income before income taxes		3,133		3,578		3,897		3,985
Income taxes		528		481		593		560
Net income	$	2,605	$	3,097	$	3,304	$	3,425
Per share data:
Net income
Basic	$	0.41	$	0.48	$	0.51	$	0.53
Diluted		0.40		0.48		0.51		0.53
Average shares outstanding:
Basic		6,440,524		6,451,452		6,468,786		6,478,360
Diluted		6,476,138		6,480,658		6,496,652		6,500,298

XML

Note 15 - Commitments

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Lease Disclosure [Text Block]

15. C OMMITMENTS

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 at

December 31:

(Dollar amounts in thousands)	2019		2018
Commitments to extend credit	$	260,579	$	228,427
Standby letters of credit		1,616		1,656
Total	$	262,195	$	230,083

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. 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.

Leasing

Commitments

The Company leases

seven

of its branch locations and

one

loan production office. As of

December 31, 2019,

net assets recorded under leases amounted to

$4.9

million and have remaining lease terms of

1

year to

20

years. As of

December 31, 2019,

finance lease assets included in premises and equipment, net, totaled

$4.0

million and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled

$903,000.

As of

December 31, 2019,

finance lease obligations included in other borrowings totaled

$4.1

million and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled

$906,000.

On

April 17, 2019,

the Company purchased a building to relocate the Mantua branch which is and has been at a leased location as of

December 31, 2019.

The relocation is planned for

2020,

and the Company entered into an amended lease agreement with the Mantua lessor which does

not

exceed

12

months. As such, the lease for the Mantua location is

not

considered a capitalized lease as of

December 31, 2019.

Lease costs incurred are as follows:

	For the Twelve
	Months Ended
	December 31, 2019
Lease Costs:
Finance lease cost:
Amortization of right-of-use asset	$	360
Interest Expense		132
Other		57
Operating lease cost		245
Total lease cost	$	794

The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of

December 31, 2019:

	Operating			Finance
Weighted-average term (years)		6.5			13.7
Weighted-average discount rate		2.9	%		3.3	%

The following table displays the undiscounted cash flows due related to operating and finance leases as of

December 31, 2019,

along with a reconciliation to the discounted amount recorded on the

December 31, 2019

balance sheet:

	Operating			Finance
Undiscounted cash flows due within:
2020	$	185		$	458
2021		169			476
2022		169			478
2023		169			478
2024		133			478
2025 and thereafter		174			2,749
Total undiscounted cash flows		999			5,117
Impact of present value discount		(93	)		(1,019	)
Amount reported on balance sheet	$	906		$	4,098

XML

Note 19 - Accumulated Other Comprehensive Income (Loss)

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Comprehensive Income (Loss) Note [Text Block]

19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax:

	Unrealized gains/(losses) on
	available-for-sale
(Dollars in thousands)	securities (a)
Balance as of December 31, 2017	$	1,091
Other comprehensive loss		(1,291	)
Change in accounting principle, ASC 2016-01 (b)		(141	)
Change in accounting principle, ASC 2018-02 (b)		187
Period change		(1,245	)
Balance at December 31, 2018	$	(154	)
Balance as of December 31, 2018	$	(154	)
Other comprehensive income		2,149
Amount reclassified from accumulated other comprehensive income		(153	)
Period change		1,996
Balance at December 31, 2019	$	1,842

(a) All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.

(b) Reclassifications are the result of the adoption of ASUs 2016 - 01 and 2018 - 02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders’ Equity for the affected transitional periods.

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income for the year ended

December 31, 2019:

	Amount Reclassified from			Affected Line Item in
	Accumulated Other			the Statement Where
(Dollars in thousands)	Comprehensive Income			Net Income is
Details about other comprehensive income	December 31, 2019			Presented
Unrealized gains on available-for-sale securities (a)
	$	194		Investment securities gains on sale, net
		(41	)	Income taxes
	$	153

(a) Amounts in parentheses indicate expenses and other amounts indicate income.

There were

no

other reclassifications of amounts from accumulated other comprehensive income for the year ended

December 31, 2018.

XML

Note 18 - Fair Value Disclosure Measurements (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Estimated Selling Costs of Impaired Loans	$ 2,100,000	$ 492,000

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Note 5 - Loans and Related Allowance for Loan and Lease Losses - Classes of the Loan Portfolio Summarized by Credit Quality (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Loans	$ 984,258	$ 992,109
Commercial And Industrial [Member]
Loans	89,527	83,857
Real Estate Construction Porfolio Segment [Member]
Loans	63,246	56,731
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans	347,047	336,487
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans	470,027	498,247
Consumer Portfolio Segment [Member]
Loans	14,411	16,787
Pass [Member]
Loans	957,939	965,166
Pass [Member] | Commercial And Industrial [Member]
Loans	84,136	77,002
Pass [Member] | Real Estate Construction Porfolio Segment [Member]
Loans	63,246	55,397
Pass [Member] | Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans	342,988	332,475
Pass [Member] | Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans	453,170	483,516
Pass [Member] | Consumer Portfolio Segment [Member]
Loans	14,399	16,776
Special Mention [Member]
Loans	11,028	13,076
Special Mention [Member] | Commercial And Industrial [Member]
Loans	3,619	4,572
Special Mention [Member] | Real Estate Construction Porfolio Segment [Member]
Loans		1,334
Special Mention [Member] | Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans	420	553
Special Mention [Member] | Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans	6,989	6,617
Substandard [Member]
Loans	15,291	13,867
Substandard [Member] | Commercial And Industrial [Member]
Loans	1,772	2,283
Substandard [Member] | Real Estate Construction Porfolio Segment [Member]
Loans
Substandard [Member] | Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans	3,639	3,459
Substandard [Member] | Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans	9,868	8,114
Substandard [Member] | Consumer Portfolio Segment [Member]
Loans	12	11
Doubtful [Member]
Loans
Doubtful [Member] | Commercial And Industrial [Member]
Loans
Doubtful [Member] | Real Estate Construction Porfolio Segment [Member]
Loans
Doubtful [Member] | Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans
Doubtful [Member] | Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans

XML

Note 14 - Employee Benefits - Activity Related to Restricted Stock Units Awarded (Details) - Restricted Stock [Member] - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Nonvested (in shares)	42,350
Nonvested, weighted average grant date fair value per share (in dollars per share)	$ 21.72	$ 20.98
Granted (in shares)	29,130
Granted, weighted average grant date fair value per share (in dollars per share)		20.95
Vested (in shares)	(10,440)
Vested, weighted average grant date fair value per share (in dollars per share)		$ 16.56
Nonvested (in shares)	61,040	42,350
Nonvested, weighted average grant date fair value per share (in dollars per share)		$ 21.72
Expected to vest at December 31, 2019 (in shares)	41,136
Expected to vest at December 31, 2019 (in dollars per share)		$ 20.57

XML

Note 4 - Investment and Equity Securities - Gross Unrealized Losses and Fair Value (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Less than Twelve Months, Fair Value	$ 5,733	$ 22,519
Less than Twelve Months, Gross Unrealized Losses	(27)	(295)
Twelve Months or Greater, Fair Value	8,223	27,415
Twelve Months or Greater, Gross Unrealized Losses	(107)	(754)
Total, Fair Value	13,956	49,934
Total, Gross Unrealized Losses	(134)	(1,049)
US Government Agencies Debt Securities [Member]
Less than Twelve Months, Fair Value
Less than Twelve Months, Gross Unrealized Losses
Twelve Months or Greater, Fair Value		4,105
Twelve Months or Greater, Gross Unrealized Losses		(61)
Total, Fair Value		4,105
Total, Gross Unrealized Losses		(61)
Nontaxable Municipal Bonds [Member]
Less than Twelve Months, Fair Value	4,324	20,451
Less than Twelve Months, Gross Unrealized Losses	(25)	(286)
Twelve Months or Greater, Fair Value		11,053
Twelve Months or Greater, Gross Unrealized Losses		(187)
Total, Fair Value	4,324	31,504
Total, Gross Unrealized Losses	(25)	(473)
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Less than Twelve Months, Fair Value	1,409	2,068
Less than Twelve Months, Gross Unrealized Losses	(2)	(9)
Twelve Months or Greater, Fair Value	8,223	12,257
Twelve Months or Greater, Gross Unrealized Losses	(107)	(506)
Total, Fair Value	9,632	14,325
Total, Gross Unrealized Losses	$ (109)	$ (515)

