##### 



Branching out
 2007 Annual Report




---



##### 



Branching out




---



##### 



Statistical Summary
    
    
    2Decade of Progress
    
    
    4Letter to Our Shareholders
    
    
    8Letter from the Chairman
    
    
    10Middlefield Banc Corp. Board of Directors
    
    
    11Emerald Bank Directors, Staff & Officers
    
    
    15The Middlefield Banking Company Board of Directors
    
    
    16The Middlefield Banking Company Staff
    
    
    17The Middlefield Banking Company Officers
    
    
    18The Middlefield Banking Company Branch Locations
    
    
    19Financials
    
    
    21




---



##### 




  (in thousands)
 $
    2,799
    
    
    $
    3,273
    
    
    $
    3,701
    
    
    $
    3,884
    
    
    $
    3,37503
    
    
    
    04
    
    
    
    05
    
    
    
    06
    
    
    
    07
 (in thousands)
 $
    262,369
    
    
    $
    291,214
    
    
    $
    311,214
    
    
    $
    340,852
    
    
    $
    434,27303
    
    
    
    04
    
    
    
    05
    
    
    
    06
    
    
    
    07
 (in thousands)
 $
    23,504
    
    
    $
    24,822
    
    
    $
    27,289
    
    
    $
    30,464
    
    
    $
    34,96103
    
    
    
    04
    
    
    
    05
    
    
    
    06
    
    
    
    07
 (in thousands)
 $
    190,369
    
    
    $
    213,030
    
    
    $
    231,214
    
    
    $
    246,342
    
    
    $
    306,14703
    
    
    
    04
    
    
    
    05
    
    
    
    06
    
    
    
    07
  $
    1.89
    
    
    $
    2.18
    
    
    $
    2.50
    
    
    $
    2.60
    
    
    
    2.1703
    
    
    
    04
    
    
    
    05
    
    
    
    06
    
    
    
    07
  $
    0.65
    
    
    $
    0.77
    
    
    $
    0.80
    
    
    $
    0.87
    
    
    $
    0.9403
    
    
    
    04
    
    
    
    05
    
    
    
    06
    
    
    
    07




---



##### 




  $
    16.49
    
    
    $
    17.67
    
    
    $
    19.25
    
    
    $
    20.30
    
    
    $
    27.61'03
    
    
    
    '04
    
    
    
    '05
    
    
    
    '06
    
    
    
    '07
  1.13
    %
    
    
    1.17
    %
    
    
    1.23
    %
    
    
    1.22
    %
    
    
    0.85
    %'03
    
    
    
    '04
    
    
    
    '05
    
    
    
    '06
    
    
    
    '07
  12.39
    %
    
    
    13.36
    %
    
    
    14.43
    %
    
    
    13.59
    %
    
    
    10.06
    %'03
    
    
    
    '04
    
    
    
    '05
    
    
    
    '06
    
    
    
    '07




---



##### 



Decade of Progress 1998
    
    
    1999
    
    
    2000Interest income
    
    $
    10,901,445
    
    
    $
    11,448,619
    
    
    $
    12,770,170Interest expense
    
    $
    5,084,615
    
    
    $
    5,048,276
    
    
    $
    5,909,884Net interest income
    
    $
    5,816,830
    
    
    $
    6,400,343
    
    
    $
    6,860,286Provision for loan loss
    
    $
    270,000
    
    
    $
    296,000
    
    
    $
    275,000Net interest income after provision for loan losses
    
    $
    5,546,830
    
    
    $
    6,104,343
    
    
    $
    6,585,286Noninterest income, including security gains/losses
    
    $
    598,771
    
    
    $
    804,358
    
    
    $
    982,663Nonintest expense
    
    $
    3,824,819
    
    
    $
    4,254,374
    
    
    $
    4,408,617Income before income taxes
    
    $
    2,320,782
    
    
    $
    2,654,327
    
    
    $
    3,159,332Income taxes
    
    $
    630,337
    
    
    $
    735,318
    
    
    $
    992,661Net income
    
    $
    1,690,445
    
    
    $
    1,919,009
    
    
    $
    2,166,671Total Assets
    
    $
    155,557,609
    
    
    $
    165,512,453
    
    
    $
    176,488,813Deposits
    
    $
    128,827,889
    
    
    $
    135,094,459
    
    
    $
    147,166,046Equity Capital
    
    $
    16,656,797
    
    
    $
    17,689,055
    
    
    $
    18,243,362Loans Outstanding, Net
    
    $
    102,728,454
    
    
    $
    119,471,741
    
    
    $
    133,266,893Allowance For Loan Losses
    
    $
    1,538,726
    
    
    $
    1,756,137
    
    
    $
    2,037,322Net Charge-Offs (Recoveries)
    
