MIDDLEFIELD BANC CORP (Form: 10-K, Received: 03/15/2022 16:03:19)

State or Other Jurisdiction of

I.R.S. Employer Identification No.

Incorporation or Organization

15985 East High Street, Middlefield, Ohio

Address of Principal Executive Offices

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, 2021

	☐	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)

	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 ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting 1-Feb

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, 2021 of common stock held by non-affiliates of the registrant was approximately $139.7 million, based on the closing price of $23.60 per share of common stock as reported on the NASDAQ Capital Market.

As of March 15, 2022, there were 5,879,972 shares of common stock issued and outstanding.

Documents Incorporated by Reference Portions of the registrant’s definitive proxy statements for the 2022 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, 2021 are incorporated by reference into Part I and Part II of this report.

MIDDLEFIELD BANC CORP.

YEAR ENDED DECEMBER 31, 2021

INDEX TO FORM 10-K

		Page
Part I

Item 1.	Business	3
Item 1A.	Risk Factors	22
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	31

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 8.	Financial Statements and Supplementary Data	32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	32
Item 9A.	Controls and Procedures	32
Item 9B.	Other Information	32

Part III

Item 10.	Directors, Executive Officers, and Corporate Governance	32
Item 11.	Executive Compensation	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
Item 13.	Certain Relationships and Related Transactions, and Director Independence	33
Item 14.	Principal Accountant Fees and Services	33

Part IV

Item 15.	Exhibits and Financial Statement Schedules	33
Item 16.	Form 10-K Summary	38

SIGNATURES

Part I

Item1 — 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 its subsidiaries. The 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. Several 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

• the effects of the continuing global coronavirus outbreak and disruptions in global or national supply chains.

• 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.

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.

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. On December 31, 2021, 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. On December 31, 2021, 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 the advance approval of the Federal Reserve Bank.

Market Area MBC’s footprint across nine counties is home to 3.9 million people – roughly one third of Ohio’s population – and 38.7% of Ohio’s gross domestic product (“GDP”). 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 MBC’s newer metro markets of Cleveland/Akron and Columbus.

MBC’s eleven Northeast Ohio branches are located in Ashtabula, Cuyahoga, Geauga, Portage, Summit, and Trumbull Counties. MBC’s five Central Ohio branches are located in Delaware County, Franklin County, and Madison County. MBC has a loan production office in Mentor located in Lake County. Lake County is contiguous to Ashtabula, Cuyahoga, and Geauga Counties in our Northeast Ohio market. The most recent FDIC market share data available from June 30, 2021 shows we had a deposit market share of approximately 18.67% in Geauga County, which represented the second largest market share in Geauga County, 5.57% in Ashtabula County, 0.14% in Cuyahoga County, 0.30% in Delaware County, 0.12% in Franklin County, 1.35% in Madison County, 5.03% in Portage County, 0.48 % in Summit County, and 1.63% in Trumbull County. According to the most recent information available from the U.S. Department of Commerce Bureau of Economic Analysis, seven of these nine counties are ranked in the top half of Ohio counties measured by per capita personal income by county for 2018 through 2020.

The economy of MBC’s Northeast Ohio market is centered around manufacturing and agriculture and includes a large Amish population. MBC’s headquarters, main banking office, 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 2020 per capita personal income of $73,958, Geauga County is ranked second highest among Ohio’s 88 counties.

MBC’s market area in Northeast Ohio benefits from the area’s proximity to Cleveland in Cuyahoga County. Cuyahoga County is Ohio’s second most populous county and boasts the second largest economy in Ohio measured by GDP. The most recent data from the Bureau of Economic Analysis indicates Cuyahoga County’s 2020 GDP is $84.3 billion. In 2019 Cuyahoga County’s GDP of $88 billion was greater than the total GDP of 13 states and ranked 31st of 3,108 counties nationally. In analysis of county-level GDP data from the U.S. Bureau of Economic Analysis, the Cleveland State University College of Urban Affairs analyzed per capita gross domestic product for the Cleveland metro area (an area covering Cuyahoga, Geauga, Lake, Lorain and Medina Counties) compared to 14 large metro areas including the seven fastest-growing of the large metro areas nationally from 2001 through 2018. Cuyahoga County ranked 88th for annual GDP growth per capita from 2000 to 2018, ahead of the home counties of cities experiencing greater population growth such as Charlotte, Indianapolis, and Phoenix. In that same time period from 2000 to 2018, Cuyahoga County ranked 474th out of the 500 largest counties in the U.S. for population change.

MBC’s market area in Central Ohio benefits from the area’s proximity to Columbus in Franklin County. Franklin County is Ohio’s most populous county and has the highest GDP of Ohio’s 88 counties. Columbus is the state capital, the largest city in Ohio, and the 14th largest city in the U.S. 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. According to information reported by the Federal Reserve Bank of Cleveland as of November, 2019, the employment growth rate for the Columbus metro area has been greater than Ohio’s employment growth rate, responsible for one in every three new jobs in Ohio. Since 2015, construction has been the fastest-growing sector in the Columbus metro area. Per capita personal income in the Columbus metro area continues to be above the statewide level for Ohio. According to data from Claritas as of November, 2021, the Columbus MSA is projected to have the highest population growth in Ohio over the next five years at 4.15%, and the Columbus MSA is projected to grow by 11.56% over the next five years.

Based on the most recent data available for 2020, Delaware County had the highest per capita personal income at $79,382 among Ohio’s 88 counties, and Delaware County has one of the fastest growing housing markets in the country according to the U.S. Census Bureau’s data on the 100 fastest growing counties with 5,000 or more housing units from July 1, 2018 to July 1, 2019. Union County, which is contiguous to Delaware County, had the 13th fastest-growing housing market in the U.S. during this time period. From 2018 to 2019, the number of housing units in Union County jumped 4%, in part due to growth in Dublin, Plain City and Jerome Township, as well as Honda’s facilities in Marysville.

As a result of the COVID-19 pandemic, the nine Ohio counties in which we operate retail banking centers, Ohio, and the United States generally have experienced a significant increase in unemployment. Ohio’s unemployment rate peaked in April 2020 at 17.3% (non-seasonally adjusted). Since December 2021, unemployment rates have fallen closer to pre-pandemic levels, and in the nine counties where MBC operates retail banking centers, the average unemployment rate remains at 3.3%; a rate lower than the employment rate for the State of Ohio (3.4%) and United States (3.7%). The following table summarizes unemployment percentage rates in the counties where we operate retail banking centers, Ohio, and the US average on a comparative basis as of December 31, 2019, December 31, 2020, and December 31, 2021.

Area	Dec-19		Dec-20		Dec -21		2020- 2021 Change
Ashtabula County		4.9		5.7		4.0		-1.7
Cuyahoga County		3.6		8.3		4.1		-4.2
Delaware County		2.8		3.3		2.3		-1.0
Franklin County		3.2		4.7		2.9		-1.8
Geauga County		3.1		5.6		3.0		-2.6
Madison County		3.1		3.7		2.5		-1.2
Portage County		4.1		4.6		3.2		-1.4
Summit County		4.0		5.2		3.5		-1.7
Trumbull County		5.6		6.4		4.4		-2.0
9 Counties Average		3.8		5.3		3.3		-2.0
Ohio		3.8		5.2		3.4		-1.8
United States		3.4		6.5		3.7		-2.8

Ohio Department of Job and Family Services Bureau of Labor Market Information non-seasonally adjusted unemployment rates as of December 2019, December 2020, and December 2021.The December 2021 unemployment rate is classified as preliminary as of January 2022.

The average unemployment rate of MBC’s nine-county market area is slightly below the state of Ohio’s unemployment rate. Prior to 2021, Ohio and the bank’s market area had unemployment rates lesser than the national average. As of December 2021, Ohio and the bank’s market area continue to have unemployment rates that are less than the national average. Ashtabula, Cuyahoga, and Trumbull are the only counties in MBC’s market area with unemployment rates above the national average as of December 2021. With a 4.2% decrease on a year-over-year basis, Cuyahoga County experienced the most significant change in the unemployment rate from December 2020 to December 2021.

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

Lending — Loan Portfolio Composition and Activity. The Bank makes residential and commercial mortgage, home equity lines of credit, secured and unsecured consumer installment, commercial and industrial, and real estate construction loans for owner-occupied, non-owner occupied, multifamily, 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, 2021, MBC’s 15%-of-capital limit on loans to a single borrower was approximately $21.5 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. These loans are still secured by real estate to provide the Bank with an extra security measure. 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 various purposes, including personal, home improvements, revolving credit lines, autos, boats, and recreational vehicles.

The following table presents 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.

			Due after one		Due after five
	Due in one		years through		years through		Due after
	year or less		five years		fifteen years		fifteen years		Total
(Dollars in thousands)
Commercial real estate:
Owner occupied	$	7,668	$	20,568	$	61,699	$	21,535	$	111,470
Non-owner occupied		23,999		76,549		145,395		37,675		283,618
Multifamily		5,588		7,296		12,129		6,176		31,189
Residential real estate		545		4,375		38,472		196,697		240,089
Commercial and industrial		18,090		72,643		39,027		19,052		148,812
Home equity lines of credit		796		6,142		19,344		78,073		104,355
Construction and other		6,799		18,205		16,887		12,257		54,148
Consumer installment		5,678		2,099		233		-		8,010

	$	69,163	$	207,877	$	333,186	$	371,465	$	981,691

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 the dollar amount of all loans due after December 31, 2022 that have predetermined interest rates and the dollar amount of all loans due after December 31, 2022 that have floating or adjustable rates.

	Fixed		Adjustable
	Rate		Rate		Total
(Dollars in thousands)
Commercial real estate:
Owner occupied	$	34,941	$	68,861	$	103,802
Non-owner occupied		112,781		146,838		259,619
Multifamily		7,242		18,359		25,601
Residential real estate		81,905		157,639		239,544
Commercial and industrial		93,921		36,801		130,722
Home equity lines of credit		18		103,541		103,559
Construction and other		4,347		43,002		47,349
Consumer installment		2,332		-		2,332

	$	337,487	$	575,041	$	912,528

Residential Real Estate Loans A significant portion of the Bank’s lending consists of origination of residential loans secured by 1-4 family real estate located in Ashtabula, Cuyahoga, Delaware, Franklin, Geauga, Madison, Portage, Summit, and Trumbull counties. Residential real estate loans approximated $240.1 million or 24.5% of the Bank’s total loan portfolio on December 31, 2021.

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 76.1% of the residential mortgage loan portfolio has an adjustable rate and is secured by 1-4 family real estate on December 31, 2021. The Bank originates variable-rate and fixed-rate, single-family mortgage loans. Generally, the fixed-rate mortgage loans are underwritten according to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines and sold to the agency. Upon the sale to Freddie Mac, the servicing rights are retained and are done so 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.

On December 31, 2021, residential real estate loans of approximately $1.6 million were non-accruing, representing 0.7% of the residential real estate loan portfolio. On December 31, 2020, residential real estate loans of approximately $2.5 million were non-accruing on that date, representing 1.1% of the residential mortgage loan portfolio.

Home Equity Lines of Credit Home equity lines of credit comprise variable-rate home equity lines of credit as well as closed-end home equity installment loans. The Bank’s home equity credit policy generally allows for a loan of up to 85% of the combined loan-to-value ratio (CLTV) when we have the first lien or the HELOC is in the first position, less the principal balance of the outstanding first mortgage loan. The policy also allows a maximum 80% CLTV for a HELOC, where we do not have the first lien position. The Bank’s home equity loans generally have terms of 20 years. The credit performance of most of the home equity lines of credit portfolio where we hold the first lien position is superior to the portion of the portfolio where we have the second lien position but do not hold the first lien. Lien position information is generally determined at the time of origination and monitored ongoing for risk management purposes.

On December 31, 2021, the Bank had approximately $104.4 million in its home equity lines of credit portfolio, representing 10.6% of total loans. On December 31, 2021, home equity lines of credit of approximately $121,000 were non-accruing and represented 0.1% of the home equity lines of credit portfolio. On December 31, 2020, the Bank had approximately $112.5 million in its home equity lines of credit portfolio, representing 10.2% of total loans. On December 31, 2020, home equity lines of credit of approximately $422,000 were non-accruing and represented 0.4% of the home equity lines of credit portfolio

Commercial and Commercial Real Estate Loans

The Bank’s commercial and commercial real estate 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, non-owner occupied business properties, multi-family residential properties, 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 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 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.

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 $750,000 or more. Ongoing financial information is generally required for any commercial relationship where the exposure is $250,000 or more.

The fair value of commercial loan collateral must exceed the Bank’s exposure. For this purpose, fair value is determined by independent appraisal or 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 agencies, 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 security measure. Risks associated with loans secured by real estate include fluctuating land values, changing local economic conditions, changes in tax policies, a concentration of loans within a limited geographic area, and pandemic-related effects.

On December 31, 2021, commercial and commercial real estate loans totaled $575.1 million, or 58.6% of the Bank’s total loan portfolio. Commercial and industrial loans include $34.1 million in Paycheck Protection Program (“PPP”) loans, which provide relief to small businesses affected by the COVID-19 pandemic. On December 31, 2021, commercial and commercial real estate loans of approximately $3.0 million were non-accruing and represented 0.5% of the commercial and commercial real estate loan portfolios. On December 31, 2020, commercial and commercial real estate loans totaled $684.2 million, or 62.0% of the Bank’s total loan portfolio. Commercial and industrial loans include $116.1 million in Paycheck Protection Program (“PPP”) loans, which provide relief to small businesses affected by the COVID-19 pandemic. On December 31, 2020, commercial and commercial real estate loans of approximately $4.7 million were non-accruing and represented 0.7% of the commercial and commercial real estate loan portfolios.

Construction and Other

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

On December 31, 2021, real estate construction loans totaled $54.1 million, or 5.5% of the Bank’s total loan portfolio. There were no loans in the construction and other portfolio that were 90 days delinquent or non-accruing on that date. On December 31, 2020, real estate construction and other loans totaled $63.6 million, or 5.8% of the Bank’s total loan portfolio. There were no loans in the construction and other portfolio that were 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 various purposes, including personal, home improvement, revolving credit lines, automobiles, 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 is typically required for consumer loans having terms exceeding five years.

On December 31, 2021, the Bank had approximately $8.0 million in its consumer installment loan portfolio, representing 0.8% of total loans. On December 31, 2021, consumer installment loans of approximately $182,000 were non-accruing and represented 2.3% of the consumer installment loan portfolio. On December 31, 2020, the Bank had approximately $9.8 million in its consumer installment loan portfolio, representing 0.9% of total loans. On December 31, 2020, consumer installment loans of approximately $224,000 were non-accruing and represented 2.3% of the consumer installment loan portfolio

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

When a loan request is made, the Bank reviews the application, credit bureau reports, property appraisals or evaluations, financial information, verifications of income, and other documentation concerning the borrower's creditworthiness, 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 officer’s loan approval authority. Loans exceeding an individual officer’s approval authority are submitted to an Officer’s Loan Committee, which can approve loans up to $4,000,000. The Board of Directors’ Loan Committee acts as approval authority for exposures over $4,000,000 and up to $7,500,000. Loans exceeding $7,500,000 require approval from the entire 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 varies with the volume and type of loans and commitments made and with competitive and economic conditions. Note 1 to the Consolidated Financial Statements discusses how loan fees and income are recognized for financial reporting purposes.