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses - Impaired Loans by Class (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Recorded investment, with no related allowance	$ 7,344	$ 3,380
Unpaid principal balance, with no related allowance	8,199	4,061
Recorded investment, with related allowance	5,726	10,695
Unpaid principal balance, with related allowance	5,787	11,406
Related allowance	660	1,354
Recorded investment	13,070	14,075
Unpaid principal balance	13,986	15,467
Commercial Loans [Member]
Recorded investment, with related allowance	4,942
Unpaid principal balance, with related allowance	4,952
Related allowance	627
Commercial And Industrial [Member]
Recorded investment, with no related allowance	747	207
Unpaid principal balance, with no related allowance	1,524	413
Recorded investment, with related allowance	135	2,363
Unpaid principal balance, with related allowance	135	3,013
Related allowance	3	667
Recorded investment	882	2,570
Unpaid principal balance	1,659	3,426
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Recorded investment, with no related allowance	979	1,306
Unpaid principal balance, with no related allowance	1,057	1,462
Recorded investment, with related allowance		664
Unpaid principal balance, with related allowance		715
Related allowance	30	43
Recorded investment	1,628	1,970
Unpaid principal balance	1,757	2,177
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Recorded investment, with no related allowance	5,617	1,867
Unpaid principal balance, with no related allowance	5,617	2,186
Recorded investment, with related allowance		7,666
Unpaid principal balance, with related allowance		7,676
Related allowance	627	643
Recorded investment	10,559	9,533
Unpaid principal balance	10,569	9,862
Consumer Portfolio Segment [Member]
Recorded investment, with no related allowance	1
Unpaid principal balance, with no related allowance	1
Recorded investment, with related allowance		2
Unpaid principal balance, with related allowance		2
Related allowance		1
Recorded investment	1	2
Unpaid principal balance	1	$ 2
Real Estate Construction Porfolio Segment [Member] | Residential Loan [Member]
Recorded investment, with related allowance	649
Unpaid principal balance, with related allowance	700
Related allowance	$ 30

XML

Note 15 - Commitments - Weighted Average Remaining Lease Term and Discount Rate Information (Details)	Dec. 31, 2019
Weighted-average term (years), Operating Lease (Year)	6 years 182 days
Weighted-average term (years), Fiance Lease (Year)	13 years 255 days
Weighted-average discount rate), Operating Lease	2.90%
Weighted-average discount rate, Fiance Lease	3.30%

XML

Note 21 - Parent Company - Condensed Statement of Cash Flows (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Net income	$ 3,141	$ 3,269	$ 3,290	$ 3,011	$ 3,425	$ 3,304	$ 3,097	$ 2,605	$ 12,711	$ 12,431
Other, net									(1,867)	112
Net cash provided by operating activities									13,459	14,281
Stock options exercised									4	168
Repurchase of treasury shares									(2,229)
Cash dividends									3,685	3,779
Net cash (used in) financing activities									(86,555)	130,309
Increase (decrease) in cash									(72,820)	68,047
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR				107,933				39,886	107,933	39,886
CASH AND CASH EQUIVALENTS AT END OF YEAR	35,113				107,933				35,113	107,933
Parent Company [Member]
Net income									12,711	12,431
Equity method investments, income (loss)									(9,778)	(9,712)
Stock-based compensation									548	371
(Gain) loss on equity securities									(94)	9
Other, net									3,095	(382)
Net cash provided by operating activities									6,482	2,717
Proceeds from issuance of common stock									95	92
Restricted stock cash portion									(44)
Stock options exercised									4	168
Proceeds from dividend reinvestment plan									372	618
Repurchase of treasury shares									(2,229)
Cash dividends									(3,685)	(3,779)
Net cash (used in) financing activities									(5,487)	(2,901)
Increase (decrease) in cash									995	(184)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR				$ 1,582				$ 1,766	1,582	1,766
CASH AND CASH EQUIVALENTS AT END OF YEAR	$ 2,577				$ 1,582				2,577	1,582
Increase in common stock through increase in other, net									265	183
Parent Company [Member] | Middlefield Banking Company [Member]
Equity method investments, income (loss)									(10,742)	(9,711)
Parent Company [Member] | EMORECO [Member]
Equity method investments, income (loss)									$ 964	$ (1)

XML

Note 17 - Regulatory Capital (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations [Table Text Block]

	As of December 31, 2019
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.35	%		12.12	%		12.12	%		12.79	%
Middlefield Banc Corp.		10.23	%		12.56	%		11.77	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

	As of December 31, 2018
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		9.60	%		11.09	%		11.09	%		11.83	%
Middlefield Banc Corp.		10.35	%		11.83	%		11.04	%		12.57	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

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Note 12 - Accrued Interest Payable and Other Liabilities (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Other Liabilities [Table Text Block]

	2019		2018
(Dollar amounts in thousands)
Accrued interest payable	$	917	$	744
Accrued directors' benefits		1,470		1,346
Accrued salary and benefits expense		1,451		1,058
Operating lease liabilities		906		-
Other		1,288		1,692
Total	$	6,032	$	4,840

XML

Note 12 - Accrued Interest Payable and Other Liabilities - Components of Accrued Interest Payable and Other Liabilities (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Accrued interest payable	$ 917,000	$ 744,000
Accrued directors' benefits	1,470,000	1,346,000
Accrued salary and benefits expense	1,451,000	1,058,000
Other	1,288,000	1,692,000
Total	6,032,000	4,840,000
Accrued Interest Payable and Other Liabilities [Member]
Operating lease liabilities	$ 906,000

XML

Note 7 - Goodwill and Intangible Assets (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Goodwill, Ending Balance	$ 15,071,000	$ 15,071,000
Finite-Lived Core Deposits, Gross	2,100,000	2,400,000
Amortization of Intangible Assets, Total	341,000	352,000
Core Deposits [Member]
Finite-Lived Intangible Assets, Accumulated Amortization	$ 1,400,000	$ 1,000,000
Finite-Lived Intangible Asset, Useful Life	10 years

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses - Past Due Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Loans, current balance	$ 975,566	$ 984,245
Loans, past due	8,692	7,864
Loans	984,258	992,109
Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due	2,589	3,583
Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due	345	1,296
Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due	5,758	2,985
Commercial And Industrial [Member]
Loans, current balance	88,965	82,770
Loans, past due	562	1,087
Loans	89,527	83,857
Commercial And Industrial [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due	190	288
Commercial And Industrial [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due	66	213
Commercial And Industrial [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due	306	586
Real Estate Construction Porfolio Segment [Member]
Loans, current balance	63,246	56,731
Loans, past due
Loans	63,246	56,731
Real Estate Construction Porfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due
Real Estate Construction Porfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due
Real Estate Construction Porfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due	0	0
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans, current balance	344,311	331,379
Loans, past due	2,736	5,108
Loans	347,047	336,487
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans, current balance	465,666	496,597
Loans, past due	4,361	1,650
Loans	470,027	498,247
Real Estate Mortgage Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member] | Residential Loan [Member]
Loans, past due	1,713	2,612
Real Estate Mortgage Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member] | Commercial Loans [Member]
Loans, past due	63	664
Real Estate Mortgage Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member] | Residential Loan [Member]
Loans, past due	63	1,083
Real Estate Mortgage Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member] | Commercial Loans [Member]
Loans, past due
Real Estate Mortgage Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member] | Residential Loan [Member]
Loans, past due	960	1,413
Real Estate Mortgage Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member] | Commercial Loans [Member]
Loans, past due	4,298	986
Consumer Portfolio Segment [Member]
Loans, current balance	13,378	16,768
Loans, past due	1,033	19
Loans	14,411	16,787
Consumer Portfolio Segment [Member] | Financial Asset, 30 to 59 Days Past Due [Member]
Loans, past due	623	19
Consumer Portfolio Segment [Member] | Financial Asset, 60 to 89 Days Past Due [Member]
Loans, past due	216
Consumer Portfolio Segment [Member] | Financial Asset, Equal to or Greater than 90 Days Past Due [Member]
Loans, past due	$ 194	$ 0