    $
    66,074
    
    
    $
    78,589
    
    
    $
    (6,185
    )Full Time Employees (Average Equivalents)
    
    
    59
    
    
    
    61
    
    
    
    57Number of Offices
    
    
    4
    
    
    
    4
    
    
    
    4Earnings Per Share
    
    
    1.10
    
    
    
    1.25
    
    
    
    1.50Dividends Per Share
    
    
    0.33
    
    
    
    0.38
    
    
    
    0.40Book Value Per Share
    
    
    11.36
    
    
    
    12.13
    
    
    
    12.96Dividends Pay-out Ratio
    
    
    29.53
    %
    
    
    29.82
    %
    
    
    27.47
    %Cash Dividends Paid
    
    $
    499,215
    
    
    $
    572,343
    
    
    $
    595,255Return on Average Assets
    
    
    1.15
    %
    
    
    1.21
    %
    
    
    1.31
    %Return on Average Equity
    
    
    10.43
    %
    
    
    11.17
    %
    
    
    12.83
    %
 




---



##### 



2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007$
    13,706,569
    
    
    $
    14,119,963
    
    
    $
    14,647,163
    
    
    $
    15,732,536
    
    
    $
    17,378,504
    
    
    $
    19,494,550
    
    
    $
    24,871,934$
    6,747,922
    
    
    $
    6,148,086
    
    
    $
    5,724,907
    
    
    $
    5,768,898
    
    
    $
    6,654,614
    
    
    $
    8,567,442
    
    
    $
    13,530,919$
    6,958,647
    
    
    $
    7,971,877
    
    
    $
    8,922,256
    
    
    $
    9,963,638
    
    
    $
    10,723,890
    
    
    $
    10,927,108
    
    
    $
    11,341,015$
    170,000
    
    
    $
    300,000
    
    
    $
    315,000
    
    
    $
    174,000
    
    
    $
    302,000
    
    
    $
    60,000
    
    
    $
    429,391$
    6,788,647
    
    
    $
    7,671,877
    
    
    $
    8,607,256
    
    
    $
    9,789,638
    
    
    $
    10,421,890
    
    
    $
    10,867,108
    
    
    $
    10,911,624$
    1,194,193
    
    
    $
    1,143,217
    
    
    $
    1,428,144
    
    
    $
    1,779,231
    
    
    $
    2,119,237
    
    
    $
    2,427,455
    
    
    $
    2,632,592$
    4,741,374
    
    
    $
    5,206,339
    
    
    $
    6,105,450
    
    
    $
    6,965,706
    
    
    $
    7,424,640
    
    
    $
    7,938,373
    
    
    $
    9,372,650$
    3,241,466
    
    
    $
    3,608,755
    
    
    $
    3,929,950
    
    
    $
    4,603,163
    
    
    $
    5,116,487
    
    
    $
    5,356,190
    
    
    $
    4,171,566$
    970,859
    
    
    $
    1,107,806
    
    
    $
    1,131,330
    
    
    $
    1,330,000
    
    
    $
    1,415,156
    
    
    $
    1,471,943
    
    
    $
    796,223$
    2,270,607
    
    
    $
    2,500,949
    
    
    $
    2,798,620
    
    
    $
    3,273,163
    
    
    $
    3,701,331
    
    
    $
    3,884,247
    
    
    $
    3,375,343$
    197,857,964
    
    
    $
    226,245,533
    
    
    $
    262,369,448
    
    
    $
    291,213,986
    
    
    $
    311,214,191
    
    
    $
    340,603,704
    
    
    $
    434,273,056$
    167,382,728
    
    
    $
    187,384,494
    
    
    $
    219,839,910
    
    
    $
    239,885,451
    
    
    $
    249,449,640
    
    
    $
    271,050,193
    
    
    $
    362,918,000$
    19,786,807
    
    
    $
    21,746,408
    
    
    $
    23,504,314
    
    
    $
    24,822,024
    
    
    $
    27,289,365
    
    
    $
    30,463,934
    
    
    $
    34,961,384$
    150,766,103
    
    
    $
    172,642,646
    
    
    $
    190,358,883
    
    
    $