Mortgage Banking Activity The Bank originates residential 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, 2021, the Bank recorded gains of $1.2 million on the sale of $35.1 million in loans receivable originated for sale. During the year ended December 31, 2020, the Bank recorded gains of $1.5 million on the sale of $44.3 million in loans receivable originated for sale. These 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 depends 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 repayment cannot be expected within a reasonable time, or a repayment agreement is not entered into, 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, it is classified as OREO until it is sold. When a 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. If fair value, less cost to sell, is less than carrying value, then carrying value is reduced through the allowance for loan and lease losses (“ALLL”) immediately before booking as OREO. 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 a 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 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 the collection of principal in full — based on 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 the 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.

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, government-guaranteed mortgage-backed securities, or subordinated debt of other financial institutions. The Bank generally does not invest in securities 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 per 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 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.

The contractual maturity of investment debt securities is as follows:

	December 31, 2021
	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	$	-		-	$	-		-		$	32,300		4.79	%	$	-		-		$	32,300		4.79	%	$	32,537
Obligations of states and political subdivisions:
Taxable		-		-		500		5.30	%		-		-			-		-			500		5.30	%		502
Tax-exempt **		-		-		1,179		4.43	%		6,793		3.86	%		114,905		2.96	%		122,877		3.03	%		126,843
Mortgage-backed securities in
government-sponsored entities		-		-		36		2.98	%		1,869		2.00	%		8,235		2.00	%		10,140		2.00	%		10,317
Total	$	-		-	$	1,715		4.65	%	$	40,962		4.51	%	$	123,140		2.90	%	$	165,817		3.32	%	$	170,199

** 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.

Yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax-equivalent basis. The average yield is determined based on the current book price and projected yield of each investment category, assuming the yield to call or maturity.

As of December 31, 2021, the Bank held 43,994 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 to the FHLB or to another member institution. Member institutions must 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 on December 31, 2021, was $4.4 million.

Sources of Funds —Deposit accounts are a significant source of funds for the Bank. The Bank offers many deposit products to attract commercial and regular consumer checking and savings customers, including standard and money market savings accounts, NOW accounts, a variety of fixed-maturity, fixed-rate certificates with maturities ranging from 3 to 60 months, and brokered deposits. These accounts earn interest at rates established by management based on liquidity, competitive market factors, and management’s desire to increase certain types or maturities. 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 uninsured time deposits as of December 31, 2021, including certificates of deposit, by the time remaining until maturity.

(Dollar amounts in thousands)	Amount		Percent of Total


Within three months	$	7,506		22.46	%
Beyond three but within six months		4,778		14.30	%
Beyond six but within twelve months		10,463		31.31	%
Beyond one year		10,672		31.94	%

Total	$	33,419		100.00	%

The following table shows on a consolidated basis the amount of uninsured deposits as of December 31, 2021 by category:

	December 31,		December 31,
	2021		2020		$ change			% change

Noninterest-bearing demand	$	118,231	$	102,544	$	15,687			15.3	%
Interest-bearing demand		67,541		74,163		(6,622	)		-8.9	%
Money market		108,771		125,403		(16,632	)		-13.3	%
Savings		36,150		48,771		(12,621	)		-25.9	%
Time		33,419		74,891		(41,472	)		-55.4	%
Total deposits	$	364,112	$	425,772	$	(61,660	)		-14.5	%

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 on some investments and loan balances. On December 31, 2021, MBC had no FHLB borrowings outstanding. The Bank also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.

Competition

The banking and financial services industry is highly competitive. We compete with many 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 some 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, have more significant resources than we do, and compete aggressively. 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, concerning fees charged, interest rates, and pricing, we believe that the Bank’s commitment to personal service, innovation, and involvement in the communities that the Bank serves, 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 and Human Capital Resources

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development are advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements, and educational reimbursement programs. Reimbursement is available to employees enrolled in a pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to our business, in compliance with Section 127 of the Internal Revenue Code, and for seminars, conferences, and other training events employees attend in connection with their job duties.

The safety, health, and wellness of our employees is a top priority. The Company continued to prioritize the health and safety of clients and associates in 2021, although without the significant disruptions to our workforce that occurred in 2020. Banking centers offered drive- through services without interruption, while lobbies were fully open and accessible to clients. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum, and sponsoring various wellness programs.

Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a low-cost provider. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages, and providing valuable fringe benefits aids in the retention of our top-performing employees.

As of December 31, 2021, the Bank had 185 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. 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 must 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 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 held in the form of vault cash or a noninterest-bearing account (or pass-through account) at a Federal Reserve Bank, the effect of the reserve requirement is to reduce an institution’s earning assets.

The Federal Reserve Board and the FDIC have extensive authority to prevent and 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 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 associated with the business of banking, the Federal Reserve considers whether the performance of the actions 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 in which a bank holding company may engage while preserving existing authority for bank holding companies to engage in activities 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 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 the authority to decide that other activities are also financial 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 the enactment of the Gramm-Leach-Bliley Act. Federal Reserve Board rules require that all 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.

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.

The Federal Reserve has issued regulations under the Bank Holding Company Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary bank. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary bank during periods of financial stress or adversity. Under this requirement, we are expected to commit resources to support our Bank, including when we may not be in a financial position to provide such help.

Our Company is a legal entity separate and distinct from its bank subsidiary. As a bank holding company, we are subject to certain restrictions on our ability to pay dividends under applicable banking laws and regulations. Federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. Federal Reserve policy provides that a bank holding company should not pay dividends unless (1) the bank holding company’s net income over the last four quarters (net of dividends paid) is sufficient to fund the dividends fully, (2) the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Bank holding companies also are required to consult with the Federal Reserve before materially increasing dividends. The Federal Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.

Since all of our income comes from dividends from our Bank, which is also the primary source of our liquidity, our ability to pay dividends and repurchase shares depends upon our receipt of dividends from our Bank.

Capital — Risk-Based Capital Requirements The Federal Reserve Board and the FDIC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and financial institutions. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or 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 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 composed of capital instruments and related surplus meeting specified requirements. It 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 of 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 capital levels are required for asset categories believed to present more significant 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 particular 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 institution 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, 2021, the Bank exceeded the regulatory requirement for the “capital conservation buffer.”

The FDIC also employs a market risk component in calculating 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 into account 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 excessive 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 undue 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.

Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) required that the community bank leverage ratio be temporarily lowered to 8%. The FDIC issued an interim final rule, effective on April 23, 2020, that implements a temporary 8% community bank leverage ratio requirement, as mandated by the CARES Act. Under the interim final rule, a community banking organization that temporarily fails to meet any of the qualifying criteria, including the 8% community bank leverage ratio requirement, generally will still be considered well-capitalized provided that the banking organization maintains a leverage ratio equal to 7% or greater. A banking organization that ceases to be a qualifying institution after the end of the grace period or reports a leverage ratio of less than 7% must comply with the generally applicable capital requirements and file the appropriate regulatory reports. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for 2021 and 9% after that.

Prompt Corrective Action. To resolve the problems of undercapitalized financial 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 an unsafe or unsound condition or practice warrants that treatment.

A financial institution’s capital classification can significantly affect its operations 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 harm the bank’s liquidity. An insured depository institution is subject to additional restrictions at each successively lower capital category. 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 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 must appoint a receiver or conservator shortly after an institution becomes critically undercapitalized. For a complete discussion of the Company and the Bank’s actual capital amounts and ratios, refer to Note 17 of the “Notes to Consolidated Financial Statements” of this Annual Report.

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 to pay 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 to pay 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. The FDIC’s capital maintenance requirements and prompt corrective action rules may also affect a bank's ability to pay dividends. 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 fund the dividends fully and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19) and stimulate the economy. The law had several provisions relevant to depository institutions, including:

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Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes;

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As previously noted, temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;

	●	The ability of a borrower of a federally backed mortgage loan experiencing financial hardship due to the COVID-19 pandemic to request forbearance from paying the mortgage by submitting a request to the borrower’s servicer affirming the borrower’s financial hardship during the COVID-19 emergency. Federally backed mortgage loans include single-family (1-4 units) residential mortgage loans owned or securitized by Fannie Mae or Freddie Mac or insured, guaranteed, or otherwise assisted by the federal government. The term includes mortgages insured by the Federal Housing Administration and the Department of Veterans Affairs and the Department of Agriculture’s direct and guaranteed loans.

		Although the CARES Act established forbearance protection through December 31, 2020, the Biden administration extended the program for mortgages insured by the Federal Housing Administration, the Department of Veterans Affairs, and for the Department of Agriculture’s direct and guaranteed loans until June 30, 2021. The Federal Housing Finance Agency extended the program for residential mortgage loans owned or securitized by Fannie Mae or Freddie Mac through June 30, 2021. During the forbearance, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account.

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The ability of a borrower of a multi-family federally backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. A forbearance would be granted for up to 30 days, which could be extended for up to two additional 30-day periods upon the borrower's request. Later extensions were made available, for a total of six months, for certain federally backed multi-family mortgage loans. During the time of the forbearance, the multi-family borrower could not evict or initiate the eviction of a tenant or charge any late fees, penalties, or other charges to a tenant for late payment of rent. Additionally, a multi-family borrower that received a forbearance could not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provided the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.

The Paycheck Protection Program The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided $659 billion to fund loans by depository institutions to eligible small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. These loans are 100% federally guaranteed (principal and interest). An eligible business could apply under the Paycheck Protection Program (“PPP”) during the applicable covered period and receive a loan up to 2.5 times the organization’s average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term (or five-year loan term for loans made after June 5, 2020) to maturity; and (c) principal and interest payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or notifies the lender no loan forgiveness is allowed.

If the borrower did not submit a loan forgiveness application to the lender within 10 months following the end of the 24-week loan forgiveness covered period (or the 8-week loan forgiveness covered period with respect to loans made prior to June 5, 2020 if such covered period is elected by the borrower), the borrower would begin paying principal and interest on the PPP loan immediately after the 10-month period. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be fully reduced by the loan forgiveness amount under the PPP loan so long as, during the applicable loan forgiveness covered period, employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) became law, expanding the authority to make loans under the PPP through March 31, 2021, and revising specific PPP requirements. The Economic Aid Act expands PPP eligibility to include eligible 501(c)(6) organizations, housing cooperatives, and direct marketing organizations and provides greater flexibility for businesses with seasonal employees. The Economic Aid Act also permits a second round of funding for specific borrowers who have already received a PPP loan. As of December 31, 2021, the Company had $212.6 million in PPP loan originations with the SBA's forgiveness of $178.4 million.

The Economic Aid Act also extended the provisions of the CARES Act that suspended requirements under generally accepted accounting principles in the United States (“GAAP”) for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspended any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, and (ii) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.

Sarbanes-Oxley Act of 2002 The goals of the Sarbanes-Oxley Act enacted in 2002 are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and 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 months 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. Banks' premium for deposit insurance is based upon a risk classification system established by the FDIC.

Effective July 1, 2016, the FDIC changed the way banks are assessed for deposit insurance. The FDIC has eliminated the risk categories for “small 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 1 or 2 ratings has been reduced to 1.5 to 16 basis points and the maximum assessment rate for established small banks with CAMELS 3 through 4 ratings is 40 basis points.

Effective June 26, 2020, the FDIC adopted a Final Rule to mitigate the effect on deposit insurance assessments when an insured institution participates in the PPP. Under the rule, the FDIC provides adjustments to the risk-based premium formula and certain of its risk ratios, and provides an offset to an insured institution’s total assessment amount due for the increase to its assessment base attributable to participation in the PPP.

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.

Transactions with Affiliates Transactions between an insured bank, such as the Bank, and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and implementing regulations. 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:

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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,

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

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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

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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 the Federal Reserve’s Regulation O. 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. In addition, 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:

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

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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.

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 criteria consider 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,

	-	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.

In November, 2021, the FDIC, the OCC and the Federal Reserve Board issued a final rule requiring banking organizations that experience a computer-security incident to notify a bank’s primary federal bank regulator. Compliance begins May 1, 2022. A computer-security incident occurs when there is violation or imminent threat of a violation to banking security policies and procedures, or when actual or potential harm to the confidentiality, integrity, or availability of an information system or the information occurs. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and no later than 36 hours after the bank determines a computer-security incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into bigger incidents. This rule also requires bank service providers to notify their customers of a computer-security incident.

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.

Item 1A — Risk Factors

Risks Related to the Company’s Business

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.

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 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.

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.

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, 2021, approximately $633.7 million, or 54.3%, 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 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.

We rely extensively on models in managing many aspects of our business, and these models may be inaccurate or misinterpreted. We rely extensively on models in managing many aspects of our business, including liquidity and capital planning, credit and other risk management, pricing, and reserving. The models may prove in practice to be less predictive than we expect. The errors or inaccuracies in our models may be material, and could lead us to make wrong or sub-optimal decisions in managing our business, and this could have a material adverse effect on our business, financial condition or 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.

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 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, 2021, we had $16.5 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 Relating to Economic and Market Conditions

The economic impact of the ongoing COVID-19 outbreak could adversely affect our financial condition and results of operations. The ongoing COVID-19 pandemic and measures taken to limit COVID-19’s spread adversely affect our business, customers, employees, and third-party service providers.

COVID-19 has negatively impacted global, national and local economies, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels and decreased consumer confidence, generally. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering-in-place requirements in many states and communities and may result in similar restrictions in the future. As a result, the demand for our products and services have been and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly if businesses remain required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with COVID-19. The pandemic could also affect the stability of our deposit base as well as our capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue and cause us to incur additional expenses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold as well as reductions in other comprehensive income. The extent of the impact of COVID-19, including the rise of new strains, on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

government action in response to the COVID-19 pandemic and its effects on our business and operations, including vaccination mandates and their effects on our workforce, human capital resources and infrastructure;

declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by the Company;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

cyber security risks are increased as the result of an increase in the number of employees working remotely;

the unanticipated loss or unavailability of key associates due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors;

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs for bank failures.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Even after COVID-19 has subsided, the U.S. economy will likely require time to recover, the length of which is unknown and during which the U.S. may experience a recession or market correction. We may continue to experience materially adverse impacts to our business as a result of any such recession or market correction.

We continue to closely monitor COVID-19 and related risks as they evolve. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have. The ultimate impact of the outbreak, the permanence of operating conditions that developed during the pandemic, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume are highly uncertain and subject to change. The effects could have a material impact on our results of operations and heighten many of the other risk factors identified in this item

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. The wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. Our profitability depends upon our continued ability to successfully compete in our market areas. 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.

Changing interest rates have a direct and immediate impact on financial institutions. 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 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 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 Ashtabula, Cuyahoga, Delaware, Franklin, Geauga, Madison, Portage, Summit, and Trumbull 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.

Volatility and uncertainty related to inflation and the effects of inflation, which may lead to increased costs for businesses and consumers and potentially contribute to poor business and economic conditions generally, may also enhance or contribute to some of the risks discussed herein. For example, higher inflation, or volatility and uncertainty related to inflation, could reduce demand for the Company’s products, adversely affect the creditworthiness of the Company’s borrowers or result in lower values for the Company’s investment securities and other interest-earning assets.