XML

Note 10 - Short-term Borrowings - Outstanding Balances and Related Information of Short-term Borrowings (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Balance at year-end	$ 5,075	$ 90,398	$ 74,707
Average balance outstanding	14,808	42,231	63,910
Maximum month-end balance	$ 92,000	$ 101,857	$ 114,025
Weighted-average rate at year-end	1.66%	2.53%	1.36%
Weighted-average rate during the year	2.49%	1.99%	1.18%

XML

Note 9 - Deposits (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
2020	$ 251,291
2021	62,523
2022	25,195
2023	16,868
2024	12,923
Total	$ 368,800	$ 300,914

XML

Note 13 - Income Taxes - Tax Rate Reconciliation (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Provision at statutory rate, amount									$ 3,214	$ 3,065
Provision at statutory rate, percent									21.00%	21.00%
Tax-exempt income, amount									$ (647)	$ (622)
Tax-exempt income, percent									(4.20%)	(4.30%)
Nondeductible interest expense, amount									$ 32	$ 27
Nondeductible interest expense, percent									0.20%	0.20%
Stock-based compensation, amount										$ (37)
Stock-based compensation, percent										(0.30%)
Other, amount									$ (7)	$ (271)
Other, percent									(0.10%)	(1.80%)
Total provision	$ 634	$ 661	$ 686	$ 611	$ 560	$ 593	$ 481	$ 528	$ 2,592	$ 2,162
Actual tax expense and effective rate, percent									16.90%	14.80%

XML

Consolidated Balance Sheet - USD ($)	Dec. 31, 2019	Dec. 31, 2018
ASSETS
Cash and cash equivalents	$ 35,113,000	$ 107,933,000
Equity securities, at fair value	710,000	616,000
Investment securities available for sale, at fair value	105,733,000	98,322,000
Loans held for sale	1,220,000	597,000
Loans:
Loans	984,258,000	992,109,000
Less allowance for loan and lease losses	6,768,000	7,428,000
Net loans	977,490,000	984,681,000
Premises and equipment, net	17,874,000	13,003,000
Goodwill	15,071,000	15,071,000
Core deposit intangibles	2,056,000	2,397,000
Bank-owned life insurance	16,511,000	16,080,000
Accrued interest receivable and other assets	10,697,000	9,698,000
TOTAL ASSETS	1,182,475,000	1,248,398,000
LIABILITIES
Noninterest-bearing demand	191,370,000	203,410,000
Interest-bearing demand	107,844,000	92,104,000
Money market	160,826,000	196,685,000
Savings	192,003,000	222,954,000
Time	368,800,000	300,914,000
Total deposits	1,020,843,000	1,016,067,000
Short-term borrowings:
Federal funds purchased	75,000	398,000
Federal Home Loan Bank advances	5,000,000	90,000,000
Total short-term borrowings	5,075,000	90,398,000
Other borrowings	12,750,000	8,803,000
Accrued interest payable and other liabilities	6,032,000	4,840,000
TOTAL LIABILITIES	1,044,700,000	1,120,108,000
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 7,294,792 and 7,260,994 shares issued; 6,423,630 and 6,488,664 shares outstanding	86,617,000	85,925,000
Retained earnings	65,063,000	56,037,000
Accumulated other comprehensive income (loss)	1,842,000	(154,000)
Treasury stock, at cost; 871,162 and 772,330 shares	(15,747,000)	(13,518,000)
TOTAL STOCKHOLDERS' EQUITY	137,775,000	128,290,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	1,182,475,000	1,248,398,000
Commercial And Industrial [Member]
Loans:
Loans	89,527,000	83,857,000
Less allowance for loan and lease losses	456,000	969,000
Real Estate Construction Porfolio Segment [Member]
Loans:
Loans	63,246,000	56,731,000
Less allowance for loan and lease losses	97,000	100,000
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans:
Loans	347,047,000	336,487,000
Less allowance for loan and lease losses	1,658,000	1,581,000
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans:
Loans	470,027,000	498,247,000
Less allowance for loan and lease losses	4,529,000	4,651,000
Consumer Portfolio Segment [Member]
Loans:
Loans	14,411,000	16,787,000
Less allowance for loan and lease losses	$ 28,000	$ 127,000

XML

Note 21 - Parent Company - Condensed Statement of Comprehensive Income (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Total income	$ 13,436	$ 13,885	$ 13,720	$ 13,484	$ 13,459	$ 12,829	$ 12,129	$ 11,940	$ 54,525	$ 50,357
Interest expense	3,128	3,307	3,451	3,254	2,998	2,584	2,287	2,040	13,140	9,909
Income before income tax benefit	3,775	3,930	3,976	3,622	3,985	3,897	3,578	3,133	15,303	14,593
Income tax benefit	634	661	686	611	560	593	481	528	2,592	2,162
NET INCOME	$ 3,141	$ 3,269	$ 3,290	$ 3,011	$ 3,425	$ 3,304	$ 3,097	$ 2,605	12,711	12,431
Comprehensive Income									14,707	11,140
Parent Company [Member]
Gain (loss) on equity securities									94	(9)
Other									12	9
Total income									5,556	4,650
Interest expense									343	325
Other									2,949	2,119
Total expenses									3,292	2,444
Income before income tax benefit									2,264	2,206
Income tax benefit									(669)	(513)
Income before equity in undistributed net income of subsidiaries									2,933	2,719
Equity in undistributed net income of subsidiaries									9,778	9,712
NET INCOME									12,711	12,431
Comprehensive Income									14,707	11,140
Parent Company [Member] | Subsidiary Banks [Member]
Dividends from subsidiary									4,450	4,650
Parent Company [Member] | Non Bank Subsidiary [Member]
Dividends from subsidiary									$ 1,000

XML

Note 2 - Revenue Recognition (Details Textual)	12 Months Ended
	Dec. 31, 2019
Revenue from Interest Income and Noninterest Income, Percent	92.20%

XML

Note 4 - Investment and Equity Securities (Details Textual) - USD ($)		12 Months Ended
		Dec. 31, 2019	Dec. 31, 2018
Equity Securities, FV-NI		$ 710,000	$ 616,000
Equity Securities, FV-NI, Unrealized Gain (Loss), Total	[1]	94,000	(9,000)
Equity Securities, FV-NI, Realized Gain (Loss), Total		0	0
Security Owned and Pledged as Collateral, Fair Value, Total		55,600,000	63,500,000
Proceeds from Sale of Debt Securities, Available-for-sale		12,324,000	0
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax, Total		$ 41,000	0
Available-for-sale Securities, Percentage of Portfolio		96.10%
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Credit Losses on Debt Securities Held, Ending Balance		$ 0
Accounting Standards Update 2016-01 [Member]
Reclassification of Investment Securities Available for Sale to Equity Securities			$ 625,000

[1] Not within scope of ASC 606

XML

Consolidated Statement of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Treasury Stock [Member]	Total
Balance (in shares) at Dec. 31, 2017	7,207,762
Balance at Dec. 31, 2017	$ 84,859	$ 47,431	$ 1,091	$ (13,518)	$ 119,863
Change in accounting principle, ASC 2016-01		141	(141)
Change in accounting principle, ASC 2018-02		(187)	187
Net income		12,431			12,431
Other comprehensive income (loss)			(1,291)		(1,291)
Dividend reinvestment and purchase plan (in shares)	24,512
Dividend reinvestment and purchase plan	$ 618				$ 618
Stock options exercised (in shares)	17,600				24,600
Stock options exercised	$ 168				$ 168
Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture, Total	11,120
Stock-based compensation	$ 280				280
Cash dividends		(3,779)			$ (3,779)
Balance (in shares) at Dec. 31, 2018	7,260,994				6,488,664
Balance at Dec. 31, 2018	$ 85,925	56,037	(154)	(13,518)	$ 128,290
Net income		12,711			12,711
Other comprehensive income (loss)			1,996		1,996
Dividend reinvestment and purchase plan (in shares)	17,866
Dividend reinvestment and purchase plan	$ 372				$ 372
Stock options exercised (in shares)	400				400
Stock options exercised	$ 4				$ 4
Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture, Total	15,532
Stock-based compensation	$ 316				316
Cash dividends		(3,685)			(3,685)
Treasury shares acquired				(2,229)	$ (2,229)
Balance (in shares) at Dec. 31, 2019	7,294,792				6,423,630
Balance at Dec. 31, 2019	$ 86,617	$ 65,063	$ 1,842	$ (15,747)	$ 137,775

XML

Note 19 - Accumulated Other Comprehensive Income (Loss) - Significant Amounts Reclassified Out of Each Component of Accumulated Other Comprehensive Income (Loss) (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)
Investment securities gains on sale, net	$ 194	[1]
Income taxes	(41)	[1]
Net of tax	$ 153

[1] Amounts in parentheses indicate expenses and other amounts indicate income.