    213,029,852
    
    
    $
    231,213,699
    
    
    $
    246,341,647
    
    
    $
    306,146,646$
    2,062,252
    
    
    $
    2,300,485
    
    
    $
    2,521,270
    
    
    $
    2,623,431
    
    
    $
    2,841,098
    
    
    $
    2,848,887
    
    
    $
    3,299,276$
    145,070
    
    
    $
    61,767
    
    
    $
    94,215
    
    
    $
    71,839
    
    
    $
    84,333
    
    
    $
    52,211
    
    
    $
    422,52964
    
    
    
    66
    
    
    
    72
    
    
    
    73
    
    
    
    75
    
    
    
    80
    
    
    
    915
    
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    8
    
    
    
    91.54
    
    
    
    1.68
    
    
    
    1.89
    
    
    
    2.18
    
    
    
    2.50
    
    
    
    2.60
    
    
    
    2.170.52
    
    
    
    0.58
    
    
    
    0.65
    
    
    
    0.72
    
    
    
    0.80
    
    
    
    0.87
    
    
    
    0.9413.93
    
    
    
    15.35
    
    
    
    16.49
    
    
    
    17.67
    
    
    
    19.25
    
    
    
    20.30
    
    
    
    22.5634.00
    %
    
    
    34.30
    %
    
    
    34.37
    %
    
    
    32.72
    %
    
    
    31.69
    %
    
    
    33.43
    %
    
    
    43.07
    %$
    772,068
    
    
    $
    857,751
    
    
    $
    961,901
    
    
    $
    1,070,833
    
    
    $
    1,173,044
    
    
    $
    1,298,567
    
    
    $
    1,453,7071.22
    %
    
    
    1.17
    %
    
    
    1.13
    %
    
    
    1.17
    %
    
    
    1.23
    %
    
    
    1.22
    %
    
    
    0.85
    %11.89
    %
    
    
    12.08
    %
    
    
    12.39
    %
    
    
    13.36
    %
    
    
    14.43
    %
    
    
    13.59
    %
    
    
    10.06
    %
  




---



##### 








---



##### 



Reaching out to you




---



##### 



Letter to Our Shareholders 
 President and Chief Executive Officer
 To our Shareholders and Friends
        




---



##### 








---



##### 



Letter from the Chairman 
 Chairman, Board of Directors
 Chairmans Report to the Shareholders
       
 




---



##### 



Back row, left to right: Front row,
left to right:
 
 Chairman, Board of Directors, Middlefield Banc Corp.
The Middlefield Banking Company
Retired: Jaco Products and Capital Plastics
 Retired: Copperweld Steel
 Retired Retail Merchant
 Secretary/Treasurer
The Frank Agency, Inc.
 President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company
 Executive Vice President/Chief Operating Officer
Middlefield Banc Corp.
The Middlefield Banking Company
 President
McCaskey Landscape and Design, LLC
 Chief Financial Officer/Treasurer Molded
Fiber Glass Companies
 Northeast Ohio Senior District
Manager Waste Management of Ohio, Inc.
 President
Chesapeake Financial Advisors
 




---



##### 








---



##### 








---



##### 








---



##### 



Board of Directors
 Chairman, Board of Directors, Emerald Bank
President
Chesapeake Financial Advisors
 President and Chief Executive Officer
Emerald Bank
 Chief Executive Officer
The Kontogiannis Companies
 President
Anthony-Thomas Candy Co.
 Shareholder
Rea & Associates, Inc.
 President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company
 Chairman, Board of Directors, Middlefield
Banc Corp. The Middlefield Banking Company
Retired: Jaco Products and Capital Plastics
 Staff
 Accounting  Branch Supervisor  Loan Processing  Customer Services  Customer Services  Regional Loan Specialist
 Officers
 President and Chief Executive Officer
 Senior Vice President
Chief Lending Officcer
 