Risks Associated with the Company’s Common Stock

The Company may issue additional shares of its common stock in the future, which could dilute a shareholder's ownership of common stock. The Company's articles of incorporation authorize its Board of Directors, without shareholder approval, to, among other things, issue additional shares of common stock. The issuance of any additional shares of common stock could be dilutive to a shareholder's ownership of Company common stock. To the extent that the Company issues options or warrants to purchase common stock in the future and the options or warrants are exercised, the Company's shareholders may experience further dilution. Holders of shares of Company common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares and, therefore, shareholders may not be permitted to invest in future issuances of Company common stock.

If an entity holds as little as a 5% interest in our outstanding securities, that entity could, under certain circumstances, be subject to regulation as a "bank holding company." Any entity, including a "group" composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a "controlling influence" over us, may be subject to regulation as a "bank holding company" in accordance with the Bank Holding Company Act of 1956. In addition, any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act to acquire or retain 5% or more of our outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder's investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.

Anti-takeover provisions could delay or prevent an acquisition or change in control by a third party. Provisions of the Ohio General Corporation Law, our Amended and Restated Articles of Incorporation, and our Code of Regulations, including a staggered board and supermajority voting requirements, could make it more difficult for a third party to acquire control of us or could have the effect of discouraging a third party from attempting to acquire control of us.

Risks Related to the Legal and Regulatory Environment

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. Supervision and regulation affect 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.

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.

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.

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. In July 2017, the United Kingdom Financial Conduct Authority (the “FCA”), 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. Subsequently in November 2020 the FCA proposed end dates immediately following the December 31, 2021 publication for the one-week and two-month LIBOR settings, and the June 30, 2023 publication for other LIBOR tenors. These announcements indicate that the continuation of LIBOR on the current basis cannot and will not be guaranteed after December 31, 2021 or June 30, 2023, as applicable. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, a general consensus exists that in the U.S. the Secured Overnight Financing Rate (SOFR) index will be an acceptable alternative to LIBOR. The language in our LIBOR-based contracts and financial instruments have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, our LIBOR-based contracts and financial instruments may provide a procedure for selecting a substitute index or indices for the calculation of interest rates. The implementation of a substitute index or indices for the calculation of interest rates under our LIBOR-based contracts and financial instruments may result in our incurring significant expenses in effecting the transition and may result in disputes or litigation over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our 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.

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.

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.

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, 2021, non-owner occupied commercial real estate loans (including construction, land, and land development loans) represent 255.5% of total risk-based capital and the Bank’s commercial real estate loan portfolio has increased by approximately 16.2% during the prior 36 months. Construction, land, and land development loans represent 36.1% of total risk-based capital as of December 31, 2021. Management has extensive experience in commercial real estate lending. Management has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive capital planning policy, which includes pro forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well-capitalized ratios.

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 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.

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, 2021, MBC could have declared dividends of approximately $7.9 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.

General Risk Factors

Climate change, natural disasters, acts of war or terrorism, the impact of pandemics or epidemics, 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 effects of coronavirus on international trade (including supply chains and export levels), travel, employee productivity and other economic activities had a destabilizing effect on financial markets and economic activity during 2020, continuing through 2021. In addition, coronavirus and the extent to which it has spread has affected, and may continue to affect, international trade (including supply chains and export levels), travel, employee productivity and other economic activities. The continuation of the coronavirus pandemic 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.

Item1B — Unresolved Staff Comments

Not applicable.

Item2 — 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 banking centers and one administrative office as listed below:

●

branch offices in Middlefield (two offices), Chardon, and Newbury in Geauga County;

●

an administrative office in Middlefield in Geauga County;

●

branch offices in Garrettsville and Mantua in Portage County;

●

a branch office in Orwell in Ashtabula County;

●

a branch office in Cortland in Trumbull County;

●

branch offices in Dublin and Westerville in Franklin County;

●

a loan production office in Mentor in Lake County;

●

branch offices in Sunbury and Powell in Delaware County;

●

branch offices in Beachwood and Solon in Cuyahoga County;

●

a branch office in Twinsburg in Summit County;

●

a branch office in Plain City in Madison County.

On December 31, 2021, the net book value of the Bank’s investment in premises and equipment totaled $17.3 million.

Item3 — 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 Company's financial condition or the subsidiary bank, either individually or in the aggregate.

Item4 — Mine Safety Disclosures

Not applicable.

Part II

Item5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Details of repurchases of Company common stock during the fourth quarter of 2021 are included in the following table:

2021 period In thousands, except per share data	Total shares purchased		Average price paid per share		Total shares purchased as part of a publicly announced program		Maximum number of shares that may yet be purchased under the program

October 1- October 31		74,242	$	24.14		328,039		179,655
November 1- November 30		63,678	$	26.05		391,717		115,977
December 1- December 31		28,426	$	24.99		420,143		87,551
Total		166,346	$	25.05

Our common stock is traded on the NASDAQ Capital Market under the symbol “MBCN.” At the close of business on December 31, 2021, there were approximately 949 shareholders of record. Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. Our Board of Directors has consistently declared cash dividends on our common stock. Any dividends declared and paid in the future would depend upon several factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurance can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipts of dividends from the Bank, which are restricted by banking regulations.

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 2021 Annual Report to Shareholders and is incorporated herein by reference.

Item6 — Selected Financial Data

Not applicable.

Item7 — 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 2021 Annual Report to Shareholders and is incorporated herein by reference.

Item7A — Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item8 — 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. (PCAOB: 00074) appear in the Company’s 2021 Annual Report to Shareholders and are incorporated herein by reference.

Item9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

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, has 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 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 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, 2021, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Item9B — Other Information

None

Part III

Item10 — Directors, Executive Officers, and Corporate Governance

Incorporated by reference to the definitive proxy statement for the 2022 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2021.

The Company’s Code of Ethics is available on the corporate website 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 on this internet address.

Item11 — Executive Compensation

Item12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item13 — Certain Relationships and Related Transactions, and Director Independence

Item14 — Principal Accountant Fees and Services

Part IV

Item15 — Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

Index to Consolidated Financial Statements:
Consolidated Financial Statements as of December 31, 2021 and 2020 and for each of the two years in the period ended December 31, 2021:
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 Item601 of RegulationS-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

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*	[reserved]

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**	Compensation Agreement between Middlefield Banc Corp. and Michael C. Ranttila	filed herewith

10.4.7*	Change in Control Agreement between Middlefield Banc Corp. and Michael C. Ranttila	Incorporated by reference to Exhibit 10.4.7 of Middlefield Banc Corp.’s Form 10-K Current Report filed on March 12, 2021

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

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

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	Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.24**	Amended Executive Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.25**	Amended Executive Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.26**	Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.26 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.27**	Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.27 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.28**	Executive Deferred Compensation Agreement with Charles O. Moore	Incorporated by reference to Exhibit 10.28 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.29*	[reserved]

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

10.32**	Executive Deferred Compensation Agreement with Michael C. Ranttila	Incorporated by reference to Exhibit 10.32 of Middlefield Banc Corp.’s Form 10-K Current Report filed on March 12, 2021

13	Portions of Annual Report to Shareholders for the year ended December 31, 2020 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

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***	Inline XBRL Instance	furnished herewith

101.SCH***	Inline XBRL Taxonomy Extension Schema	furnished herewith

101.CAL***	Inline XBRL Taxonomy Extension Calculation	furnished herewith

101.DEF***	Inline XBRL Taxonomy Extension Definition	furnished herewith

101.LAB***	Inline XBRL Taxonomy Extension Labels	furnished herewith

101.PRE***	Inline XBRL Taxonomy Extension Presentation	furnished herewith

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* 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.

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 15, 2022

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 15, 2022
Thomas G. Caldwell
President, Chief Executive Officer, and Director

/s/ Donald L. Stacy				March 15, 2022
Donald L. Stacy, Treasurer and Chief Financial Officer
(Principal accounting and financial officer)

/s/ Carolyn J. Turk				March 15, 2022
Carolyn J. Turk, Director

/s/ James R. Heslop, II				March 15, 2022
James R. Heslop, II, Executive Vice President,
Chief Operating Officer, and Director

/s/ Kenneth E. Jones				March 15, 2022
Kenneth E. Jones, Director

/s/ James J. McCaskey				March 15, 2022
James J. McCaskey, Director

/s/ William J. Skidmore				March 15, 2022
William J. Skidmore, Chairman of the Board

/s/ Kevin A. DiGeronimo				March 15, 2022
Kevin A. DiGeronimo, Director

/s/ Darryl E. Mast				March 15, 2022
Darryl E. Mast, Director

/s/ Thomas W. Bevan				March 15, 2022
Thomas W. Bevan, Director

/s/ Michael C. Voinovich				March 15, 2022
Michael C. Voinovich, Director

Exhibit 10.4.6

74 0 0 10,000,000 10,000,000 7,330,548 7,308,685 5,888,737 6,379,323 1,441,811 929,362 58,200 0.6 512,449 0.69 3 0 10 0 0 0 0 0 0 15.1 10 0 October 30, 2034 June 1, 2040 January 28, 2021 January 28, 2021 December 21, 2037 December 21, 2037 0 2018 2019 2020 2021 6 3 320,000 10 10 0 25.0 72.2 36.6 17.6 48.5 22.7 0 Not within scope of ASC 606 All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. From services offered by the Company through it's servicing partnership with LPL Financial Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs that are not identifiable, less any associated allowance. PPPLF (Paycheck Protection Program Liquidity Facility) borrowings were used to fund PPP loans. This was paid off in 2021. Maturity range and interest rates are as of December 31, 2020. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. 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Exhibit 13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders 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, 2021 and 2020; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for 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, 2021 and 2020, 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.

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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

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. 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.

Basis for Opinion (Continued)

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses (ALL) – Qualitative Factors

Description of the Matter

The Company’s loan portfolio totaled $981.7 million as of December 31, 2021, and the associated ALL was $14.3 million. As discussed in Notes 1 and 5 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.

We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.

How We Addressed the Matter in Our Audit

We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.

To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments, including the potential effect of COVID-19 on the adjustments.

Allowance for Loan Losses (ALL) – Qualitative Factors (Continued)

How We Addressed the Matter in Our Audit (Continued)

Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data, third-party macroeconomic data, and peer bank data and considered the existence of new or contrary information. We also compared the ALL to a range of historical losses to evaluate the ALL, including the reasonableness of qualitative adjustments. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the COVID-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors.

We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.

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

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

Cranberry Township, Pennsylvania

March 15, 2022

MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)

	December 31,
	2021			2020

ASSETS
Cash and due from banks	$	97,172		$	92,874
Federal funds sold		22,322			19,543
Cash and cash equivalents		119,494			112,417
Equity securities, at fair value		818			609
Investment securities available for sale, at fair value		170,199			114,360
Loans held for sale		1,051			878
Loans:
Commercial real estate:
Owner occupied		111,470			103,121
Non-owner occupied		283,618			309,424
Multifamily		31,189			39,562
Residential real estate		240,089			233,995
Commercial and industrial		148,812			232,044
Home equity lines of credit		104,355			112,543
Construction and other		54,148			63,573
Consumer installment		8,010			9,823
Total loans		981,691			1,104,085
Less: allowance for loan and lease losses		14,342			13,459
Net loans		967,349			1,090,626
Premises and equipment, net		17,272			18,333
Goodwill		15,071			15,071
Core deposit intangibles		1,403			1,724
Bank-owned life insurance		17,060			16,938
Other real estate owned		6,992			7,387
Accrued interest receivable and other assets		14,297			13,636

TOTAL ASSETS	$	1,331,006		$	1,391,979

LIABILITIES
Deposits:
Noninterest-bearing demand	$	334,171		$	291,347
Interest-bearing demand		196,308			195,722
Money market		177,281			198,493
Savings		260,125			243,888
Time		198,725			295,750
Total deposits		1,166,610			1,225,200
Other borrowings		12,901			17,038
Accrued interest payable and other liabilities		6,160			5,931
TOTAL LIABILITIES		1,185,671			1,248,169
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 7,330,548 and 7,308,685 shares issued; 5,888,737 and 6,379,323 shares outstanding		87,131			86,886
Retained earnings		83,971			69,578
Accumulated other comprehensive income		3,462			4,284
Treasury stock, at cost; 1,441,811 and 929,362 shares		(29,229	)		(16,938	)
TOTAL STOCKHOLDERS' EQUITY		145,335			143,810

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,331,006		$	1,391,979

See accompanying notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands, except per share data)

	Year Ended December 31,
	2021		2020
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	47,896	$	49,003
Interest-earning deposits in other institutions		90		118
Federal funds sold		3		22
Investment securities:
Taxable interest		1,679		909
Tax-exempt interest		2,565		2,472
Dividends on stock		102		114
Total interest and dividend income		52,335		52,638

INTEREST EXPENSE
Deposits		3,913		8,962
Short-term borrowings		-		79
Other borrowings		152		209
Total interest expense		4,065		9,250

NET INTEREST INCOME		48,270		43,388

Provision for loan losses		700		9,840

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		47,570		33,548

NONINTEREST INCOME
Service charges on deposit accounts		3,425		2,539
Gains (losses) on equity securities		209		(101	)
Earnings on bank-owned life insurance		546		427
Gain on sale of loans		1,240		1,487
Revenue from investment services		727		526
Other income		1,059		1,112
Total noninterest income		7,206		5,990

NONINTEREST EXPENSE
Salaries and employee benefits		17,151		15,835
Occupancy expense		2,178		2,158
Equipment expense		1,361		1,308
Data processing costs		2,880		2,650
Ohio state franchise tax		1,144		1,082
Federal deposit insurance expense		494		423
Professional fees		1,313		1,359
Net gain (loss) on other real estate owned		11		(172	)
Advertising expense		885		698
Software amortization expense		361		351
Core deposit intangible amortization		321		332
Other expense		3,979		3,764
Total noninterest expense		32,078		29,788

Income before income taxes		22,698		9,750
Income taxes		4,065		1,401

NET INCOME	$	18,633	$	8,349

EARNINGS PER SHARE
Basic	$	3.01	$	1.31
Diluted		3.00		1.30

See accompanying notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)

	Year Ended December 31,
	2021			2020

Net income	$	18,633		$	8,349

Other comprehensive income (loss):
Net unrealized holding gain on available- for-sale investment securities		(1,041	)		3,091
Tax effect		219			(649	)

Reclassification adjustment for investment securities gains included in net income		-			-
Tax effect		-			-

Total other comprehensive income (loss)		(822	)		2,442

Comprehensive income	$	17,811		$	10,791

See accompanying notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

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

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2019		7,294,792	$	86,617	$	65,063		$	1,842		$	(15,747	)	$	137,775

Net income						8,349									8,349
Other comprehensive income									2,442						2,442
Stock options exercised		1,350		12											12
Stock-based compensation, net		12,543		257											257
Treasury shares acquired (58,200 shares)												(1,191	)		(1,191	)
Cash dividends ($0.60 per share)						(3,834	)								(3,834	)

Balance, December 31, 2020		7,308,685	$	86,886	$	69,578		$	4,284		$	(16,938	)	$	143,810

Net income						18,633									18,633
Other comprehensive income (loss)									(822	)					(822	)
Stock options exercised		10,650		94											94
Stock-based compensation, net		11,213		151											151
Treasury shares acquired (512,449 shares)												(12,291	)		(12,291	)
Cash dividends ($0.69 per share)						(4,240	)								(4,240	)