XML

Note 18 - Fair Value Disclosure Measurements - Assets Measured on a Nonrecurring Basis (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Impaired loans	$ 13,070	$ 14,075
Fair Value, Nonrecurring [Member]
Impaired loans	5,166	1,075
Fair Value, Inputs, Level 1 [Member] | Fair Value, Nonrecurring [Member]
Impaired loans
Fair Value, Inputs, Level 2 [Member] | Fair Value, Nonrecurring [Member]
Impaired loans
Fair Value, Inputs, Level 3 [Member] | Fair Value, Nonrecurring [Member]
Impaired loans	$ 5,166	$ 1,075

XML

Note 6 - Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Property, Plant and Equipment [Table Text Block]

(Dollar amounts in thousands)	2019		2018
Land and land improvements	$	2,920	$	2,920
Building and leasehold improvements		15,836		15,377
Furniture, fixtures, and equipment		9,357		8,011
Financing right-of-use assets		4,012		-
Total premises and equipment		32,125		26,308
Less accumulated depreciation and amortization		14,251		13,305
Total premises and equipment, net	$	17,874	$	13,003

XML

Note 2 - Revenue Recognition (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Disaggregation of Revenue [Table Text Block]

Noninterest Income	2019			2018
(Dollar amounts in thousands)
Service charges on deposit accounts:
Overdraft fees	$	841		$	798
ATM banking fees		932			867
Service charges and other fees		413			249
Investment securities gains on sale, net (a)		194			-
Gain (loss) on equity securities (a)		94			(9	)
Earnings on bank-owned life insurance (a)		431			428
Gain on sale of loans (a)		433			231
Revenue from investment services		528			385
Other income		975			779
Total noninterest income	$	4,841		$	3,728
Net gain (loss) on other real estate owned	$	(123	)	$	(55	)

XML

Note 11 - Other Borrowings

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Other Borrowings [Text Block]

11. OTHER BORROWINGS

Other borrowings consist of advances from the FHLB and subordinated debt as follows:

				Weighted-			Stated interest
(Dollar amounts in thousands)	Maturity range			average			rate range
Description	from		to	interest rate			from			to			2019		2018
Fixed-rate amortizing	07/01/25	10/01/28			4.06	%		4.02	%	4.47	%	$	404	$	555
Finance lease liabilities	12/31/21	06/01/40			3.29	%		2.70	%	3.51	%		4,098		-
Junior subordinated debt	12/21/37	12/21/37			4.10	%		3.61	%	4.42	%		8,248		8,248
Total												$	12,750	$	8,803

The scheduled maturities of other borrowings are as follows:

(Dollar amounts in thousands)
			Weighted-
Year Ending December 31,	Amount		Average Rate
2020	$	445		3.36	%
2021		442		3.36	%
2022		434		3.36	%
2023		433		3.36	%
2024		430		3.36	%
Beyond 2024		10,566		3.87	%
Total	$	12,750		3.84	%

Fixed-rate amortizing advances from the FHLB require monthly principal and interest payments and an annual

20

percent pay-down of outstanding principal. Monthly principal and interest payments are adjusted after each

20

percent pay-down. Under the terms of a blanket agreement, FHLB borrowings are secured by certain qualifying assets of the Company which consist principally of

first

mortgage loans or mortgage-backed securities. Under this credit arrangement, the Company has a remaining borrowing capacity of approximately

$273.4

million at

December 31, 2019.

At

December 31, 2019,

the Company also had available a

$10.0

million letter of credit with FHLB, which expired

January 23, 2020.

At

December 31, 2019,

there was

no

outstanding borrowings on this letter of credit.

The Company formed a special purpose entity (“Entity”) to issue

$8.0

million of floating rate, obligated mandatorily redeemable securities, and

$248,000

in common securities as part of a pooled offering. The rate adjusts quarterly, equal to LIBOR plus

1.67%.

The Entity

may

redeem them, in whole or in part, at face value. The Company borrowed the proceeds of the issuance from the Entity in

December 2006

in the form of an

$8.3

million note payable, which matures in

December 2037,

and is included in the other borrowings on the Company’s Consolidated Balance Sheet.

On

January 1, 2019,

the Company adopted ASU

2016

-

02

which resulted in the recording of finance lease liabilities of

$3.8

million on the Consolidated Balance Sheet. See Note

15

of the financial statements.

XML

Note 3 - Earnings Per Share

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Earnings Per Share [Text Block]

3. 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 for the year ended

December 31:

	2019			2018
Weighted-average common shares issued		7,286,554			7,232,238
Average treasury stock shares		(816,146	)		(772,330	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		6,470,408			6,459,908
Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		32,398			27,906
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		6,502,806			6,487,814

Options to purchase

14,500

shares of common stock at

$8.78

a share were outstanding during the year ended

December 31, 2019.

Also outstanding were

61,040

shares of restricted stock.

None

of the outstanding options or restricted stock were anti-dilutive.

Options to purchase

14,900

shares of common stock at

$8.78

a share were outstanding during the year ended

December 31, 2018.

Also outstanding were

42,350

shares of restricted stock.

None

of the outstanding options or restricted stock were anti-dilutive.

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of

December 31, 2019,

the Company held

871,162

of the Company’s shares, which is an increase of

98,832

shares for the

twelve

months ended

December 31, 2019,

from the

772,330

shares held as of

December 31, 2018.

XML

Note 7 - Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill totaled

$

15.1

million for both years ended

December 

31,

2019,

and

2018.

Core deposit intangible carrying amount was

$2.1

million and

$2.4

million for the years ended

December 

31,

2019,

and

2018,

respectively. Core deposit accumulated amortization was

$1.4

million and

$1.0

million for the years ended

December 

31,

2019,

and

2018.

Amortization expense totaled

$341,000

and

$352,000

in

2019

and

2018,

respectively.

Core deposit intangible assets are amortized to their estimated residual values over their expected useful lives, commonly of

ten

 years. The estimated aggregate future amortization expense for core deposit intangible assets as of

December 

31,

2019

is as follows:

2020	$	332
2021		321
2022		309
2023		296
2024		281
Thereafter		517
Total	$	2,056

XML

Note 10 - Short-term Borrowings (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Long-term Line of Credit, Total	$ 0	$ 0
Federal Home Loan Bank Advances, Additional Borrowing Capacity	87,000	$ 27,000
Line of Credit 1 [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 6,000
Line of Credit Facility, Interest Rate During Period	5.00%
Line of Credit 2 [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 10,000
Line of Credit Facility, Interest Rate During Period	4.93%
Line of Credit 3 [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 4,000
Line of Credit Facility, Interest Rate During Period	5.51%

XML

Note 14 - Employee Benefits (Details Textual) - USD ($)		12 Months Ended
	May 10, 2017	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2007
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value		$ 251,068	$ 185,356
Share-based Payment Arrangement, Nonvested Award, Option, Cost Not yet Recognized, Amount		$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		400	24,600
Share-based Payment Arrangement, Option [Member]
Payments For Stock Options Exercised		$ 0	$ 85,000
Restricted Stock [Member]
Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture, Total		29,130	22,702
Share-based Payment Arrangement, Expense		$ 184,000	$ 191,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Rights, Average Total Shareholder Annual Return, Percentage		10.00%	8.00%
Share-based Payment Arrangement, Nonvested Award, Excluding Option, Cost Not yet Recognized, Amount		$ 715,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition		1 year 302 days
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period, Fair Value		$ 265,000	$ 205,000
Retirement Plan [Member]
Defined Contribution Plan Employer Voluntary Matching Bank Contribution		50.00%	50.00%
Defined Contribution Plan, Employer Matching Contribution, Percent of Employees' Gross Pay		6.00%	6.00%
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		6 years
Defined Benefit Plan, Plan Assets, Contributions by Employer		$ 319,000	$ 306,000
Retirement Plan [Member] | Middlefield Banking Company [Member]
Defined Contribution Plan Annual Vesting Percentage		20.00%
Retirement Plan [Member] | Liberty Bank, N.A. [Member]
Deferred Compensation Arrangement with Individual, Requisite Service Period		3 years
Executive Deferred Compensation Plan [Member] | Middlefield Banking Company [Member]
Deferred Compensation Arrangement with Individual, Recorded Liability		$ 615,000	504,000
Defined Contribution Plan, Employer Discretionary Contribution Amount		$ 85,000	$ 98,000
Stock Option and Restricted Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized				320,000
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term				10 years
Shares, Outstanding, Ending Balance		14,500
The 2017 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	448,000
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term	10 years
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant		386,188
Omnibus Equity Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		0	0
Share-based Payment Arrangement, Expensed and Capitalized, Amount, Total		$ 265,000	$ 215,000