 
 Emerald Bank Drive up ATM   
 




---



##### 



Board of Directors
 Chairman, Board of Directors, Middlefield Banc Corp.
The Middlefield Banking Company
Retired: Jaco Products and Capital Plastics
 Retired: Copperweld Steel
 Retired Retail Merchant
 Secretary/Treasurer
The Frank Agency, Inc.
 President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company
 Executive Vice President/Chief Operating Officer
Middlefield Banc Corp.
The Middlefield Banking Company
 President
McCaskey Landscape and Design, LLC
 Chief Financial
Officer/Treasurer Molded
Fiber Glass Companies
 Northeast Ohio Senior District Manager
Waste Management of Ohio, Inc.
 




---



##### 



Staff
 Main Office:  Head Teller  Customer
Services  Teller  Customer Services  Teller*  Receptionist  Teller*  Teller*  Teller*  Teller  Teller*  Customer
Services  Teller*
 West Branch:  Customer Services  Head Teller  Teller  Teller*  Teller  Teller  Teller*
 Mantua Branch:  Branch Supervisor  Head Teller  Teller  Teller*
 Chardon Branch:  Customer Services  Teller*  Teller*  Teller*  Teller
 Newbury Branch:  Branch Manager  Customer Services  Teller  Teller*
 Garrettsville Branch:  Teller  Teller  Head Teller*  Teller  Customer Services  Teller  Teller*
 Orwell Branch:  Branch Supervisor  Teller  Teller*  Customer Services  Teller*
 Loan Department:  Loan Administrative Assistant  Lender  Loan Administrative Assistant  Loan Administrative Assistant  Loan Administrative Assistant  Loan Collection Manager  Loan Receptionist  Loan Administrative Assistant  Lender Lender
 Operations:  Bookkeeper  Bookkeeper  Bookkeeper  Audit Assistant*  Proof Operator  Facility
Maintenance Bookkeeper Compliance Assistant Float Teller
 Financial Services:  Financial Consultant
 *

denotes part time
 




---



##### 



Officers
 President and Chief Executive Officcer
 Executive Vice President
Chief Operating Officer
 Senior Vice President
Operations/Administration
 Senior Vice President
Senior Lender
 Senior Vice President
Chief Financial Officer
 Senior Vice
President Area Executive
 Vice President
Chief Accounting Officer
 Vice President
Human Resource Administrator
 Vice President
Network Administrator
 Vice President
Compliance and Security Officer
 Vice President
Loan Administration
 Vice President/Lending
 Vice President/Lending
 Assistant Vice President
 Assistant Vice President
 Assistant Vice President
West Branch Manager
 Assistant Vice President
Orwell Lending Officer
 Assistant Vice President
Chardon Branch Manager
 Assistant Vice President
Commercial Lender
 Banking Officer
Garrettsville Branch Manager
 




---



##### 








---



##### 








---



##### 



Consolidated Statements
    
    
    22Notes to Consolidated Financial Statements
    
    
    26Managements Discussion and Analysis
    
    
    52Shareholder Information
    
    
    70




---



##### 



Year Ended December 31,Consolidated Balance Sheet
    
    2007
    
    2006ASSETSCash and due from banks
    
    $
    9,072,972
    
    
    $
    6,893,148Federal funds sold
    
    
    8,631,963
    
    
    
    6,200,000Interest-bearing deposits in other institutions
    
    
    110,387
    
    
    
    546,454Cash and cash equivalents
    
    
    17,815,322
    
    
    
    13,639,602Investment securities available for sale
    
    
    85,967,764
    
    
    
    63,048,135Investment securities held to maturity
(fair value of $134,306 for 2006)
    
    
    
    
    
    
    125,853Loans
    
    
    309,445,922
    
    
    
    249,190,534Less allowance for loan losses
    
    
    3,299,276
    
    
    
    2,848,887Net loans
    
    
    306,146,646
    
    
    
    246,341,647Premises and equipment
    
    
    7,044,685
    
    
    