Balance, December 31, 2021		7,330,548	$	87,131	$	83,971		$	3,462		$	(29,229	)	$	145,335

See accompanying notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)

	Year Ended December 31,
	2021			2020
OPERATING ACTIVITIES
Net income	$	18,633		$	8,349
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		700			9,840
(Gain) loss on equity securities		(209	)		101
Depreciation and amortization of premises and equipment, net		1,420			1,342
Software amortization expense		361			351
Financing lease amortization expense		313			286
Gain on sale of premises and equipment		-			(27	)
Amortization of premium and discount on investment securities, net		506			365
Accretion of deferred loan fees, net		(4,780	)		(2,790	)
Amortization of core deposit intangibles		321			332
Stock-based compensation (income) expense, net		478			144
Origination of loans held for sale		(34,081	)		(42,487	)
Proceeds from sale of loans		35,148			44,316
Gain on sale of loans		(1,240	)		(1,487	)
Earnings on bank-owned life insurance		(546	)		(427	)
Deferred income tax		(401	)		(1,348	)
Gain on other real estate owned		(43	)		(253	)
Increase in accrued interest receivable		1,078			(1,739	)
Decrease in accrued interest payable		(343	)		(337	)
Other, net		(1,893	)		551
Net cash provided by operating activities		15,422			15,082

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		11,521			18,170
Purchases		(68,907	)		(24,071	)
Decrease (increase) in loans, net		127,294			(127,874	)
Proceeds from the sale of other real estate owned		501			709
Net purchase of premises and equipment		(605	)		(1,077	)
Proceeds from the disposal of premises and equipment		-			27
Purchase of restricted stock		-			(1,600	)
Redemption of restricted stock		658			391
Proceeds from bank-owned life insurance		424			-
Net cash (used in) provided by investing activities		70,886			(135,325	)

FINANCING ACTIVITIES
Net (decrease) increase in deposits		(58,590	)		204,357
Decrease in short-term borrowings, net		-			(5,075	)
Proceeds from other borrowings		-			3,952
Repayment of other borrowings		(4,204	)		(674	)
Stock options exercised		94			12
Repurchase of treasury shares		(12,291	)		(1,191	)
Cash dividends		(4,240	)		(3,834	)
Net cash (used in) provided by financing activities		(79,231	)		197,547

Increase (decrease) in cash and cash equivalents		7,077			77,304

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		112,417			35,113

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	119,494		$	112,417

See accompanying notes to the consolidated financial statements.

	Year Ended December 31,
	2021			2020
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	4,408		$	9,587
Income taxes		5,526			2,177

Noncash investing transactions:
Transfers from loans to other real estate owned	$	63		$	7,688
Finance lease assets added to premises and equipment		(67	)		(1,010	)

Noncash financing transactions:
Finance lease liabilities added to borrowed funds	$	67		$	1,010

See accompanying notes to the consolidated financial statements.

MIDDLEFIELD BANC CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Nature of Operations and Basis of Presentation

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“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, including interest earnings on residential real estate, commercial mortgage, commercial and consumer financings, and 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. At the same time, 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 according to U.S. Generally Accepted Accounting Principles. In preparing the financial statements, management must 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, computed using a level yield method, and recognized as interest income adjustments. 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 2021 and 2020, 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 quarterly 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 difference between fair value and the 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 recognizes 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 2021 and 2020, remains in compliance with regulatory capital and liquidity requirements and continues to pay dividends on the stock and make redemptions at the par value. Considering these factors, management concluded that the stock was not impaired on December 31, 2021, or 2020.

Mortgage Banking Activities

The Bank sells mortgage 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. Loan servicing rights are amortized in proportion to and throughout estimated net future servicing revenue. The expected period of the estimated net servicing income is partly based 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.

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 $105.9 million and $92.3 million on December 31, 2021, and 2020, 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, 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 the 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 deferred and the net amount amortized as an adjustment of the related loan’s yield. These amounts are amortized over the contractual life of the associated loans.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents the amount that 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 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, 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 a 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 a realized loss has occurred. An allowance for loan and lease losses is maintained for estimated losses until such time. 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, considering all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall concerning 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-acceptable 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 assets' estimated useful lives, which range from three 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 significant 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 specific 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 element 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. 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. It 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 sure to exercise the extension option(s), the additional term is included in the calculation of the right-of-use asset and a 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 either a qualitative assessment or a two-step process for testing the impairment of goodwill on at least an annual basis. Either of these approaches 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 measure 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 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 specific 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 (“OREO”)

Real estate properties acquired through foreclosure are initially recorded at fair value at the foreclosure date, 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. The Company is required to disclose the carrying amount of residential real estate loans in the process of foreclosure. At December 31, 2021 and 2020, the Company reported $1.0 million and $734,000, respectively, in residential real estate loans in the process of foreclosure.

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.

Treasury Stock

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, 2021, the Company had 1,441,811 of the Company’s shares, which is an increase of 512,449 shares for the twelve months ended December 31, 2021, from the 929,362 shares held as of December 31, 2020.

Earnings Per Share

The Company provides a 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.

Stock-Based Compensation

The Company accounts for stock compensation based on the grant date fair value of all share-based payment awards 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 grant date. The market price of the Company’s common shares at the grant date 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 received in cash by the participant upon vesting. 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. The Company also measures the fair value of the liability each reporting period and adjusts accordingly.

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 Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, 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 affected 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. 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. This Update is effective 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. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. Management will continue to monitor model output throughout the deferral period.

CECL Adoption The Company continues to monitor the opportunity to early adopt ASC Topic 326, which replaces the current incurred loss approach for measuring credit losses with an expected loss model ("CECL"). CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. Expected results of adoption are challenging to foreshadow due to the evolving macroeconomic landscape. Early adoption of CECL is unlikely.

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 unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for 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.

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. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU requires applicable entities to disclose, as of each balance sheet date, in a footnote to the financial statements, the aggregate dollar amount of loans (exclusive of loans to any such persons which in the aggregate do not exceed $60,000 during the latest year) made by the registrant or any of its subsidiaries to directors, executive officers, or principal holders of equity securities of the registrant or any of its significant subsidiaries, or to any associate of such persons. This disclosure need not be furnished when the aggregate amount of such loans at the balance sheet date (or with respect to the latest fiscal year, the maximum amount outstanding during the period) does not exceed five percent of stockholders equity as of that date. This Update does not affect the Company's reported statements of financial condition or results of operations.

2.	REVENUE RECOGNITION

Per ASC Topic 606, management determined that the primary sources of revenue 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 90.9% of the Company's total revenue.

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 canceled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized monthly as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific customer requests or activities, including overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to particular performance obligations of the Company where the revenue is recognized at a defined point in time, which is the completion of the requested service/transaction.

Gains (losses) on sale of other real estate owned (“OREO”) - Gains and losses are recognized after 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 the transfer of the property title, physical possession of the asset, and the buyer securing 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 an actual 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. Gains and losses on the sale of OREO are reported in the Consolidated Statement of Income.

Revenue from investment services – The Company earns investment services revenue through its servicing partnership with LPL Financial. The performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time. The Company generally receives trailing investment services revenue in arrears and recognizes the revenue when the monthly statement is received.

The following table depicts the disaggregation of revenue derived from contracts with customers to describe the nature, amount, timing, and uncertainty of revenue and cash flows for the years ended December 31,

Noninterest Income	2021			2020
(Dollar amounts in thousands)

Service charges on deposit accounts:
Overdraft fees	$	727		$	665
ATM banking fees		1,377			1,061
Service charges and other fees		1,321			813
Gain (loss) on equity securities ^(a)		209			(101	)
Earnings on bank-owned life insurance^(a)		546			427
Gain on sale of loans ^(a)		1,240			1,487
Revenue from investment services ^(b)		727			526
Other income		1,059			1,112
Total noninterest income	$	7,206		$	5,990

Gain on other real estate owned	$	(43	)	$	(253	)

(a)	Not within scope of ASC 606

(b)	From services offered by the Company through it's servicing partnership with LPL Financial

3.	EARNINGS PER SHARE

The Company provides a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the average shares outstanding. Diluted earnings per share adds the dilutive effects of stock options and restricted stock to average shares outstanding.

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:

	2021			2020

Weighted-average common shares issued		7,325,449			7,302,845

Average treasury stock shares		(1,138,783	)		(917,495	)

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		6,186,666			6,385,350

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		24,410			19,174

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		6,211,076			6,404,524

There were no options to purchase shares of common stock outstanding on December 31, 2021. Also outstanding were 76,933 shares of restricted stock, 53,438 shares of which were anti-dilutive.

Options to purchase 12,150 shares of common stock at $8.78 per share were outstanding during the year ended December 31, 2020. All options were dilutive. Also outstanding were 67,634 shares of restricted stock, 67,295 shares of which were anti-dilutive.

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, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value

Subordinated debt	$	32,300	$	356	$	(119	)	$	32,537
Obligations of states and political subdivisions:
Taxable		500		2		-			502
Tax-exempt		122,877		4,307		(341	)		126,843
Mortgage-backed securities in government-sponsored entities		10,140		257		(80	)		10,317
Total	$	165,817	$	4,922	$	(540	)	$	170,199

	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value

Subordinated debt	$	21,050	$	254	$	(7	)	$	21,297
Obligations of states and political subdivisions:
Taxable		500		2		-			502
Tax-exempt		73,157		4,643		-			77,800
Mortgage-backed securities in government-sponsored entities		14,230		536		(5	)		14,761
Total	$	108,937	$	5,435	$	(12	)	$	114,360

Equity securities totaled $818,000 and $609,000 on December 31, 2021, and 2020, respectively, which incorporates a recognized net gain (loss) on equity investments of $209,000 and ($101,000) for the years ended December 31, 2021, and 2020, respectively. No net gains on sold equity securities were realized from sales during these periods.

The amortized cost and fair value of debt securities on December 31, 2021, 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	$	-	$	-
Due after one year through five years		1,715		1,726
Due after five years through ten years		40,962		41,427
Due after ten years		123,140		127,046

Total	$	165,817	$	170,199

Investment securities with an approximate carrying value of $77.1 million and $71.1 million on December 31, 2021, and 2020, respectively, were pledged to secure deposits and other purposes as required by law.

There were no securities sold during the year ended December 31, 2021, or 2020.

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, 2021
	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

Subordinated debt	$	9,150	$	(100	)	$	731	$	(19	)	$	9,881	$	(119	)
Obligations of states and political subdivisions
Tax-exempt		24,273		(341	)		-		-			24,273		(341	)
Mortgage-backed securities in government-sponsored entities	$	-	$	-		$	1,980	$	(80	)	$	1,980	$	(80	)
Total	$	33,423	$	(441	)	$	2,711	$	(99	)	$	36,134	$	(540	)

	December 31, 2020
	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

Subordinated debt	$	4,243	$	(7	)	$	-	$	-	$	4,243	$	(7	)
Mortgage-backed securities in government-sponsored entities		2,748		(5	)		-		-		2,748		(5	)
Total	$	6,991	$	(12	)	$	-	$	-	$	6,991	$	(12	)

Every quarter, the Company assesses 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 recognizes 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 on December 31, 2021, and 2020, 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 results from 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 80.9% of the total available-for-sale portfolio as of December 31, 2021. 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 quarterly. 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.

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 Cuyahoga and Summit County, locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, and consumer loans are granted. Although the Company has a diversified loan portfolio on December 31, 2021, and 2020, loans outstanding to individuals and businesses depend on 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):

December 31, 2021
Ending Loan Balance by Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	731	$	110,739	$	111,470
Non-owner occupied		5,297		278,321		283,618
Multifamily		-		31,189		31,189
Residential real estate		1,104		238,985		240,089
Commercial and industrial		587		148,225		148,812
Home equity lines of credit		250		104,105		104,355
Construction and other		-		54,148		54,148
Consumer installment		-		8,010		8,010
Total	$	7,969	$	973,722	$	981,691

December 31, 2020
Ending Loan Balance by Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	1,565	$	101,556	$	103,121
Non-owner occupied		4,123		305,301		309,424
Multifamily		-		39,562		39,562
Residential real estate		1,319		232,676		233,995
Commercial and industrial		834		231,210		232,044
Home equity lines of credit		246		112,297		112,543
Construction and other		-		63,573		63,573
Consumer installment		-		9,823		9,823
Total	$	8,087	$	1,095,998	$	1,104,085

The commercial and industrial loan portfolio as of December 31, 2021, includes $34.1 million in loans issued through the Paycheck Protection Program (“PPP”). Although the SBA guarantees PPP loans if specific criteria are met, minimal risk exists in the portfolio. Therefore, a 0.4% qualitative adjustment, equaling $137,000 is reserved for loss. The commercial and industrial loan portfolio as of December 31, 2020, includes $116.1 million in loans issued through the Paycheck Protection Program (“PPP”). Therefore, a 0.4% qualitative adjustment, equaling $464,000 is reserved for loss.

The amounts above include net deferred loan origination fees of $3.6 million and $4.4 million on December 31, 2021, and December 31, 2020, respectively. The net deferred loan origination fees at December 31, 2021, include $1.3 million of unearned deferred fees from PPP loans. The net deferred loan origination fees at December 31, 2020, include $2.7 million of unearned deferred fees from PPP loans.

December 31, 2021
Ending Allowance Balance by Impairment Evaluation
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,826	$	1,836
Non-owner occupied		655		6,776		7,431
Multifamily		-		454		454
Residential real estate		17		1,723		1,740
Commercial and industrial		42		840		882
Home equity lines of credit		16		1,436		1,452
Construction and other		-		533		533
Consumer installment		-		14		14
Total	$	740	$	13,602	$	14,342

December 31, 2020
Ending Allowance Balance by Impairment Evaluation
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,332	$	1,342
Non-owner occupied		371		6,446		6,817
Multifamily		-		461		461
Residential real estate		20		1,663		1,683
Commercial and industrial		48		1,305		1,353
Home equity lines of credit		41		1,364		1,405
Construction and other		-		378		378
Consumer installment		-		20		20
Total	$	490	$	12,969	$	13,459

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate (“CRE”) which is further segmented into Owner Occupied (“CRE OO”), Non-owner Occupied (“CRE NOO”), and Multifamily, Residential Real Estate (“RRE”), Commercial and Industrial (“C&I”), Home Equity Lines of Credit (“HELOC”), Construction and Other (“Construction”), and Consumer Installment Loans. Although PPP loans are included with C&I loans, the nature of PPP loans differs considerably from the rest of the category. The U.S. government fully guarantees loans funded through the PPP program. This guarantee exists at the loans' inception and throughout the loans' lives and was not entered into separately and apart from the loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for the CRE and Construction portfolios, were partially offset by a decrease in the allowance for the C&I portfolio. The increase in the allowance for loan losses for CRE was primarily a result of an increase in specifically impaired loans, coupled with increased exposure to substandard credits. The increase in the allowance for loan losses for the Construction portfolios was a result of slight increases in the historical loss factors applied to the portfolio. The decrease in the allowance for the C&I portfolio was a result of a decrease in outstanding loan balances as a result of PPP loan forgiveness.