XML

Note 13 - Income Taxes (Details Textual) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Deferred Tax Assets, Valuation Allowance, Total	$ 0	$ 0

XML

Note 7 - Goodwill and Intangible Assets - Estimated Aggregate Future Amortization Expense for Core Deposit Intangible Assets (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
2023	$ 296
2024	281
Total	2,056	$ 2,397
Core Deposits [Member]
2020	332
2021	321
2022	309
Thereafter	$ 517

XML

Note 5 - Loans and Related Allowance for Loan and Lease Losses - Nonaccrual Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Loans, nonacrrual status	$ 8,879	$ 6,595
Loans, 90+ days past due and accruing	0	945
Commercial And Industrial [Member]
Loans, nonacrrual status	946	996
Loans, 90+ days past due and accruing	0	91
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Loans, nonacrrual status	3,285	2,731
Loans, 90+ days past due and accruing	0	754
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Loans, nonacrrual status	4,451	2,864
Loans, 90+ days past due and accruing	0	100
Consumer Portfolio Segment [Member]
Loans, nonacrrual status	197	4
Loans, 90+ days past due and accruing	$ 0	$ 0

XML

Note 11 - Other Borrowings (Details Textual) - USD ($)	1 Months Ended	12 Months Ended
	Dec. 31, 2006	Dec. 31, 2019	Jan. 01, 2019
Annual Paydown of Principal Required		20.00%
Federal Home Loan Bank, Advances, General Debt Obligations, Amount of Available, Unused Funds		$ 273,400,000
Stock Issued During Period, Value, New Issues	$ 248,000
Notes Payable, Total	$ 8,300,000
Finance Lease, Liability, Total		4,098,000
Accounting Standards Update 2016-02 [Member]
Finance Lease, Liability, Total			$ 3,800,000
London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate	1.67%
Mandatorily Redeemable Securities [Member] | Special Purpose Entity [Member]
Securities Sold under Agreements to Repurchase, Total	$ 8,000,000
Letter of Credit [Member]
Federal Home Loan Bank, Advances, General Debt Obligations, Maximum Amount Available		10,000,000
Advances from Federal Home Loan Banks, Total		$ 0

XML

Note 19 - Accumulated Other Comprehensive Income (Loss) - Changes in Accumulated Other Comprehensive Income (Loss) by Component, Net of Tax (Details) - USD ($)			12 Months Ended
		Jan. 01, 2018	Dec. 31, 2019	Dec. 31, 2018
Balance		$ 119,863,000	$ 128,290,000	$ 119,863,000
Change in accounting principle, ASC 2016-01
Change in accounting principle, ASC 2018-02		187,000
Period change			1,996,000	(1,291,000)
Balance			137,775,000	128,290,000
AOCI, Accumulated Gain (Loss), Debt Securities, Available-for-sale, Parent [Member]
Balance	[1]	$ 1,091,000	(154,000)	1,091,000
Other comprehensive income (loss) before reclassification	[1]		2,149,000	(1,291,000)
Change in accounting principle, ASC 2016-01	[1],[2]			(141,000)
Change in accounting principle, ASC 2018-02	[1],[2]			187,000
Period change	[1]		1,996,000	(1,245,000)
Amount reclassified from accumulated other comprehensive income	[1]		(153,000)
Balance	[1]		$ 1,842,000	$ (154,000)

[1] All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.

[2] Reclassifications are the result of the adoption of ASUs 2016-01 and 2018-02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders' Equity for the affected transitional periods.

XML

Note 18 - Fair Value Disclosure Measurements - Assets Measured on a Recurring Basis (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Total debt securities	$ 105,733,000	$ 98,322,000
Equity securities in financial institutions	710,000	616,000
Subordinated Debt Securities [Member]
Total debt securities	4,126,000
US Government Agencies Debt Securities [Member]
Total debt securities		7,471,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Total debt securities	18,630,000	17,758,000
Fair Value, Recurring [Member]
Total debt securities	105,733,000	98,322,000
Equity securities in financial institutions	710,000	616,000
Total	106,443,000	98,938,000
Fair Value, Recurring [Member] | Subordinated Debt Securities [Member]
Total debt securities	4,126,000
Fair Value, Recurring [Member] | US Government Agencies Debt Securities [Member]
Assets measured on a recurring basis		7,471,000
Fair Value, Recurring [Member] | US States and Political Subdivisions Debt Securities [Member]
Total debt securities	82,977,000	73,093,000
Fair Value, Recurring [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Total debt securities	18,630,000	17,758,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Total debt securities
Equity securities in financial institutions	710,000	616,000
Total	710,000	616,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Subordinated Debt Securities [Member]
Total debt securities
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | US Government Agencies Debt Securities [Member]
Assets measured on a recurring basis
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | US States and Political Subdivisions Debt Securities [Member]
Total debt securities
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Total debt securities
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Total debt securities	105,733,000	98,322,000
Equity securities in financial institutions
Total	105,733,000	98,322,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Subordinated Debt Securities [Member]
Total debt securities	4,126,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | US Government Agencies Debt Securities [Member]
Assets measured on a recurring basis		7,471,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member]
Total debt securities	82,977,000	73,093,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Total debt securities	18,630,000	17,758,000
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Total debt securities
Equity securities in financial institutions
Total
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Subordinated Debt Securities [Member]
Total debt securities
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | US Government Agencies Debt Securities [Member]
Assets measured on a recurring basis
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | US States and Political Subdivisions Debt Securities [Member]
Total debt securities
Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Total debt securities

XML

Note 21 - Parent Company - Condensed Balance Sheet (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Equity Securities, FV-NI	$ 710,000	$ 616,000
Other assets	10,697,000	9,698,000
TOTAL ASSETS	1,182,475,000	1,248,398,000
Trust preferred debt	8,248,000	8,248,000
TOTAL LIABILITIES	1,044,700,000	1,120,108,000
STOCKHOLDERS' EQUITY	137,775,000	128,290,000	$ 119,863,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	1,182,475,000	1,248,398,000
Parent Company [Member]
Cash and due from banks	2,577,000	1,582,000
Equity Securities, FV-NI	710,000	616,000
Other assets	977,000	4,080,000
TOTAL ASSETS	146,768,000	137,008,000
Other liabilities	745,000	470,000
TOTAL LIABILITIES	8,993,000	8,718,000
STOCKHOLDERS' EQUITY	137,775,000	128,290,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	146,768,000	137,008,000
Parent Company [Member] | Non Bank Subsidiary [Member]
Equity method investments	1,400,000	2,364,000
Parent Company [Member] | Subsidiary Banks [Member]
Equity method investments	$ 141,104,000	$ 128,366,000

XML

Consolidated Balance Sheet (Parentheticals) - $ / shares $ / shares in Thousands	Dec. 31, 2019	Dec. 31, 2018
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	10,000,000	10,000,000
Common stock, shares issued (in shares)	7,294,792	7,260,994
Common stock, shares outstanding (in shares)	6,423,630	6,488,664
Treasury stock, shares (in shares)	871,162	772,330

XML

Note 1 - Summary of Significant Accounting Policies (Details Textual)		12 Months Ended
	Jan. 01, 2018 USD ($)	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)	Jan. 01, 2019 USD ($)
Number of Branches		16
Servicing Asset at Fair Value, Amount, Ending Balance		$ 70,800,000	$ 59,400,000
Goodwill, Impairment Loss		0	0
Finance Lease, Right-of-Use Asset		4,012,000
Tax Cuts and Jobs Act, Reclassification from AOCI to Retained Earnings, Tax Effect	$ 187,000
Finance Lease, Liability, Total		4,098,000
Operating Lease, Right-of-Use Asset		$ 903,000
Accounting Standards Update 2016-01 [Member]
Reclassification of AOCI and Retained Earnings	$ 141,000
Accounting Standards Update 2016-02 [Member]
Finance Lease, Right-of-Use Asset				$ 3,800,000
Operating Lease, Liability, Total				1,100,000
Finance Lease, Liability, Total				3,800,000
Operating Lease, Right-of-Use Asset				$ 1,100,000
Core Deposits [Member]
Finite-Lived Intangible Asset, Useful Life		10 years
Furniture and Fixtures [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life		3 years
Furniture and Fixtures [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life		20 years
Building and Building Improvements [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life		3 years
Building and Building Improvements [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life		40 years