    6,742,465Goodwill
    
    
    4,371,206
    
    
    
    123,175Bank-owned life insurance
    
    
    7,153,381
    
    
    
    6,872,743Accrued interest and other assets
    
    
    5,774,052
    
    
    
    3,958,084TOTAL ASSETS
    
    $
    434,273,056
    
    
    $
    340,851,704LIABILITIESDeposits:Noninterest-bearing demand
    
    $
    41,348,219
    
    
    $
    41,002,573Interest-bearing demand
    
    
    19,566,035
    
    
    
    11,724,173Money market
    
    
    22,684,041
    
    
    
    14,738,767Savings
    
    
    76,895,857
    
    
    
    54,246,499Time
    
    
    202,423,848
    
    
    
    149,338,181Total deposits
    
    
    362,918,000
    
    
    
    271,050,193Short-term borrowings
    
    
    1,510,607
    
    
    
    1,609,738Other borrowings
    
    
    32,395,319
    
    
    
    36,112,738Accrued interest and other liabilities
    
    
    2,487,746
    
    
    
    1,615,101TOTAL LIABILITIES
    
    $
    399,311,672
    
    
    $
    310,387,770STOCKHOLDERS EQUITYCommon stock, no par value; 10,000,000 shares authorized,
1,701,546 and 1,519,887 shares issued
    
    
    26,650,123
    
    
    
    19,507,257Retained earnings
    
    
    13,746,956
    
    
    
    14,685,971Accumulated other comprehensive loss
    
    
    (52,969
    )
    
    
    (520,987
    )Treasury stock, at cost; 151,745 shares in 2007 and
95,080 shares in 2006
    
    
    (5,382,726
    )
    
    
    (3,208,307
    )TOTAL STOCKHOLDERS EQUITY
    
    
    34,961,384
    
    
    
    30,463,934TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    434,273,056
    
    
    $
    340,851,704
  




---



##### 



Year Ended December 31,Consolidated Statement of Income
    
    2007
    
    2006
    
    2005INTEREST AND DIVIDEND INCOMEInterest and fees on loans
    
    $
    21,063,258
    
    
    $
    17,092,516
    
    
    $
    15,040,518Interest-bearing deposits in other institutions
    
    
    155,550
    
    
    
    20,175
    
    
    
    15,500Federal funds sold
    
    
    498,040
    
    
    
    117,115
    
    
    
    35,173Investment securities:Taxable
    
    
    1,265,673
    
    
    
    1,143,375
    
    
    
    1,353,035Tax-exempt
    
    
    1,773,292
    
    
    
    1,038,318
    
    
    
    864,745Other dividend income
    
    
    116,121
    
    
    
    83,051
    
    
    
    69,533TOTAL INTEREST AND DIVIDEND INCOME
    
    
    24,871,934
    
    
    
    19,494,550
    
    
    
    17,378,504INTEREST EXPENSEDeposits
    
    
    11,633,010
    
    
    
    7,157,226
    
    
    
    5,520,206Shortterm borrowings
    
    
    92,720
    
    
    
    167,475
    
    
    
    103,836Other borrowings
    
    
    1,805,189
    
    
    
    1,242,741
    
    
    
    1,030,572TOTAL INTEREST EXPENSE
    
    
    13,530,919
    
    
    
    8,567,442
    
    
    
    6,654,614NET INTEREST INCOME
    
    
    11,341,015
    
    
    
    10,927,108
    
    
    
    10,723,890Provision for loan losses
    
    
    429,391
    
    
    
    60,000
    
    
    
    302,000NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    10,911,624
    
    
    
    10,867,108
    
    
    
    10,421,890NONINTEREST INCOMEService charges on deposit accounts
    
    
    1,954,992
    
    
    
    1,800,173
    
    
    
    1,579,121Investment securities gains (losses), net
    
    
    7,942
    
    
    
    (5,868
    )
    
    
    Earnings on bank-owned life insurance
    
    
    280,638
    
    
    
    239,761
    
    
    
    208,677Other income
    
    
    389,020
    
    
    
    393,389
    
    
    
    331,439TOTAL NONINTEREST INCOME
    
    
    2,632,592
    
    
    
    2,427,455
    
    
    