Management evaluates individual loans in all commercial segments for possible impairment based on guidelines established by the Board of Directors. Loans are considered 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 concerning 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 decision 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 allowance allocation and whether a loan can be removed from impairment status is made quarterly. 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, 2021
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Non-owner occupied	$	1,547	$	1,802		-
Residential real estate		820		874		-
Commercial and industrial		370		538		-
Home equity lines of credit		7		7		-
Total	$	2,744	$	3,221	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	731	$	731	$	10
Non-owner occupied		3,750		4,277		655
Residential real estate		284		284		17
Commercial and industrial		217		230		42
Home equity lines of credit		243		243		16
Total	$	5,225	$	5,765	$	740

Total:
Commercial real estate:
Owner occupied	$	731	$	731	$	10
Non-owner occupied		5,297		6,079		655
Residential real estate		1,104		1,158		17
Commercial and industrial		587		768		42
Home equity lines of credit		250		250		16
Total	$	7,969	$	8,986	$	740

December 31, 2020
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	1,118	$	1,142	$	-
Non-owner occupied		801		801		-
Residential real estate		941		1,013		-
Commercial and industrial		561		1,056		-
Home equity lines of credit		80		92		-
Consumer installment		-		-		-
Total	$	3,501	$	4,104	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	447	$	447	$	10
Non-owner occupied		3,322		3,596		371
Residential real estate		378		378		20
Commercial and industrial		273		276		48
Home equity lines of credit		166		166		41
Total	$	4,586	$	4,863	$	490

Total:
Commercial real estate:
Owner occupied	$	1,565	$	1,589	$	10
Non-owner occupied		4,123		4,397		371
Residential real estate		1,319		1,391		20
Commercial and industrial		834		1,332		48
Home equity lines of credit		246		258		41
Consumer installment		-		-		-
Total	$	8,087	$	8,967	$	490

The tables above include troubled debt restructurings totaling $2.6 million and $2.9 million as of December 31, 2021, and 2020, respectively. The amounts allocated within the allowance for losses for troubled debt restructurings were $150,000 and $45,000 on December 31, 2021, and December 31, 2020, respectively.

The following table presents the average balance and interest income by class, recognized on impaired loans (in thousands):

	As of December 31, 2021				As of December 31, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	1,334	$	53	$	2,851	$	72
Non-owner occupied		5,023		262		8,815		184
Residential real estate		1,208		56		1,247		52
Commercial and industrial		763		62		1,076		42
Home equity lines of credit		245		12		308		8
Total	$	8,573	$	445	$	14,297	$	358

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 standard 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.

Additionally, on April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current before any relief are not TDRs. As of December 31, 2021, there were no loans with Covid-19 related payment modifications. As of December 31, 2020, we modified 11 loans aggregating $24.5 million, consisting of the deferral of principal payments and the extension of the maturity date.

The following tables summarize troubled debt restructurings that did not meet the exemption criteria above (in thousands) for the following years ended:

	December 31, 2021
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Commercial real estate:
Non-owner occupied		1		-		1	$	730	$	730
Residential real estate		1		-		1		96		96
							$	826	$	826

	December 31, 2020
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Commercial and industrial		2		-		2	$	25	$	24
Residential real estate		1		-		1		114		114
							$	139	$	138

There were no subsequent defaults of troubled debt restructurings for the years ended December 31, 2021, or 2020.

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 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, based on 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 borrowers' present and future capacity 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 $750,000 or greater. Confirmation of the appropriate risk grade is included in the ongoing review. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Detailed reviews, including resolutions plans, are performed on loans classified as Substandard every quarter. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in determining 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, 2021	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	104,217	$	2,400	$	4,853	$	-	$	111,470
Non-owner occupied		230,672		3,038		49,908		-		283,618
Multifamily		31,189		-		-		-		31,189
Residential real estate		237,132		-		2,957		-		240,089
Commercial and industrial		143,911		2,748		2,153		-		148,812
Home equity lines of credit		103,296		-		1,059		-		104,355
Construction and other		53,807		341		-		-		54,148
Consumer installment		8,005		-		5		-		8,010
Total	$	912,229	$	8,527	$	60,935	$	-	$	981,691

			Special						Total
December 31, 2020	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	93,939	$	7,084	$	2,098	$	-	$	103,121
Non-owner occupied		258,974		983		49,467		-		309,424
Multifamily		39,562		-		-		-		39,562
Residential real estate		230,944		265		2,786		-		233,995
Commercial and industrial		227,765		1,800		2,479		-		232,044
Home equity lines of credit		111,208		-		1,335		-		112,543
Construction and other		58,082		-		5,491		-		63,573
Consumer installment		9,816		-		7		-		9,823
Total	$	1,030,290	$	10,132	$	63,663	$	-	$	1,104,085

Management further monitors the loan portfolio's performance and credit quality by analyzing the portfolio's age 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, 2021	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	111,257	$	81	$	132	$	-	$	213	$	111,470
Non-owner occupied		282,365		880		-		373		1,253		283,618
Multifamily		31,189		-		-		-		-		31,189
Residential real estate		238,483		1,187		-		419		1,606		240,089
Commercial and industrial		148,437		112		-		263		375		148,812
Home equity lines of credit		104,316		-		39		-		39		104,355
Construction and other		54,148		-		-		-		-		54,148
Consumer installment		7,799		16		19		176		211		8,010
Total	$	977,994	$	2,276	$	190	$	1,231	$	3,697	$	981,691

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2020	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	102,587	$	418	$	-	$	116	$	534	$	103,121
Non-owner occupied		305,613		1,844		1,373		594		3,811		309,424
Multifamily		39,562		-		-		-		-		39,562
Residential real estate		230,996		2,364		95		540		2,999		233,995
Commercial and industrial		231,534		260		219		31		510		232,044
Home equity lines of credit		112,325		120		-		98		218		112,543
Construction and other		63,529		44		-		-		44		63,573
Consumer installment		9,424		71		108		220		399		9,823
Total	$	1,095,570	$	5,121	$	1,795	$	1,599	$	8,515	$	1,104,085

The following tables present the recorded investment in nonaccrual loans and loans past due over 89 days and still on accrual by class of loans (in thousands):

			90+ Days Past
December 31, 2021	Nonaccrual		Due and Accruing

Commercial real estate:
Owner occupied	$	81	$	-
Non-owner occupied		2,442		-
Residential real estate		1,577		-
Commercial and industrial		456		-
Home equity lines of credit		121		-
Consumer installment		182		-
Total	$	4,859	$	-

			90+ Days Past
December 31, 2020	Nonaccrual		Due and Accruing

Commercial real estate:
Owner occupied	$	458	$	-
Non-owner occupied		3,758		-
Residential real estate		2,487		-
Commercial and industrial		509		-
Home equity lines of credit		422		-
Consumer installment		224		-
Total	$	7,858	$	-

There were no loans past due 90 days or more and still accruing interest on December 31, 2021 or 2020.

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 loan portfolio's risk characteristics and credit quality, 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, resulting 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 to estimate losses in the current portfolio. Other qualitative factors modify these historical loss amounts.

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. Then, a historical charge-off factor is calculated utilizing the last twelve consecutive historical quarters.

Management has identified several additional qualitative factors to supplement the historical charge-off factor. These factors likely 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 every quarter using a defined, consistently applied process 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 ALLL within the primary segments of the loan portfolio and the activity within those segments (in thousands):

	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2020		Charge-offs			Recoveries		Provision			December 31, 2021
Loans:
Commercial real estate:
Owner occupied	$	1,342	$	-		$	45	$	449		$	1,836
Non-owner occupied		6,817		(313	)		138		789			7,431
Multifamily		461		-			-		(7	)		454
Residential real estate		1,683		(27	)		27		57			1,740
Commercial and industrial		1,353		(1	)		194		(664	)		882
Home equity lines of credit		1,405					56		(9	)		1,452
Construction and other		378		-			46		109			533
Consumer installment		20		(124	)		142		(24	)		14
Total	$	13,459	$	(465	)	$	648	$	700		$	14,342

	Allowance for Loan and Lease Losses
	Balance									Balance
	December 31, 2019		Charge-offs			Recoveries		Provision		December 31, 2020
Loans:
Commercial real estate:
Owner occupied	$	801	$	(50	)	$	17	$	574	$	1,342
Non-owner occupied		3,382		(3,022	)		74		6,383		6,817
Multifamily		340		-			-		121		461
Residential real estate		726		(62	)		42		977		1,683
Commercial and industrial		456		(245	)		294		848		1,353
Home equity lines of credit		932		(55	)		84		444		1,405
Construction and other		103		-			157		118		378
Consumer installment		28		(405	)		22		375		20
Total	$	6,768	$	(3,839	)	$	690	$	9,840	$	13,459

The provision fluctuations during the year ended December 31, 2021, allocated to:

●

non-owner occupied commercial real estate loans are due to exposure to the substandard rate credits related to the hospitality industry.

●

commercial and industrial loans are due to a decrease in outstanding balances as PPP loans receive forgiveness.

●

owner-occupied are due to an increase in substandard rated credits.

The provision fluctuations during the year ended December 31, 2020, allocated to:

●

commercial real estate loans are due to large charge-offs from two relationships totaling $3.0 million and additional provisions for hospitality-related relationships.

●

commercial and industrial loans are due to several small charge-offs that total $245,000, along with an allocation for the PPP loans of $464,000, along with additional provisions for unexpected losses resulting from the current economic environment.

●

residential real estate loans are due to several small charge-offs totaling $62,000 and additional provisions for unforeseen losses resulting from the current economic environment.

consumer installment loans are due to charge-offs in the student loan portfolio totaling $383,000.

6.	PREMISES AND EQUIPMENT

Major classifications of premises and equipment at December 31:

(Dollar amounts in thousands)	2021		2020

Land and land improvements	$	2,963	$	2,963
Building and leasehold improvements		16,531		16,239
Furniture, fixtures, and equipment		9,596		9,395
Financing right-of-use assets		4,491		4,737
Total premises and equipment		33,581		33,334
Less accumulated depreciation and amortization		16,309		15,001

Total premises and equipment, net	$	17,272	$	18,333

Depreciation expense charged to operations was $1.4 million in 2021 and $1.3 million in 2020.

7.	GOODWILL AND INTANGIBLE ASSETS

Goodwill totaled $15.1 million for both years ended December 31, 2021, and 2020. Core deposit intangible carrying amount was $1.4 million and $1.7 million for the years ended December 31, 2021, and 2020, respectively. Core deposit accumulated amortization was $1.7 million and $1.4 million for the years ended December 31, 2021, and 2020. Amortization expense totaled $321,000 and $332,000 in 2021 and 2020, respectively.

Core deposit intangible assets are amortized to their estimated residual values over their expected useful lives, commonly ten years. The estimated aggregate future amortization expense for core deposit intangible assets as of December 31, 2021, is as follows:

Remaining 2022	$	309
2023		296
2024		281
2025		264
2026		253
Thereafter		-
Total	$	1,403

Activity for mortgage servicing rights (“MSR”s) follows:

(Dollar amounts in thousands)	2021			2020

Beginning of year	$	476		$	390
Additions		257			276
Amortized to expense		(191	)		(190	)

End of year	$	542		$	476

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)	2021		2020

Restricted stock	$	4,399	$	5,057
Accrued interest receivable on investment securities		1,312		854
Accrued interest receivable on loans		2,820		4,356
Deferred tax asset, net		1,693		1,073
Operating right-of-use assets		872		742
Other		3,201		1,554

Total	$	14,297	$	13,636

9.	DEPOSITS

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 as of December 31, 2021, and 2020 were $33.4 million and $74.9 million, respectively.

Scheduled maturities of all time deposits as of December 31, 2021, are as follows:

(Dollar amounts in thousands)
2022	$	144,016
2023		25,496
2024		16,640
2025		6,533
2026		6,040
Total	$	198,725

Scheduled maturities of time deposits that meet or exceed the FDIC Insurance limit of $250,000 as of December 31, 2021, are as follows:

(Dollar amounts in thousands)	Amount		Percent of Total

Within three months	$	7,506		22.46	%
Beyond three but within six months		4,778		14.30	%
Beyond six but within twelve months		10,463		31.31	%
Beyond one year		10,672		31.94	%

Total	$	33,419		100.00	%

Deposits of related parties amounted to $29.2 million as of December 31, 2021.

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)	2021			2020

Balance at year-end		-			-
Average balance outstanding		85			22,637
Maximum month-end balance		-			62,329
Weighted-average rate at year-end		N/A			N/A
Weighted-average rate during the year		0.40	%		0.35	%

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 3.50%, a $10.0 million line of credit at an adjustable rate, currently at 3.33%, and a $4.0 million line of credit at an adjustable rate, currently 3.50%. On December 31, 2021, and 2020, there were no outstanding borrowings under these lines of credit. The additional borrowing capacity on FHLB advances was $417.4 million and $401.7 million on December 31, 2021, and 2020, 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		2021		2020
Finance lease liabilities	10/30/34	06/01/40			2.63	%		1.89	%	3.51	%	$	4,653	$	4,839
PPPLF^(a)	01/28/21	01/28/21			0.00	%		0.35	%	0.35	%		-		3,951
Junior subordinated debt	12/21/37	12/21/37			1.84	%		1.80	%	1.80	%		8,248		8,248

Total												$	12,901	$	17,038

^(a) PPPLF (Paycheck Protection Program Liquidity Facility) borrowings were used to fund PPP loans. This was paid off in 2021. Maturity range and interest rates are as of December 31, 2020.

The scheduled maturities of other borrowings are as follows:

(Dollar amounts in thousands)
			Weighted-
Year Ending December 31,	Amount		Average Rate
2022	$	265		2.63	%
2023		272		2.63	%
2024		279		2.63	%
2025		286		2.63	%
2026		298		2.63	%
Beyond 2025		11,501		1.97	%

Total	$	12,901		1.62	%

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 had an available borrowing capacity of approximately $417.4 million on December 31, 2021.

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 at face value in whole or in part. The Company borrowed the issuance proceeds 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.

As of December 31, 2021, the Company had finance lease liabilities of $4.7 million on the Consolidated Balance Sheet. See Note 15 of the financial statements for more information.

In April 2020, the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to small businesses under the PPP provisions of the CARES Act. Only PPP loans are eligible to serve as collateral for the PPPLF, with each dollar of PPP loans providing one dollar of advance availability. The maturity date of an extension of credit under the PPPLF will equal the maturity date of the pool of PPP loans pledged to secure the extension of credit. Any principal payments received by the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration or principal payments from the borrower after the initial six-month deferment period, must be used to pay down the PPPLF advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance relationship. The interest rate on PPPLF advances is fixed at 0.35%.

No PPPLF advances could be obtained under the CARES Act after September 30, 2020. In 2021, the Company paid off the advance, and there were no outstanding advances under the PPPLF as of December 31, 2021.

12.

ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES

The components of accrued interest payable and other liabilities are as follows at December 31:

	2021		2020
(Dollar amounts in thousands)
Accrued interest payable	$	237	$	580
Accrued directors' benefits		2,247		1,587
Accrued salary and benefits expense		1,631		1,410
Operating lease liabilities		878		746
Other		1,167		1,608

Total	$	6,160	$	5,931

13.