XML

Note 3 - Earnings Per Share - Shares Used in Calculation of Earnings Per Share (Details) - shares	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Weighted-average common shares issued (in shares)									7,286,554	7,232,238
Average treasury stock shares (in shares)									(816,146)	(772,330)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share (in shares)	6,423,543	6,458,258	6,502,508	6,498,278	6,478,360	6,468,786	6,451,452	6,440,524	6,470,408	6,459,908
Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share (in shares)									32,398	27,906
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share (in shares)	6,455,387	6,479,066	6,514,946	6,510,568	6,500,298	6,496,652	6,480,658	6,476,138	6,502,806	6,487,814

XML

Consolidated Statement of Changes in Stockholders' Equity (Parentheticals) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Retained Earnings [Member]
Cash dividends per share (in dollars per share)		$ 0.59
Cash dividends per share (in dollars per share)	$ 0.57
Treasury acquired, shares (in shares)	98,832

XML

Note 7 - Goodwill and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

2020	$	332
2021		321
2022		309
2023		296
2024		281
Thereafter		517
Total	$	2,056

XML

Note 3 - Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Weighted Average Number of Shares [Table Text Block]

	2019			2018
Weighted-average common shares issued		7,286,554			7,232,238
Average treasury stock shares		(816,146	)		(772,330	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		6,470,408			6,459,908
Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		32,398			27,906
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		6,502,806			6,487,814

XML

Note 2 - Revenue Recognition

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

2. REVENUE RECOGNITION

In accordance with ASC Topic

606,

management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are

not

within the scope of ASC

606.

These revenue sources cumulatively comprise

92.2%

of the total revenue of the Company.

The main types of noninterest income within the scope of the standard are as follows:

Service charges on deposit accounts

– The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. The agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific customer requests or activities that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, which is completion of the requested service/transaction.

Gains (losses) on sale of other real estate owned

(“OREO”

)

- Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset includes transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred and the payment terms, that the contract has a true commercial substance and that amounts due from the buyer are reasonable. In situations where financing terms are

not

reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset. Gain and losses on sale of OREO is reported within other expense in the Consolidated Statement of Income.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the years ended

December 31,

Noninterest Income	2019			2018
(Dollar amounts in thousands)
Service charges on deposit accounts:
Overdraft fees	$	841		$	798
ATM banking fees		932			867
Service charges and other fees		413			249
Investment securities gains on sale, net (a)		194			-
Gain (loss) on equity securities (a)		94			(9	)
Earnings on bank-owned life insurance (a)		431			428
Gain on sale of loans (a)		433			231
Revenue from investment services		528			385
Other income		975			779
Total noninterest income	$	4,841		$	3,728
Net gain (loss) on other real estate owned	$	(123	)	$	(55	)

(a)

Not

within scope of ASC

606

XML

Note 6 - Premises and Equipment

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

6. PREMISES AND EQUIPMENT

Major classifications of premises and equipment at

December 31: 

(Dollar amounts in thousands)	2019		2018
Land and land improvements	$	2,920	$	2,920
Building and leasehold improvements		15,836		15,377
Furniture, fixtures, and equipment		9,357		8,011
Financing right-of-use assets		4,012		-
Total premises and equipment		32,125		26,308
Less accumulated depreciation and amortization		14,251		13,305
Total premises and equipment, net	$	17,874	$	13,003

Depreciation expense charged to operations was

$1.0

million in

2019

and

$951,000

in

2018.

XML

Note 10 - Short-term Borrowings

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Short-term Debt [Text Block]

10. SHORT-TERM BORROWINGS

For the year ended

December 31,

outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase and short-term borrowings from other banks, are summarized as follows:

(Dollar amounts in thousands)	2019			2018			2017
Balance at year-end	$	5,075		$	90,398		$	74,707
Average balance outstanding		14,808			42,231			63,910
Maximum month-end balance		92,000			101,857			114,025
Weighted-average rate at year-end		1.66	%		2.53	%		1.36	%
Weighted-average rate during the year		2.49	%		1.99	%		1.18	%

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

$6.0

million line of credit at an adjustable rate, currently

5.00%,

a

$10.0

million line of credit at an adjustable rate, currently at

4.93%,

and a

$4.0

million line of credit at an adjustable rate, currently

5.51%.

At

December 31, 2019,

and

2018,

there were

no

outstanding borrowings under these lines of credit. The additional borrowing capacity on FHLB advances was

$87.0

million and

$27.0

million at

December 31, 2019

and

2018,

respectively.

XML

Note 14 - Employee Benefits

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Compensation and Employee Benefit Plans [Text Block]

14. EMPLOYEE BENEFITS

Employee Retirement Plan

The Bank maintains section

401

(k) employee savings and investment plans for all full-time employees and officers of the Bank who are at least

21

years of age. The Bank’s contributions to the plans are discretionary, and were based on

50%

matching of voluntary contributions up to

6%

of compensation for the years ended

December 31, 2019

and

2018.

Employee contributions are vested at all times, and MBC contributions are fully vested after

six

years beginning at the

second

year in

20%

increments. Special vesting provisions are in place for legacy Liberty employees with

3

or more years of service. Contributions for

2019

and

2018

to these plans amounted to

$319,000

and

$306,000,

respectively.

Executive Deferred Compensation Plan

s

The Company maintains executive deferred compensation plans to provide post-retirement payments to members of senior management. The plan agreements are noncontributory, defined contribution arrangements that provide supplemental retirement income benefits to several officers, with contributions made solely by the Bank. Accrued executive deferred compensation amounted to

$615,000

and

$504,000

as of

December 31, 2019

and

2018,

respectively. During

2019

and

2018,

the Company recognized nonqualified deferred compensation expense of

$85,000

and

$98,000,

respectively, to the plans.

Stock Option and Restricted Stock Plan

In

2007,

the Company adopted the

2007

Omnibus Equity Plan (the

“2007

Plan”) for granting incentive stock options, nonqualified stock options, and restricted stock to key officers and employees and nonemployee directors of the Company. A total of

320,000

shares of authorized and unissued or issued common stock were reserved for issuance under the

2007

Plan, which expired

ten

years from the date of board approval of the plan. Although the

2007

Plan expired in

2017,

there remain outstanding

14,500

shares in incentive stock options awards granted under the

2007

Plan. The per share exercise price of an option granted is

not

less than the fair value of a share of common stock on the date the option was granted.

In

2017,

the Company adopted the

2017

Omnibus Equity Plan (the

“2017

Plan”) for granting incentive stock options, nonqualified stock options, restricted stock and other equity awards to key officers and employees and nonemployee directors of the Company. The Company’s stockholders approved the

2017

Plan at the annual meeting of the stockholders held on

May 10, 2017.

A total of

448,000

shares of authorized and unissued or issued common stock are reserved for issuance under the

2017

Plan, which expires

ten

years from the date of board approval of the plan. 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. Remaining available shares that can be issued under the Plan were

386,188

at

December 31, 2019.

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

	Shares			Weighted- average Exercise Price Per Share
Outstanding, January 1, 2019		14,900		$	8.78
Exercised		(400	)		8.78
Outstanding, December 31, 2019		14,500		$	8.78
Exercisable, December 31, 2019		14,500		$	8.78

The total intrinsic value of outstanding in-the-money exercisable stock options was

$251,068

and

$185,356

at

December 31, 2019

and

2018,

respectively.

No

options were granted for the years ended

December 31, 2019

and

2018.

The Company recognizes compensation expense in the amount of fair value of the options at the grant date and as an addition to stockholders’ equity.

For the years ended

December 

31,

2019

and

2018,

the Company recorded

$265,000

and

$215,000,

respectively, of compensation cost related to vested stock options. As of

December 31, 2019,

there was

no

unrecognized compensation cost related to vested stock options.