    2,119,237NONINTEREST EXPENSESalaries and employee benefits
    
    
    4,458,075
    
    
    
    3,675,120
    
    
    
    3,568,603Occupancy
    
    
    745,935
    
    
    
    507,250
    
    
    
    495,982Equipment
    
    
    525,250
    
    
    
    440,878
    
    
    
    432,635Data processing costs
    
    
    699,185
    
    
    
    634,707
    
    
    
    625,856Professional fees
    
    
    422,991
    
    
    
    333,932
    
    
    
    293,138Ohio state franchise tax
    
    
    424,873
    
    
    
    360,000
    
    
    
    284,950Advertising
    
    
    316,112
    
    
    
    331,644
    
    
    
    302,679Postage and freight
    
    
    208,554
    
    
    
    189,629
    
    
    
    189,970Other expense
    
    
    1,571,675
    
    
    
    1,465,213
    
    
    
    1,230,826TOTAL NONINTEREST EXPENSE
    
    
    9,372,650
    
    
    
    7,938,373
    
    
    
    7,424,639Income before income taxes
    
    
    4,171,566
    
    
    
    5,356,190
    
    
    
    5,116,488Income taxes
    
    
    796,223
    
    
    
    1,471,943
    
    
    
    1,415,156NET INCOME
    
    $
    3,375,343
    
    
    $
    3,884,247
    
    
    $
    3,701,332EARNINGS PER SHAREBasic
    
    $
    2.17
    
    
    $
    2.61
    
    
    $
    2.50Diluted
    
    
    2.14
    
    
    
    2.57
    
    
    
    2.47
  




---



##### 



AccumulatedOther
    
    
    
    
    
    TotalConsolidated Statement of
    
    Common Stock
    
    Retained
    
    Comprehensive
    
    Treasury
    
    Stockholders
    
    ComprehensiveChanges in Stockholders Equity
    
    Shares
    
    Amount
    
    Earnings
    
    Income (Loss)
    
    Stock
    
    Equity
    
    Income (Loss)Balance, December 31, 2004
    
    
    1,355,488
    
    
    
    12,815,927
    
    
    
    15,004,552
    
    
    
    (28,682
    )
    
    
    (2,969,773
    )
    
    
    24,822,023Net income
    
    
    
    
    
    
    
    
    
    
    3,701,332
    
    
    
    
    
    
    
    
    
    
    
    3,701,332
    
    
    $
    3,701,332Other comprehensive income:Unrealized loss on available-for-sale securities,
net of tax benefit of $334,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (648,406
    )
    
    
    
    
    
    
    (648,406
    )
    
    
    (648,406
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,052,926Exercise of stock options
    
    
    2,583
    
    
    
    71,386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,386Common stock issued
    
    
    7,158
    
    
    
    285,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285,669Five percent stock dividend
(including cash paid for fractional shares)
    
    
    63,549
    
    
    
    2,557,847
    
    
    
    (2,572,949
    )
    
    
    
    
    
    
    
    
    
    
    (15,102
    )Dividend reinvestment plan
    
    
    6,209
    
    
    
    245,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,506Cash dividends ($.80 per share)
    
    
    
    
    
    
    
    
    
    
    (1,173,044
    )
    
    
    
    
    
    
    
    
    
    
    (1,173,044
    )Balance, December 31, 2005
    
    
    1,434,987
    
    
    
    15,976,335
    
    
    
    14,959,891
    
    
    
    (677,088
    )
    
    
    (2,969,773
    )
    
    
    27,289,365Net income
    
    
    
    
    
    
    
    
    
    
    3,884,247
    
    
    
    
    
    
    
    
    
    
    
    3,884,247
    
    
    $
    3,884,247Other comprehensive income:Unrealized gain on available-for-sale securities,
net of reclassification adjustment, net of taxes
of $80,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,101
    
    
    
    
    
    
    
    156,101
    
    
    
    156.101Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,040,348Exercise of stock options
    
    
    2,439
    
    
    
    62,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,115Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238,534
    )
    
    
    (238,534
    )Common stock issued
    
    
    7,420
    
    
    
    305,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305,711Five percent stock dividend
(including cash paid for fractional shares)
    
    
    67,284
    
    
    