INCOME TAXES

The provision for federal income taxes for the years ended December 31 consists of:

(Dollar amounts in thousands)	2021			2020

Current payable	$	4,466		$	2,749
Deferred		(401	)		(1,348	)

Total provision	$	4,065		$	1,401

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)	2021		2020

Deferred tax assets:
Allowance for loan and lease losses	$	3,012	$	2,826
Supplemental retirement plan		608		482
Investment security basis adjustment		18		18
Nonaccrual interest income		350		355
Accrued compensation		293		244
Lease liability		1,161		1,173
Gross deferred tax assets		5,442		5,098

Deferred tax liabilities:
Premises and equipment		632		709
Net unrealized gain on AFS securities		920		1,139
Net unrealized gain on equity securities		85		41
FHLB stock dividends		139		139
Intangibles		450		414
Mortgage servicing rights		114		100
Deferred origination fees, net		34		50
Acquisition fair value adjustments		249		278
Right of use assets		1,126		1,151
Other		-		4
Gross deferred tax liabilities		3,749		4,025

Net deferred tax assets	$	1,693	$	1,073

No valuation allowance was established on December 31, 2021, and 2020, 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)	2021						2020
				% of						% of
				Pretax						Pretax
	Amount			Income			Amount			Income

Provision at statutory rate	$	4,766			21.0	%	$	2,047			21.0	%
Tax-exempt income		(703	)		(3.1	)%		(669	)		(6.9	)%
Other		2			-	%		23			0.3	%

Actual tax expense and effective rate	$	4,065			17.9	%	$	1,401			14.4	%

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, 2021 and 2020, 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 2018.

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, 2021, and 2020. 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 three or more years of service. Contributions for 2021 and 2020 to these plans amounted to $347,000 and $350,000, 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 $1.9 million and $1.7 million as of December 31, 2021, and 2020, respectively. In addition, during 2021 and 2020, the Company recognized nonqualified deferred compensation expense of $264,000 and $240,000, 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. Three hundred twenty thousand shares of common stock were reserved for issuance under the 2007 Plan, which expired ten years from the date of board approval of the plan. No remaining shares are outstanding 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. The remaining available shares that can be issued under the 2017 Plan were 386,188 on December 31, 2021.

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

	Shares			Weighted- average Exercise Price Per Share

Outstanding, January 1, 2021		12,150		$	8.78
Exercised		(12,150	)		8.78

Outstanding, December 31, 2021		-		$	-

Exercisable, December 31, 2021		-		$	-

The total intrinsic value of outstanding in-the-money exercisable stock options was $166,759 on December 31, 2020.

For the years ended December 31, 2021, and 2020, 12,150 and 2,350 options were exercised, resulting in net proceeds to the participant of $21,000 and $18,000 for December 31, 2021, and 2020, respectively.

During 2021 and 2020, the Compensation Committee of the Company's Board of Directors granted awards of restricted stock for an aggregate amount of 29,193 and 23,648 shares, respectively, to certain employees of the Bank. The expense recognized for all outstanding awards was $478,000 and $271,000 for the years ended 2021 and 2020, respectively. The number of restricted stock shares earned or settled will depend on specific conditions and are also subject to service period-based vesting. The award recipient must maintain service with Middlefield Banc Corp. and its affiliates until the third anniversary of the award to satisfy the service condition. In addition, the market condition will be met if the average total shareholder annual return (“TSR”) on Middlefield Banc Corp. stock for the three subsequent years meets target for 2020 and 2021. The target TSR is 10%, capped at 125% of target, and reduced proportionally between 0% and 10%.

The existence of a market condition, TSR, dictates that these awards be marked to market quarterly using a Monte Carlo simulation. They are recorded through the vesting period as a liability since a portion is payable in cash. The liability for these accrued officer benefits was $979,000 and $581,000 for the years ended December 31, 2021, and December 31, 2020, respectively.

The Company recognized restricted stock forfeitures in the period they occur.

The following table presents the activity during 2021 related to awards of restricted stock:

	Units			Weighted- average Grant Date Fair Value Per Unit
Nonvested at January 1, 2021		66,362		$	23.52
Granted		29,193			22.50
Vested		(18,622	)		24.02
Nonvested at December 31, 2021		76,933		$	23.01
Expected to vest at December 31, 2021		60,368		$	22.56

As of December 31, 2021, there was $557,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the 2017 Plan. The cost is expected to be recognized over a weighted-average period of 1.69 years. The total fair value of shares vested during the years ended December 31, 2021, and 2020 was $447,000, and $208,000, respectively.

15.

COMMITMENTS

In the ordinary course of business, various outstanding commitments and certain contingent liabilities 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 on December 31:

(Dollar amounts in thousands)	2021		2020

Commitments to extend credit	$	280,379	$	255,429
Standby letters of credit		586		581

Total	$	280,965	$	256,010

These instruments involve, to varying degrees, elements of credit and interest rate risk over 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 one year, 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. The collateral is typically bank deposit instruments or customer business assets for secured letters of credit.

Leasing Commitments

The Company leases six of its branch locations and one loan production office. As of December 31, 2021, net assets recorded under leases amounted to $5.4 million and have remaining lease terms of 1 year to 19 years. As of December 31, 2021, finance lease assets included in premises and equipment, net, totaled $4.5 million, and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled $872,000. As of December 31, 2021, finance lease obligations included in other borrowings totaled $4.7 million, and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled $878,000.

In December 2021, the Company entered into a new lease agreement for the loan production office located in Mentor, Ohio. The new lease agreement does not exceed 12 months and, as such, is not considered a capitalized lease as of December 31, 2021.

Lease costs incurred are as follows for the years ended December 31:

	2021		2020
Lease Costs:
Finance lease cost:
Amortization of right-of-use asset	$	313	$	286
Interest Expense		130		131
Other		63		27
Operating lease cost		225		213
Total lease cost	$	731	$	657

The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of December 31, 2021:

	Operating			Finance
Weighted-average term (years)		5.9			14.6
Weighted-average discount rate		1.8	%		2.6	%

The following table displays the undiscounted cash flows due related to operating and finance leases as of December 31, 2021, along with a reconciliation to the discounted amount recorded on the December 31, 2021 balance sheet:

	Operating			Finance
Undiscounted cash flows due within:
2022	$	169		$	385
2023		169			385
2024		169			385
2025		169			385
2026		134			389
2027 and thereafter		122			3,726
Total undiscounted cash flows		932			5,655

Impact of present value discount		(54	)		(1,002	)

Amount reported on balance sheet	$	878		$	4,653

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. The reserves requirement was reduced to zero as of December 31, 2020, and 2021 as a response to the FRB’s pandemic-related initiatives.

Loans

Federal law prevents the Company from borrowing from the Bank unless specific obligations secure the loans. Further, such a secured loan is limited to 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 an Ohio state-chartered bank can pay. 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 2021 approximates $7.9 million, plus 2022 profits retained up to the dividend declaration date.

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 some instances. As a result, failure to meet various capital requirements can initiate regulatory action that could directly affect the financial statements. As of December 31, 2021, the Bank and Company have met all capital adequacy requirements to which they are subject.

The prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized. However, these terms are not used to represent the 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, 2021, and 2020 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 Basel III Capital Rules changes.

	As of December 31, 2021
				Tier 1			Common			Total Risk
	Leverage			Risk Based			Equity Tier 1			Based
The Middlefield Banking Company		9.80	%		12.72	%		12.72	%		13.97	%
Middlefield Banc Corp.		10.02	%		12.96	%		12.18	%		14.21	%
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, 2020
				Tier 1			Common			Total Risk
	Leverage			Risk Based			Equity Tier 1			Based
The Middlefield Banking Company		9.45	%		11.47	%		11.47	%		12.68	%
Middlefield Banc Corp.		10.22	%		11.68	%		10.96	%		12.88	%
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 judgment 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, 2021

(Dollar amounts in thousands)	Level I		Level II		Level III		Total

Assets measured on a recurring basis:
Subordinated debt	$	-	$	20,337	$	12,200	$	32,537
Obligations of states and political subdivisions		-		127,345		-		127,345
Mortgage-backed securities in government- sponsored entities		-		10,317		-		10,317
Total debt securities		-		157,999		12,200		170,199
Equity securities in financial institutions		818		-		-		818
Total	$	818	$	157,999	$	12,200	$	171,017

			December 31, 2020

(Dollar amounts in thousands)	Level I		Level II		Level III		Total

Assets measured on a recurring basis:
Subordinated debt	$	-	$	14,047	$	7,250	$	21,297
Obligations of states and political subdivisions		-		78,302		-		78,302
Mortgage-backed securities in government-sponsored entities		-		14,761		-		14,761
Total debt securities		-		114,360		-		114,360
Equity securities in financial institutions		609		-		-		609
Total	$	609	$	114,360	$	-	$	114,969

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). Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments, that are valued based on the discounted cash flow approach assuming a yield curve of similar structured instruments.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different from the amounts reported at each period-end.

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 table presents the fair value reconciliation of Level 3 assets measured at fair value on a recurring basis.

	Subordinated debt
Balance as of January 1, 2021	$	7,250
Purchases, sales, settlements
Purchases		4,000
Sales		-
Settlements		-
Transfers into Level 3 ⁽¹⁾		1,700
Transfers out of Level 3 ⁽²⁾		(750	)
Balance as of December 31, 2021	$	12,200

(1) During 2021, these investments were transferred into level III. Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level III criteria. The level designation of each financial instrument is reassessed at the end of each period.

(2) During 2021, these investments were transferred out of level III. Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level III criteria. The level designation of each financial instrument is reassessed at the end of each period.

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 when 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 after the initial measurement. No such devaluation occurred during the year ended December 31, 2021.

			December 31, 2021

	Level I		Level II		Level III		Total
(Dollar amounts in thousands)
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	4,162	$	4,162

			December 31, 2020

	Level I		Level II		Level III		Total
(Dollar amounts in thousands)
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	4,111	$	4,111
Other real estate owned		-		-		6,992		6,992

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 usually 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 estimates 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 preceding tables include estimated selling costs of $901,000 and $838,000 on December 31, 2021, and 2020, respectively.

Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary. Therefore, the loan is not considered to be carried at fair value and is not included in the above table. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property and is included in the preceding table as a Level II measurement. 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. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral after foreclosure are included in net expenses from OREO.

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, 2021

Impaired loans

4,162

Appraisal of collateral (1)

Appraisal adjustments (2)

25.0%

72.2%

(36.6%)

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2020

Impaired loans

4,111

Appraisal of collateral (1)

Appraisal adjustments (2)

17.6%

48.5%

(22.7%)

Other real estate owned

6,992

Appraisal of collateral (1)

Appraisal adjustments (2)

19.9%

(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 recorded at fair value on a recurring basis is as follows:

	December 31, 2021
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Loans held for sale		1,051		-		1,051		-		1,051
Net loans		967,349		-		-		961,645		961,645

Financial liabilities:
Deposits	$	1,166,610	$	967,885	$	-	$	199,503	$	1,167,388
Other borrowings		12,901		-		-		12,901		12,901

	December 31, 2020
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(in thousands)
Financial assets:
Loans held for sale		878		-		878		-		878
Net loans		1,090,626		-		-		1,089,573		1,089,573

Financial liabilities:
Deposits	$	1,225,200	$	929,450	$	-	$	299,651	$	1,229,101
Other borrowings		17,038		-		-		15,250		15,250

Included within other borrowings is an $8.3 million note payable, which matures in December 2037. These borrowings were used to form a special purpose entity (“Entity”) to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to LIBOR plus 1.67%. The borrowing is a floating rate instrument and any difference between the cost and fair value are insignificant.

In addition to the financial instruments included in the above tables, cash and equivalents, bank-owned life insurance, Federal Home Loan Bank stock, accrued interest receivable, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.

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, 2019	$	1,842
Other comprehensive income		2,442
Balance at December 31, 2020	$	4,284

Balance as of December 31, 2020	$	4,284
Other comprehensive income (loss)		(822	)
Balance at December 31, 2021	$	3,462

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.

No unrealized gains or losses on available-for-sale securities were reclassified out of accumulated other comprehensive income for the years ended December 31, 2021, or 2020.

20.

PARENT COMPANY

Following are condensed financial statements for the Company.

CONDENSED BALANCE SHEET

(Dollar amounts in thousands)	December 31,
	2021		2020
ASSETS
Cash and due from banks	$	805	$	1,222
Equity securities, at fair value		818		609
Investment in nonbank subsidiary		1		1
Investment in subsidiary bank		150,588		149,272
Other assets		2,381		1,561

TOTAL ASSETS	$	154,593	$	152,665

LIABILITIES
Trust preferred debt	$	8,248	$	8,248
Other liabilities		1,010		607
TOTAL LIABILITIES		9,258		8,855

STOCKHOLDERS' EQUITY		145,335		143,810

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	154,593	$	152,665

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

	Year Ended December 31,
(Dollar amounts in thousands)	2021			2020

INCOME
Dividends from subsidiary bank	$	18,600		$	4,700
Dividends from nonbank subsidiary		-			1,399
Gain (loss) on equity securities		209			(101	)
Other		5			7
Total income		18,814			6,005

EXPENSES
Interest expense		151			192
Salaries and employee benefits		842			465
Ohio state franchise tax		1,144			1,082
Other		742			796
Total expenses		2,879			2,535

Income before income tax benefit		15,935			3,470

Income tax benefit		(560	)		(552	)

Income before equity in undistributed net income of subsidiaries		16,495			4,022

Equity in undistributed net income of subsidiaries		2,138			4,327

NET INCOME	$	18,633		$	8,349

Comprehensive income	$	17,811		$	10,791

CONDENSED STATEMENT OF CASH FLOWS

	Year Ended December 31,
(Dollar amounts in thousands)	2021			2020

OPERATING ACTIVITIES
Net income	$	18,633		$	8,349
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of
Subsidiaries		(2,138	)		(4,327	)
Stock-based compensation		398			144
(Gain) loss on equity securities		(209	)		101
Other, net		(664	)		(609	)
Net cash provided by operating activities		16,020			3,658

FINANCING ACTIVITIES
Stock options exercised		94			12
Repurchase of treasury shares		(12,291	)		(1,191	)
Cash dividends		(4,240	)		(3,834	)
Net cash used in financing activities		(16,437	)		(5,013	)

Decrease in cash		(417	)		(1,355	)

CASH AT BEGINNING OF YEAR		1,222			2,577

CASH AT END OF YEAR	$	805		$	1,222

21.

SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2021		2021		2021		2021

Total interest and dividend income	$	13,142	$	12,936	$	13,447	$	12,810
Total interest expense		1,244		1,049		952		820

Net interest income		11,898		11,887		12,495		11,990
Provision for loan losses		700		200		-		(200	)

Net interest income after
provision for loan losses		11,198		11,687		12,495		12,190

Total noninterest income		2,218		1,632		1,821		1,535
Total noninterest expense		8,353		7,926		7,938		7,861

Income before income taxes		5,063		5,393		6,378		5,864
Income taxes		896		968		1,174		1,027

Net income	$	4,167	$	4,425	$	5,204	$	4,837

Per share data:
Net income
Basic	$	0.65	$	0.70	$	0.85	$	0.81
Diluted		0.65		0.70		0.85		0.81
Average shares outstanding:
Basic		6,364,132		6,297,071		6,136,648		5,951,838
Diluted		6,378,493		6,312,230		6,157,181		5,975,333

(Dollar amounts in thousands)	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2020		2020		2020		2020

Total interest and dividend income	$	13,009	$	13,155	$	13,507	$	12,967
Total interest expense		2,976		2,430		2,148		1,696

Net interest income		10,033		10,725		11,359		11,271
Provision for loan losses		2,740		1,000		4,000		2,100

Net interest income after
provision for loan losses		7,293		9,725		7,359		9,171

Total noninterest income		1,074		1,495		1,811		1,610
Total noninterest expense		7,252		7,689		7,022		7,825

Income before income taxes		1,115		3,531		2,148		2,956
Income taxes		74		565		295		467

Net income	$	1,041	$	2,966	$	1,853	$	2,489

Per share data:
Net income
Basic	$	0.16	$	0.47	$	0.29	$	0.39
Diluted		0.16		0.46		0.29		0.39
Average shares outstanding:
Basic		6,417,109		6,369,467		6,376,291		6,378,706
Diluted		6,429,443		6,388,118		6,385,765		6,397,681

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 2021, the Company reported net income of $18.6 million, or $3.00 per diluted share, compared with $8.3 million, or $1.30 per diluted share, in 2020. The Company’s net income as a percentage of average assets for 2021 and 2020 was 1.36% and 0.64%, respectively, while the Company’s net income as a percentage of average shareholders’ equity was 12.74% and 5.87%, respectively.