For the years ended

December 31, 2019

and

2018,

400

and

24,600

options were exercised resulting in net proceeds to the participant of

$0

and

$85,000,

respectively.

During

2019

and

2018,

the Compensation Committee of the Board of Directors of the Company granted awards of restricted stock for an aggregate amount of

29,130

and

22,702

shares, respectively, to certain employees of the Bank. The expense recognized as a result of these awards was

$184,000

and

$191,000

for the years ended

2019

and

2018,

respectively. The number of restricted stock shares earned or settled will depend on certain conditions and are also subject to service period-based vesting. The award recipient must maintain service with Middlefield Banc Corp. and affiliates until the

third

anniversary of the award to satisfy the service condition. The performance condition will be satisfied if the average total shareholder annual return on Middlefield Banc Corp. stock for the

three

subsequent years is at least

10.00%

for

2019

and

8.00%

for

2018.

The Company recognized restricted stock forfeitures in the period they occur.

The following table presents the activity during

2019

related to awards of restricted stock:

	Units			Weighted- average Grant Date Fair Value Per Unit
Nonvested at January 1, 2019		42,350		$	20.98
Granted		29,130			20.95
Vested		(10,440	)		16.56
Nonvested at December 31, 2019		61,040		$	21.72
Expected to vest at December 31, 2019		41,136		$	20.57

As of

December 31, 2019,

there was

$715,000

of total unrecognized compensation cost related to nonvested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of

1.83

years. The total fair value of shares vested during the years ended

December 31, 2019

and

2018

was

$265,000,

and

$205,000,

respectively.

XML

Note 18 - Fair Value Disclosure Measurements

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

18. FAIR VALUE DISCLOSURE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The

three

broad levels defined by U.S. generally accepted accounting principles are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two -way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgement or estimation.

This hierarchy requires the use of observable market data when available.

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,126	$	-	$	4,126
Obligations of states and political subdivisions		-		82,977		-		82,977
Mortgage-backed securities in government- sponsored entities		-		18,630		-		18,630
Total debt securities		-		105,733		-		105,733
Equity securities in financial institutions		710		-		-		710
Total	$	710	$	105,733	$	-	$	106,443

			December 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	7,471	$	-	$	7,471
Obligations of states and political subdivisions		-		73,093		-		73,093
Mortgage-backed securities in government- sponsored entities		-		17,758		-		17,758
Total debt securities		-		98,322		-		98,322
Equity securities in financial institutions		616		-		-		616
Total	$	616	$	98,322	$	-	$	98,938

Investment Securities Available for Sale

– The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

Equity Securities

- Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which

no

sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are

not

applied, they are categorized in Level I of the fair value hierarchy.

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement.

No

such devaluation occurred during the year ended

December 31, 2019.

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,166	$	5,166

			December 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	1,075	$	1,075

Impaired Loans

– The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent

third

-party appraisals of the properties. In some cases, management

may

adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is

not

included in the above table as it is

not

currently being carried at its fair value. The fair values in the above tables include estimated selling costs of

$2.1

million and

$492,000

at

December 31, 2019

and

2018,

respectively.

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2019
Impaired loans	$	5,166	Appraisal of collateral (1)	Appraisal adjustments (2)	40.3%	to	47.4%	(41.8%)

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2018
Impaired loans	$	1,075	Appraisal of collateral (1)	Appraisal adjustment (2)	0.0%	to	100.0%	(40.6%)

( 1 ) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.

( 2 ) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The estimated fair value of the Company’s financial instruments

not

measured at fair value on a recurring basis is as follows:

	December 31, 2019
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	35,113	$	35,113	$	-	$	-	$	35,113
Loans held for sale		1,220		-		1,220		-		1,220
Net loans		977,490		-		-		974,213		974,213
Bank-owned life insurance		16,511		16,511		-		-		16,511
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848
Accrued interest receivable		3,471		3,471		-		-		3,471
Financial liabilities:
Deposits	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236
Short-term borrowings		5,075		5,075		-		-		5,075
Other borrowings		12,750		-		-		12,783		12,783
Accrued interest payable		917		917		-		-		917

	December 31, 2018
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	107,933	$	107,933	$	-	$	-	$	107,933
Loans held for sale		597		-		597		-		597
Net loans		984,681		-		-		973,124		973,124
Bank-owned life insurance		16,080		16,080		-		-		16,080
Federal Home Loan Bank stock		3,679		3,679		-		-		3,679
Accrued interest receivable		3,633		3,633		-		-		3,633
Financial liabilities:
Deposits	$	1,016,067	$	715,153	$	-	$	298,891	$	1,014,044
Short-term borrowings		90,398		90,398		-		-		90,398
Other borrowings		8,803		-		-		8,827		8,827
Accrued interest payable		744		744		-		-		744

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instruments.

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Note 14 - Employee Benefits - Stock Option Activity (Details) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Outstanding (in shares)	14,900
Outstanding, weighted average exercise price (in dollars per share)	$ 8.78	$ 8.78
Exercised (in shares)	(400)
Exercised, weighted average exercise price (in dollars per share)		$ 8.78
Outstanding (in shares)	14,500	14,900
Outstanding, weighted average exercise price (in dollars per share)	$ 8.78	$ 8.78
Exercisable (in shares)	14,500
Exercisable, weighted average exercise price (in dollars per share)		$ 8.78

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Note 4 - Investment and Equity Securities - Sales of Available for Sale Securities (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Proceeds from Sale of Debt Securities, Available-for-sale	$ 12,324,000	$ 0
Gross realized gains	227,000
Gross realized losses	$ (33,000)

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Note 5 - Loans and Related Allowance for Loan and Lease Losses - Allowance for Loan Losses (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Individually evaluated for impairment			$ 660	$ 1,354
Collectively evaluated for impairment			6,108	6,074
Less allowance for loan and lease losses	$ 7,428	$ 7,190	6,768	7,428
ALLL balance, period start	7,428	7,190
Charge-offs	(1,809)	(1,118)
Recoveries	259	516
Provision	890	840
ALLL balance, period end	6,768	7,428
Commercial And Industrial [Member]
Individually evaluated for impairment			3	667
Collectively evaluated for impairment			453	302
Less allowance for loan and lease losses	969	999	456	969
ALLL balance, period start	969	999
Charge-offs	(519)	(610)
Recoveries	82	287
Provision	(76)	293
ALLL balance, period end	456	969
Real Estate Construction Porfolio Segment [Member]
Individually evaluated for impairment
Collectively evaluated for impairment			97	100
Less allowance for loan and lease losses	100	313	97	100
ALLL balance, period start	100	313
Charge-offs
Recoveries	74	63
Provision	(77)	(276)
ALLL balance, period end	97	100
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Individually evaluated for impairment			30	43
Collectively evaluated for impairment			1,628	1,538
Less allowance for loan and lease losses	1,581	1,760	1,658	1,581
ALLL balance, period start	1,581	1,760
Charge-offs	(523)	(177)
Recoveries	78	128
Provision	522	(130)
ALLL balance, period end	1,658	1,581
Real Estate Mortgage Portfolio Segment [Member] | Commercial Loans [Member]
Individually evaluated for impairment			627	643
Collectively evaluated for impairment			3,902	4,008
Less allowance for loan and lease losses	4,651	4,036	4,529	4,651
ALLL balance, period start	4,651	4,036
Charge-offs	(32)	(111)
Recoveries	17
Provision	(107)	726
ALLL balance, period end	4,529	4,651
Consumer Portfolio Segment [Member]
Individually evaluated for impairment				1
Collectively evaluated for impairment			28	126
Less allowance for loan and lease losses	127	82	$ 28	$ 127
ALLL balance, period start	127	82
Charge-offs	(735)	(220)
Recoveries	8	38
Provision	628	227
ALLL balance, period end	$ 28	$ 127

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Note 15 - Commitments - Leases Costs (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Finance lease cost, Amortization of right-of-use asset	$ 360
Finance lease cost, Interest Expense	132
Finance lease cost, Other	57
Operating lease cost	245
Total lease cost	$ 794