Highlights of the Company’s performance in 2021 (on a year-over-year basis unless noted) include the following:

●

Net income increased 123.2% to $18.6 million

●

Net interest margin improved by 25 basis points to 3.79%, compared to 3.54%

●

Total noninterest income was up 20.3% to $7.2 million

●

Pre-tax, pre-provision for loan losses⁽¹⁾ income increased 19.4% to $23.4 million

●

Return on average assets increased to 1.36% from 0.64%

●

Return on average equity increased to 12.74% from 5.87%

●

Return on average tangible common equity⁽¹⁾ increased to 14.38% from 6.66%

●

The efficiency ratio improved to 56.48%, compared to 58.77%

●

Strong asset quality with nonperforming loans to total loans of 0.49%

●

Middlefield repurchased 512,449 shares of stock in 2021, including 166,346 shares during the fourth quarter of 2021

(1)

A reconciliation of non-GAAP financial measures can be found in the following tables.

Reconciliation of Common Stockholders' Equity to Tangible Common Equity	For the Twelve Months Ended
(Dollar amounts in thousands)	December 31,		December 31,
	2021		2020

Stockholders' Equity (GAAP)	$	145,335	$	143,810
Less Goodwill and other intangibles		16,474		16,795
Tangible Common Equity (Non-GAAP)	$	128,861	$	127,015

Shares outstanding		5,888,737		6,379,323
Tangible book value per share	$	21.88	$	19.91

Reconciliation of Average Equity to Return on Average Tangible Common Equity	For the Twelve Months Ended
	December 31,			December 31,
	2021			2020

Average Stockholders' Equity	$	146,237		$	142,241
Less Average Goodwill and other intangibles		16,634			16,960
Average Tangible Common Equity	$	129,603		$	125,281

Net income	$	18,633			8,349
Return on average tangible common equity (annualized)		14.38	%		6.66	%

Reconciliation of Pre-Tax Pre-Provision Income (PTPP)	For the Twelve Months Ended
	December 31,		December 31,
	2021		2020

Net income (GAAP)	$	18,633	$	8,349
Add Income Taxes		4,065		1,401
Add Provision for loan losses		700		9,840
PTPP (Non-GAAP)	$	23,398	$	19,590

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 recoveries of loans previously charged off and reduced by loans charged off. For a complete 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 the Company’s securities are valued based on prices compiled by third-party vendors using observable market data. However, particular 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 quarterly 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.

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 80.9% of the total available-for-sale portfolio as of December 31, 2021, 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. Quarterly, 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 entire 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. When they occur, these changes can affect deferred taxes and accrued taxes as well as the current period’s income tax expense and can be significant to the Company's operating results.

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, we are required to perform the impairment test by calculating the fair value of the reporting unit and comparing it against the reporting unit's carrying amount. 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.

Changes in Financial Condition

General The Company’s total assets decreased $61.0 million or 4.4% to $1.33 billion on December 31, 2021, from $1.39 billion on December 31, 2020. For the same period, net loans decreased $123.3 million, offset by an increase of $56.0 million in investments and a $7.1 million increase in cash and equivalents. Total liabilities decreased $62.5 million or 5.0%, while stockholders’ equity increased $1.5 million, or 1.1%.

Cash and cash equivalents Cash and due from banks and federal funds sold represent cash and cash equivalents, which increased $7.1 million or 6.3% to $119.5 million on December 31, 2021, from $112.4 million on December 31, 2020. 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. Cash remains elevated and can be traced to pandemic-related government stimulus. This resulted in increased deposits, as retail and commercial customers keep excess funds in liquid deposit accounts. The increase in cash and cash equivalents since December 31, 2020, is due to the forgiveness of PPP loans, partially offset by a decrease in deposits.

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 available-for-sale investment securities increased $55.8 million, or 48.8%, compared to 2020. Securities purchased were $68.9 million, and there were no sales of securities for the twelve months ended December 31, 2021.

The municipal bond portfolio, which totaled $127.3 million or 74.8% of the Company's total investment portfolio on December 31, 2021, increased $49.0 million due to security purchases in 2021. Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is evaluated on attributes that have historically influenced default incidences in the municipal market, such as sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. These investments have historically proven to have extremely low credit risk.

On December 31, 2021, the Company held $32.5 million of subordinated debt in other banks compared to $21.3 million on December 31, 2020. The average yield on this portfolio was 4.79% on December 31, 2021, as compared to 5.19% on December 31, 2020

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, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers’ businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well dispersed geographically. Net loans decreased $123.3 million or 11.3% to $967.3 million on December 31, 2021, from $1.09 billion on December 31, 2020. The following table summarizes fluctuation within the primary segments of the loan portfolio (dollars in thousands):

	2021			2020			$ change			% change

Commercial real estate:
Owner occupied	$	111,470		$	103,121			8,349			8.1	%
Non-owner occupied		283,618			309,424			(25,806	)		-8.3	%
Multifamily		31,189			39,562			(8,373	)		-21.2	%
Residential real estate		240,089			233,995			6,094			2.6	%
Commercial and industrial		148,812			232,044			(83,232	)		-35.9	%
Home equity lines of credit		104,355			112,543			(8,188	)		-7.3	%
Construction and other		54,148			63,573			(9,425	)		-14.8	%
Consumer installment		8,010			9,823			(1,813	)		-18.5	%
Total loans		981,691			1,104,085			(122,394	)		-11.1	%
Less: Allowance for loan and lease losses		(14,342	)		(13,459	)		(883	)		6.6	%

Net loans	$	967,349		$	1,090,626			(123,277	)		-11.3	%

The decrease in net loans is a result of PPP loan forgiveness. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020. As a qualified SBA lender, we were automatically authorized to originate PPP loans. As of December 31, 2021, we approved 2,097 applications for up to $212.6 million of loans under the PPP. In addition, on December 31, 2021, we processed $178.4 million of PPP loan forgiveness. Throughout 2021, Middlefield has helped customers receive $149.6 million of forgiveness payments under the terms of the program.

The product mix in the loan portfolio consists of CRE non-owner occupied loans equaling 28.9% of total loans, residential real estate loans 24.5%, commercial and industrial loans 15.2%, HELOC loans 10.6%, CRE owner-occupied loans 11.3%, construction and other loans 5.5%, CRE multifamily loans 3.2%, and consumer installment loans 0.8%, at December 31, 2021 compared with 28.0%, 21.2%, 21.0%, 10.2%, 9.3%, 5.8%, 3.6%, and 0.1%, respectively, at December 31, 2020.

Loans contributed to 91.5% of total interest income in 2021 and 93.1% in 2020. The loan portfolio yield of 4.56% in 2021 was 45 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 balances 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 approval. 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 expects loan growth to be minimal but will not lower the conservative credit standards to increase loan originations in a slowing economy. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the portfolio.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures used in processing applications for the PPP. Middlefield Bank may be exposed to the risk of similar litigation from customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against Middlefield Bank and is not resolved in a manner favorable to Middlefield Bank, it may result in significant financial liability or adversely affect Middlefield Bank’s reputation. In addition, litigation can be costly, regardless of the outcome. Any financial liability, litigation costs, or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition, and results of operations.

Middlefield Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by Middlefield Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Middlefield Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Middlefield Bank.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. According to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions that have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions that are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management concerning their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. On December 31, 2021, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represented 255.5% of total risk-based capital. Construction, land, and land development loans represent 36.1% of total risk-based capital. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and robust underwriting criteria for its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows owing to interest rate increases and declines in net operating income.

Nevertheless, we may be required to maintain higher levels of capital due to our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has a comprehensive capital planning policy, including pro forma projections and stress testing. The Board of Directors has established internal minimum targets for regulatory capital ratios that are more than well-capitalized ratios.

Other real estate owned (“OREO”). OREO decreased $395,000 from December 31, 2020, to $7.0 million as of December 31, 2021.

Restricted stock. The Company’s investment in FHLB’s restricted stock decreased $658,000, or 13.0%, to $4.4 million as of December 31, 2021, compared to $5.1 million as of December 31, 2020.

Premises and equipment, net. The Company’s investment in premises and equipment, net, decreased $1.1 million, or 5.8%, to $17.3 million as of December 31, 2021, compared to $18.3 million as of December 31, 2020. This decrease is mainly due to the depreciation of previously capitalized assets.

Goodwill and other intangibles. The carrying value of goodwill was $15.1 million on December 31, 2021, and December 31, 2020. During 2020, the Company considered the negative economic impact resulting from the COVID-19 shutdowns to be a triggering event necessitating a mid-cycle analysis for impairment. The Company performed a quantitative analysis of goodwill on March 31, 2020, using multiple approaches. The primary methodology was the discounted cash flow approach while also considering a market approach of comparing to multiples of similar public companies as well as market price with control premiums. The results from each primary method showed the reporting unit's valuation above carrying value on March 31, 2020. A weighted average of the methodologies resulted in a fair value approximately 18% higher than its carrying value.

Each of the valuation methods used by the Company requires significant assumptions. Depending on the specific method, assumptions are made regarding growth rates, discount rates for cash flows, control premiums, and selected multiples. Changes to any of the assumptions could result in significantly different results. Based on the analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired.

The company also completed a qualitative assessment of goodwill as of September 30, 2021, and 2020 with no resulting goodwill impairment. There have been no triggering events since the goodwill analysis as of September 30, 2021, and therefore, management has determined there is no goodwill impairment as of December 31, 2021.

The Company also monitors the ongoing value of core deposit intangibles and mortgage servicing rights (“MSR”). As of December 31, 2021, the Company recorded a decrease in core deposit intangibles of $321,000 to $1.4 million, while MSR increased $66,000 to $542,000.

Bank-owned life insurance. BOLI increased by $122,000 to $17.1 million as of December 31, 2021, from $16.9 million at the end of 2020 due to 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 98.9% of the Company’s total funding sources on December 31, 2021. The deposit base consists of demand deposits, savings, money market accounts, and time deposits. Total deposits decreased $58.6 million to $1.17 billion on December 31, 2021, from $1.23 billion on December 31, 2020. The following table summarizes fluctuation within the primary segments of the deposit portfolio (in thousands):

	December 31,		December 31,
	2021		2020			$ change			% change

Noninterest-bearing demand	$	334,171		$	291,347	$	42,824			14.7	%
Interest-bearing demand		196,308			195,722		586			0.3	%
Money market		177,281			198,493		(21,212	)		-10.7	%
Savings		260,125			243,888		16,237			6.7	%
Time		198,725			295,750		(97,025	)		-32.8	%
Total deposits	$	1,166,610		$	1,225,200	$	(58,590	)		-4.8	%

Savings, money market deposit and NOW accounts have been stable sources of funds, making up a combined 54.3% of total deposits as of December 31, 2021. Due to the current low-interest-rate environment, the company has experienced an outflow of maturing time deposits to other products. The Company uses specific non-core funding instruments to grow the balance sheet and maintain liquidity. These deposits, either from a broker or a listing service, were $15.1 million on December 31, 2021, compared to $66.9 million on December 31, 2020.

Borrowed funds. The Company uses short-term and long-term borrowings as another funding source for asset growth and liquidity needs. These borrowings primarily include advances from the Federal Home Loan Bank of Cincinnati (the “FHLB”), subordinated debt, short-term borrowings from other banks, and federal funds purchased. Other borrowings decreased $4.1 million, or 24.3%, to $12.9 million as of December 31, 2021, from $17.0 million as of December 31, 2020.

In July 2017, the United Kingdom FCA, 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. Subsequently, in November 2020, the FCA proposed end dates immediately following the December 31, 2021 publication for the one-week and two-month LIBOR settings, and the June 30, 2023 publication for other LIBOR tenors. These announcements indicate that the continuation of LIBOR on the current basis cannot and will not be guaranteed after December 31, 2021 or June 30, 2023, as applicable. 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 2022.

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 increased $1.5 million, or 1.1%, to $145.3 million on December 31, 2021, from $143.8 million on December 31, 2020. This increase was primarily the result of an increase in retained earnings of $14.4 million, net of an increase in treasury stock of $12.3 million and a decrease in AOCI of $822,000. The change in retained earnings is due to the year-to-date net income offset by dividends paid, the change in treasury stock is due to the Company repurchasing 512,449 of its outstanding shares during the twelve months ended December 31, 2021, and the change in AOCI is due to fair value adjustments of available-for-sale securities.

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 consequent 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, 2021, 2020, and 2019. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

	For the Twelve Months Ended December 31,
	2021							2020							2019

	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⁾	$	1,052,351	$	47,896		4.56	%	$	1,079,788	$	49,003		4.55	%	$	997,744	$	50,390		5.06	%
Investment securities ⁽³⁾		142,705		4,244		3.45	%		109,863		3,381		3.68	%		101,381		3,188		3.77	%
Interest-earning deposits with other banks ⁽⁴⁾		97,417		195		0.20	%		56,222		254		0.45	%		44,943		947		2.11	%
Total interest-earning assets		1,292,473		52,335		4.11	%		1,245,873		52,638		4.28	%		1,144,068		54,525		4.83	%
Noninterest-earning assets		78,802							68,219							61,596
Total assets	$	1,371,275						$	1,314,092						$	1,205,664
Interest-bearing liabilities:
Interest-bearing demand deposits	$	212,063		274		0.13	%	$	144,897		445		0.31	%	$	102,550		374		0.36	%
Money market deposits		186,009		869		0.47	%		172,587		1,501		0.87	%		167,187		2,438		1.46	%
Savings deposits		255,267		162		0.06	%		211,151		510		0.24	%		199,515		1,399		0.70	%
Certificates of deposit		231,662		2,608		1.13	%		347,609		6,506		1.87	%		369,006		8,198		2.22	%
Short-term borrowings		85		-		0.00	%		22,637		79		0.35	%		14,808		368		2.49	%
Other borrowings		13,313		152		1.14	%		15,629		209		1.34	%		12,986		363		2.80	%
Total interest-bearing liabilities		898,399		4,065		0.45	%		914,510		9,250		1.01	%		866,052		13,140		1.52	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		320,104							252,615							199,672
Other liabilities		6,535							4,726							4,040
Stockholders' equity		146,237							142,241							135,900
Total liabilities and stockholders' equity	$	1,371,275						$	1,314,092						$	1,205,664
Net interest income			$	48,270						$	43,388						$	41,385
Interest rate spread ⁽¹⁾						3.66	%						3.27	%						3.31	%
Net interest margin ⁽²⁾						3.79	%						3.54	%						3.68	%
Ratio of average interest-earning assets to average interest-bearing liabilities						143.86	%						136.23	%						132.10	%

(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 $752, $742, and $720, for 2021, 2020, and 2019, respectively.
(4)	Includes dividends received on restricted stock.

Interest Rates and Interest Differential

	2021 versus 2020									2020 versus 2019

	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total

Interest-earning assets:
Loans receivable	$	(1,247	)	$	140		$	(1,107	)	$	4,154		$	(5,541	)	$	(1,387	)
Investment securities		1,207			(344	)		863			320			(127	)		193
Interest-bearing deposits with other banks		186			(245	)		(59	)		238			(931	)		(693	)
Total interest-earning assets		146			(449	)		(303	)		4,712			(6,599	)		(1,887	)


Interest-bearing liabilities:
Interest-bearing demand deposits		206			(377	)		(171	)		152			(81	)		71
Money market deposits		117			(749	)		(632	)		79			(1,016	)		(937	)
Savings deposits		107			(455	)		(348	)		82			(971	)		(889	)
Certificates of deposit		(2,170	)		(1,728	)		(3,898	)		(475	)		(1,217	)		(1,692	)
Short-term borrowings		(79	)		-			(79	)		195			(484	)		(289	)
Other borrowings		(31	)		(26	)		(57	)		74			(228	)		(154	)
Total interest-bearing liabilities		(1,850	)		(3,335	)		(5,185	)		107			(3,997	)		(3,890	)


Net interest income	$	1,996		$	2,886		$	4,882		$	4,605		$	(2,602	)	$	2,003

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)	2021			2020			2019

Average total assets	$	1,371,275		$	1,314,092		$	1,205,664

Average shareholders' equity	$	146,237		$	142,241		$	135,900

Net income	$	18,633		$	8,349		$	12,711

Cash dividends declared per share	$	0.69		$	0.60		$	0.57

Return on average total assets		1.36	%		0.64	%		1.05	%

Return on average shareholders' equity		12.74	%		5.87	%		9.35	%

Dividend payout ratio (1)		22.76	%		45.92	%		28.99	%

Average shareholders' equity to average assets		10.66	%		10.82	%		11.27	%

(1) Cash dividends declared on common shares divided by net income

Allowance for Loan and Lease Losses. The allowance for loan and lease losses (“ALLL”) represents the amount management estimates to be adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The ALLL is established through a provision for loan losses 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 changes in the near term. The total ALLL combines 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, 2021, totaled $14.3 million, representing an $883,000 increase from the end of 2020. For 2021, the provision for loan losses was $700,000, which represented a decrease of $9.1 million from the $9.8 million provided during 2020. During 2021, net charge-offs decreased by $3.3 million to $183,000 in net recoveries compared to $3.1 million in net charge-offs in 2020. While the prior period provision was mostly attributable to the pandemic, the lack of provision for this year was impacted by credit quality and loan balance decreases.

The specific allowance incorporates the results of measuring impaired loans. The allowance formula 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 determine the adequacy of the ALLL on December 31, 2021, 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. See Notes 5 for discussions on the impact the COVID-19 pandemic has had on the bank’s ALLL assessment. 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.

The following table sets forth information concerning the Company's credit ratios for the periods presented:

	For the Years Ended
	December 31,
(Dollars in Thousands)	2021			2020
Ratio of allowance for loan and lease losses to loans		1.46	%		1.22	%
outstanding at end of period
Net charge-offs to average loans		-0.02	%		0.29	%
Nonperforming loans/total loans		0.49	%		0.71	%
Allowance for loan losses/nonperforming loans		295.16	%		171.28	%

The following table illustrates the net charge-offs to average loans ratio for each loan category for each reported period:

	At December 31,
	2021								2020
	Average Loan Balance		Net charge-offs			Net charge-offs to average loans				Average Loan Balance		Net charge-offs			Net charge-offs to average loans
(Dollars in Thousands)
Type of Loans:
Commercial real estate:
Owner occupied	$	108,269	$	45			0.04	%		$	106,258	$	(33	)		-0.03	%
Non-owner occupied		299,212		(175	)		-0.06				316,233		(2,948	)		-0.93
Multifamily		35,696		-			0.00				52,528		-			0.00
Residential real estate		239,193		-			0.00				242,392		(20	)		-0.01
Commercial and industrial		192,156		193			0.10				166,270		49			0.03
Home equity lines of credit		109,433		56							116,229		29			0.02
Construction and other		59,395		46			0.08				67,348		157			0.23
Consumer installment		8,997		18			0.20				12,530		(383	)		-3.06

Total	$	1,052,351		183			0.02			$	1,079,788		(3,149	)		-0.29

Refer to Note 5 in the consolidated financial statements.

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

	At December 31,
	2021					2020
			Percent of					Percent of
			Loans in Each					Loans in Each
			Category to					Category to
	Amount		Total Loans			Amount		Total Loans
(Dollars in Thousands)

Type of Loans:
Commercial real estate:
Owner occupied	$	1,836		11.35	% $		1,342		9.34
Non-owner occupied		7,431		28.89			6,817		28.03
Multifamily		454		3.18			461		3.58
Residential real estate		1,740		24.46			1,683		21.19
Commercial and industrial		882		15.16			1,353		21.02
Home equity lines of credit		1,452		10.63			1,405		10.19
Construction and other		533		5.52			378		5.76
Consumer installment		14		0.82			20		0.89

Total	$	14,342		100.0	% $		13,459		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 the collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes that the borrower’s financial condition is such that collection of principal and interest is doubtful after considering economic and business conditions. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.

Nonperforming loans exclude TDRs that perform according to their terms over a prescribed period. 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 24 TDRs accruing interest with a balance of $1.7 million as of December 31, 2021, compared to 25 TDRs with a balance of $2.6 million as of December 31, 2020. Nonperforming loans amounted to $4.9 million or 0.49% of total loans and $7.9 million or 0.71% of total loans on December 31, 2021, and December 31, 2020, respectively.

A significant factor in determining the appropriateness of the ALLL is the type of collateral that 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 debt service burden and reduce the future loss exposure to the Company.

Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of interest is doubtful after considering economic and business conditions. Payments received on nonaccrual loans are applied against principal according to management's assessment of collectability.

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 to be collectively evaluated. Loans that experience insignificant payment delays, defined as 90 days or less, are generally 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. An allowance for loan and lease loss is maintained for estimated losses until that time.

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $204,000 in 2021 and $126,000 in 2020. 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

2021 Results Compared to 2020 Results

General The Company posted net income of $18.6 million, compared to $8.3 million for the year ended December 31, 2020. On a per-share basis, 2021 earnings were $3.00 per diluted share, representing an increase from the $1.30 per diluted share for the year ended December 31, 2020. The return on average equity for the year ended December 31, 2021, was 12.74%, and the Company’s return on average assets was 1.36%, compared to 5.87% and 0.64%, respectively, for the year ended December 31, 2020.

Net interest income Net interest income, 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 $4.9 million in 2021 to $48.3 million compared to $43.4 million for 2020. This increase results from a $5.2 million decrease in interest expense, partially offset by a $303,000 decrease in interest and dividend income. Interest-earning assets averaged $1.29 billion during 2021, a year-over-year increase of $46.6 million from $1.25 billion for 2020. The Company’s average interest-bearing liabilities decreased from $914.5 million in 2020 to $898.4 million in 2021.

A key performance indicator, net interest margin, is net interest income as a percentage of total interest-earning assets. For 2021 the net interest margin, measured on a fully taxable-equivalent basis, increased to 3.79%, compared to 3.54% in 2020. The improvement in the net interest margin is attributable to a 56 basis point decrease in the cost of interest-bearing liabilities partially offset by a reduction of 17 basis points in the yield earned on total interest-earning assets for the year ended December 31, 2021.

The Company’s net interest margin is subject to fluctuation due to PPP loan forgiveness. As the Company is in an asset-sensitive position, reductions in market interest rates harm margin as the Company’s interest-earning assets reprice faster than its interest-bearing liabilities. Much of our asset sensitivity is due to commercial loans with variable interest rates. Both loan types have floor rates. The benefit of these floors is more evident if the Federal Reserve maintains short-term interest rates at current levels

Interest and dividend income Interest and dividend income decreased $303,000 to $52.3 million for 2021, attributable to a $1.1 million decrease in interest and fees on loans, partially offset by a $863,000 increase on investment securities. The decrease in the interest earned on loans resulted from the decrease in the average balance of loans receivable. The average balance of loans receivable decreased by $27.4 million or 2.54% to $1.05 billion for the year ended December 31, 2021, compared to $1.08 billion for the year ended December 31, 2020, which resulted in a $1.2 million decrease to interest income. The loans receivable yield increased to 4.56% for 2021, from 4.55% in 2020, which resulted in a $142,000 increase in interest income.

Interest on investment securities increased $863,000 to $4.2 million for 2021, compared to $3.4 million for 2020. The average balance of investment securities increased $32.8 million to $142.7 million for the year ended December 31, 2021, compared to $109.9 million for the year ended December 31, 2020. The investment securities yield decreased 23 basis points to 3.45% for 2021, compared to 3.68% for 2020.

Interest expense Interest expense decreased $5.2 million or 56.1% to $4.1 million for 2021, compared with $9.3 million for 2020. This decrease is attributable to a reduction in the average balance of certificates of deposits of $115.9 million, or 33.4%. This decrease is further attributable to the decline in the cost paid on certificates of deposit and money market deposits. The cost of these deposits decreased by 74 and 40 basis points, respectively. The changes in costs were due to declining interest rates on deposit products in response to the unprecedented reduction in the targeted federal funds interest rate and other continuing effects of the COVID-19 pandemic.

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 ordinary course of lending. The provision for loan losses for the year ended December 31, 2021, was $700,000, compared to $9.8 million in 2020. The loan loss provision is based upon management's assessment of various 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. While the prior period provision was primarily attributable to the pandemic, the provision for this period was impacted by credit quality and low loan growth.

The ratio of nonperforming loans to total loans was 0.49% on December 31, 2021, decreasing from 0.71% on December 31, 2020. The ratio of the allowance for loan and lease losses to total loans increased to 1.46% of total loans on December 31, 2021, compared to 1.22% on December 31, 2020. The Company remains confident in its conservative and disciplined approach to credit and risk management.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively assisted its customers with applications for resources through the program. On December 31, 2021, the Company carried $34.1 million of PPP loans classified as C&I loans for reporting purposes. The U.S. government fully guarantees loans funded through the PPP program. This guarantee exists at the loans' inception and throughout the loans' lives and was not entered into separately and apart from the loans. ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans. Although the loans are fully guaranteed by the U.S. government and absent any specific loss information about any of our PPP loans, the Company does provide a $137,000 qualitative provision for loan losses on its PPP loans on December 31, 2021.

Noninterest income Noninterest income increased $1.2 million or 20.3% to $7.2 million for 2021 compared to $6.0 million for 2020. This increase resulted from service charges on deposits accounts, gains on equity securities, and earnings on bank-owned life insurance, which increased $886,000, $310,000, and $119,000, respectively. Service charges on deposit accounts increased partially due to cash management fees relating to cannabis-related deposit business. The increase in the gain on equity securities resulted from the improvement in the stock market year over, and the increase in earnings on bank-owned life insurance is due to a payout on a claim. These increases were offset by a decrease of $247,000 in gain on loan sales, resulting from the decline in demand for residential refinances.

Noninterest expense Operating expenses increased $2.3 million, or 7.7% to $32.1 million for 2021 compared to $29.8 million for 2020. The increase resulted from an increase in salaries and employee benefits, data processing costs, advertising expense, and gain on other real estate owned, which increased $1.3 million, $230,000, $187,000, and $183,000, respectively. The salary increase is primarily due to increased profit-sharing expense, restricted stock expense, and increased recognition of deferred PPP costs in the prior year. The change in gains on other real estate owned resulted from an aggregate loss in the previous year.

Provision for income taxes The provision for income taxes increased by $2.7 million, or 190.1%, to $4.1 million for 2021 from $1.4 million for 2020. The Company’s effective federal income tax rate in 2021 was 17.9% compared to 14.4% in 2020. The increase in the effective income tax rate year over year was a result of decreases in tax-exempt income.

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 repricing 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 Company's Board of Directors continues to believe in a strong asset/liability management process 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 and the Company’s 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 for meeting its customers' current and projected needs.

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, including 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. On December 31, 2021, cash and cash equivalents totaled $119.5 million or 9.0% of total assets, equity securities totaled $818,000 or 0.1% of total assets, and investment securities classified as available for sale totaled $170.2 million or 12.8% of total assets. Management believes that the company's liquidity needs 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 $15.4 million and $15.1 million for 2021 and 2020, respectively, generated principally from net income of $18.6 million and $8.3 million in these respective periods.

Investing activities provided net cash of $70.9 million, which consisted primarily of a decrease in loans of $127.3 million and investment repayments and maturities of $11.5 million. This was partially offset by investment purchases of $68.9 million. For the same period ended in 2020, investing activities used net cash of $135.3 million, which consisted primarily of an increase in loans of $127.9 million. Also included in this usage are investment purchases of $24.1 million. Partially offsetting the use are the proceeds from investment repayments and maturities of $18.2 million.

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, and the payment of dividends. During 2021, net cash used by financing activities totaled $79.2 million, principally derived from a decrease in deposits of $58.6 million, and $12.3 million was a result of the repurchase of treasury shares. The Company repurchased 512,449 of its outstanding shares during the twelve months ended December 31, 2021. During 2020, net cash provided by financing activities totaled $197.5 million, principally derived from an increase in deposits of $204.4 million. Partially offsetting the proceeds are decreases in short-term borrowings, net, of $5.1 million and the payment of $3.8 million in cash dividends

Management monitors projected liquidity needs and determines the desired level based partly on the Company's commitment to making loans and management's assessment of the Company's ability to generate funds. As a result, 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 ensure regulatory compliance and capital adequacy for future expansion.

Registrant's Common Equity and Related Stockholder Matters

The Company had approximately 949 stockholders of record as of December 31, 2021. 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.

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, 2021. 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, 2021, the Company’s internal control over financial reporting was effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm because section 989G of the Dodd Frank Act exempts smaller reporting companies from the requirement of an attestation by registered public accountants concerning internal controls over financial reporting.

/s/ Thomas G. Caldwell

By: Thomas G. Caldwell

President and Chief Executive Officer

(Principal Executive Officer)

Date: March 15, 2022

/s/ Donald L. Stacy

By: Donald L. Stacy

Treasurer

(Principal Financial & Accounting Officer)

Date: March 15, 2022

Exhibit 21

Middlefield Banc Corp. Subsidiaries

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.

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.

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements File No. 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 15, 2022, relating to our audit of the consolidated financial statements, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K of Middlefield Banc Corp. for the year ended December 31, 2021.

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

Cranberry Township, Pennsylvania

March 15, 2022

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;

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 15, 2022		/s/ Thomas G. Caldwell

		Thomas G. Caldwell.
		President and Chief Executive Officer

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;

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):

(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 15, 2022		/s/ Donald L. Stacy

		Donald L. Stacy
		Principal Financial and Accounting Officer

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, 2021 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 15, 2022

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.