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Note 17 - Regulatory Capital - Capital Ratios (Details)	Dec. 31, 2019	Dec. 31, 2018
Leverage capital, adequately capitalized, ratio	4.00%	4.00%
Tier 1 risk based capital, adequately capitalized, ratio	6.00%	6.00%
Common equity tier 1 capital, adequately capitalized, ratio	4.50%	4.50%
Total risk based capital, adequately capitalized, ratio	8.00%	8.00%
Leverage capital, adequately capitalized plus capital conservation buffer, ratio	4.00%	4.00%
Tier 1 risk based capital, adequately capitalized plus capital conservation buffer, ratio	8.50%	8.50%
Common equity tier 1 capital, adequately capitalized plus capital conservation buffer, ratio	7.00%	7.00%
Total risk based capital, adequately capitalized plus capital conservation buffer, ratio	10.50%	10.50%
Middlefield Banking Company [Member]
Leverage capital, actual, ratio	10.35%	9.60%
Tier 1 risk based capital, actual, ratio	12.12%	11.09%
Common equity tier 1 capital, actual, ratio	12.12%	11.09%
Total risk based capital, actual, ratio	12.79%	11.83%
Leverage capital, well-capitalized, ratio (bank only)	5.00%	5.00%
Tier 1 risk based capital, well-capitalized, ratio (bank only)	8.00%	8.00%
Common equity tier 1 capital, well-capitalized, ratio (bank only)	6.50%	6.50%
Total risk based capital, well-capitalized, ratio (bank only)	10.00%	10.00%
Middlefield Banc Corp [Member]
Leverage capital, actual, ratio	10.23%	10.35%
Tier 1 risk based capital, actual, ratio	12.56%	11.83%
Common equity tier 1 capital, actual, ratio	11.77%	11.04%
Total risk based capital, actual, ratio	13.23%	12.57%

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Note 5 - Loans and Related Allowance for Loan and Lease Losses - Troubled Debt Restructurings Subsequently Defaulted (Details)	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Number of contracts, subsequently defaulted	0	0
Recorded investment, subsequently defaulted	$ 36,000
Real Estate Mortgage Portfolio Segment [Member] | Residential Loan [Member]
Number of contracts, subsequently defaulted		1
Recorded investment, subsequently defaulted		$ 19,000

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Note 18 - Fair Value Disclosure Measurements (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,126	$	-	$	4,126
Obligations of states and political subdivisions		-		82,977		-		82,977
Mortgage-backed securities in government- sponsored entities		-		18,630		-		18,630
Total debt securities		-		105,733		-		105,733
Equity securities in financial institutions		710		-		-		710
Total	$	710	$	105,733	$	-	$	106,443

			December 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	7,471	$	-	$	7,471
Obligations of states and political subdivisions		-		73,093		-		73,093
Mortgage-backed securities in government- sponsored entities		-		17,758		-		17,758
Total debt securities		-		98,322		-		98,322
Equity securities in financial institutions		616		-		-		616
Total	$	616	$	98,322	$	-	$	98,938

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis, Valuation Techniques [Table Text Block]

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,166	$	5,166

			December 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	1,075	$	1,075

Fair Value Measurement Inputs and Valuation Techniques [Table Text Block]

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2019
Impaired loans	$	5,166	Appraisal of collateral (1)	Appraisal adjustments (2)	40.3%	to	47.4%	(41.8%)

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2018
Impaired loans	$	1,075	Appraisal of collateral (1)	Appraisal adjustment (2)	0.0%	to	100.0%	(40.6%)

Fair Value, by Balance Sheet Grouping [Table Text Block]

	December 31, 2019
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	35,113	$	35,113	$	-	$	-	$	35,113
Loans held for sale		1,220		-		1,220		-		1,220
Net loans		977,490		-		-		974,213		974,213
Bank-owned life insurance		16,511		16,511		-		-		16,511
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848
Accrued interest receivable		3,471		3,471		-		-		3,471
Financial liabilities:
Deposits	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236
Short-term borrowings		5,075		5,075		-		-		5,075
Other borrowings		12,750		-		-		12,783		12,783
Accrued interest payable		917		917		-		-		917

	December 31, 2018
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	107,933	$	107,933	$	-	$	-	$	107,933
Loans held for sale		597		-		597		-		597
Net loans		984,681		-		-		973,124		973,124
Bank-owned life insurance		16,080		16,080		-		-		16,080
Federal Home Loan Bank stock		3,679		3,679		-		-		3,679
Accrued interest receivable		3,633		3,633		-		-		3,633
Financial liabilities:
Deposits	$	1,016,067	$	715,153	$	-	$	298,891	$	1,014,044
Short-term borrowings		90,398		90,398		-		-		90,398
Other borrowings		8,803		-		-		8,827		8,827
Accrued interest payable		744		744		-		-		744

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Note 13 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

(Dollar amounts in thousands)	2019		2018
Current payable	$	2,265	$	2,403
Deferred		327		(241	)
Total provision	$	2,592	$	2,162

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

(Dollar amounts in thousands)	2019		2018
Deferred tax assets:
Allowance for loan and lease losses	$	1,288	$	1,327
Supplemental retirement plan		469		454
Investment security basis adjustment		18		18
Nonaccrual interest income		297		389
Accrued compensation		244		222
Deferred origination fees, net		30		-
Net unrealized loss on AFS securities		-		41
Lease liability		1,051		-
Gross deferred tax assets		3,397		2,451
Deferred tax liabilities:
Premises and equipment		583		328
Net unrealized gain on AFS securities		490		-
Net unrealized gain on equity securities		62		1
FHLB stock dividends		139		139
Intangibles		378		342
Mortgage servicing rights		82		75
Deferred origination fees, net		-		13
Acquisition fair value adjustments		253		275
Right of use assets		1,032		-
Other		4		5
Gross deferred tax liabilities		3,023		1,178
Net deferred tax assets	$	374	$	1,273

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

(Dollar amounts in thousands)	2019						2018
				% of						% of
				Pretax						Pretax
	Amount			Income			Amount			Income
Provision at statutory rate	$	3,214			21.0	%	$	3,065			21.0	%
Tax-exempt income		(647	)		(4.2	)%		(622	)		(4.3	)%
Nondeductible interest expense		32			0.2	%		27			0.2	%
Stock-based compensation		-			-	%		(37	)		(0.3	)%
Other		(7	)		(0.1	)%		(271	)		(1.8	)%
Actual tax expense and effective rate	$	2,592			16.9	%	$	2,162			14.8	%

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Note 22 - Selected Quarterly Financial Data (Unaudited) - Selected Quarterly Financial Data (Unaudited) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Total income	$ 13,436	$ 13,885	$ 13,720	$ 13,484	$ 13,459	$ 12,829	$ 12,129	$ 11,940	$ 54,525	$ 50,357
Interest expense	3,128	3,307	3,451	3,254	2,998	2,584	2,287	2,040	13,140	9,909
Net interest income	10,308	10,578	10,269	10,230	10,461	10,245	9,842	9,900	41,385	40,448
Provision for loan losses	460	80	110	240	210	210	210	210
Net interest income after provision for loan losses	9,848	10,498	10,159	9,990	10,251	10,035	9,632	9,690	40,495	39,608
Total noninterest income	1,305	1,105	1,299	1,132	977	954	1,009	788	4,841	3,728
Total noninterest expense	7,378	7,673	7,482	7,500	7,243	7,092	7,063	7,345	30,033	28,743
Income before income tax benefit	3,775	3,930	3,976	3,622	3,985	3,897	3,578	3,133	15,303	14,593
Income tax benefit	634	661	686	611	560	593	481	528	2,592	2,162
Net income	$ 3,141	$ 3,269	$ 3,290	$ 3,011	$ 3,425	$ 3,304	$ 3,097	$ 2,605	$ 12,711	$ 12,431
Net income, basic (in dollars per share)	$ 0.48	$ 0.51	$ 0.51	$ 0.46	$ 0.53	$ 0.51	$ 0.48	$ 0.41	$ 1.96	$ 1.92
Net income, diluted (in dollars per share)	$ 0.49	$ 0.50	$ 0.50	$ 0.46	$ 0.53	$ 0.51	$ 0.48	$ 0.40	$ 1.95	$ 1.91
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share (in shares)	6,423,543	6,458,258	6,502,508	6,498,278	6,478,360	6,468,786	6,451,452	6,440,524	6,470,408	6,459,908
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share (in shares)	6,455,387	6,479,066	6,514,946	6,510,568	6,500,298	6,496,652	6,480,658	6,476,138	6,502,806	6,487,814