    2,842,749
    
    
    
    (2,859,600
    )
    
    
    
    
    
    
    
    
    
    
    (16,851
    )Dividend reinvestment plan
    
    
    7,757
    
    
    
    320,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320,347Cash dividends ($.87 per share)
    
    
    
    
    
    
    
    
    
    
    (1,298,567
    )
    
    
    
    
    
    
    
    
    
    
    (1,298,567
    )Balance, December 31, 2006
    
    
    1,519,887
    
    
    
    19,507,257
    
    
    
    14,685,971
    
    
    
    (520,987
    )
    
    
    (3,208,307
    )
    
    
    30,463,934Net income (unaudited)
    
    
    
    
    
    
    
    
    
    
    3,375,343
    
    
    
    
    
    
    
    
    
    
    
    3,375,343
    
    
    $
    3,375,343Other comprehensive income:Unrealized loss on available-for-sale securities,
net of taxes of $241,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    468,018
    
    
    
    
    
    
    
    468,018
    
    
    
    468,018Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,843,361Exercise of stock options
    
    
    538
    
    
    
    14,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,182Stock based compensation expense recognized
in earnings
    
    
    
    
    
    
    26,435
    
    
    
    12,695
    
    
    
    
    
    
    
    
    
    
    
    39,130Purchase of treasury stock (56,665 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,174,419
    )
    
    
    (2,174,419
    )Common stock issued as a result of the
acquisition of Emerald Bank
    
    
    92,447
    
    
    
    3,662,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,662,750Common stock issued
    
    
    5,735
    
    
    
    221,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221,360Five percent stock dividend
(including cash paid for fractional shares)
    
    
    73,547
    
    
    
    2,857,301
    
    
    
    (2,873,346
    )
    
    
    
    
    
    
    
    
    
    
    (16,045
    )Dividend reinvestment plan
    
    
    9,392
    
    
    
    360,838
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    360,838Cash dividends ($.94 per share)
    
    
    
    
    
    
    
    
    
    
    (1,453,707
    )
    
    
    
    
    
    
    
    
    
    
    (1,453,707
    )Balance, December 31, 2007
    
    
    1,701,546
    
    
    $
    26,650,123
    
    
    $
    13,746,956
    
    
    $
    (52,969
    )
    
    $
    (5,382,726
    )
    
    $
    34,961,384Components of comprehensive (loss):
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    
    2006
    
    
    
    2005Change in net unrealized gain (loss)
on investments available for sale
    
    
    
    
    
    
    
    
    
    $
    472,771
    
    
    $
    152,228
    
    
    $
    (648,406
    )Realized (gains) losses included in net income,
net of taxes of $2,448, $1,995, and $0
    
    
    
    
    
    
    
    
    
    
    (4,753
    )
    
    
    3,873
    
    
    
    TOTAL
    
    
    
    
    
    
    
    
    
    $
    468,018
    
    
    $
    156,101
    
    
    $
    (648,406
    )
  




---



##### 



Year Ended December 31,Consolidated Statement of Cash Flows
    
    2007
    
    2006
    
    2005OPERATING ACTIVITIESNet income
    
    $
    3,375,343
    
    
    $
    3,884,247
    
    
    $
    3,701,332Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses
    
    
    429,391
    
    
    
    60,000
    
    
    
    302,000Depreciation and amortization
    
    
    597,741
    
    
    
    578,592
    
    
    
    448,386Amortization of premium and discount on investment securities
    
    
    226,766
    
    
    
    233,044
    
    
    
    289,111Amortization of net deferred loan fees
    
    
    (65,763
    )
    
    
    (78,577
    )
    
    
    (139,722
    )Investment securities gains (losses), net
    
    
    (7,942
    )
    
    
    5,868
    
    
    
    Earnings on bank-owned life insurance
    
    
    (280,638
    )
    
    
    (239,761
    )
    
    
    (208,677
    )Deferred income taxes
    
    
    97,308
    
    
    
    (58,058
    )
    
    
    (85,339
    )Compensation expense on stock options
    
    
    26,435
    
    
    
    
    
    
    
    Increase in accrued interest receivable
    
    
    (292,056
    )
    
    
    (87,907
    )
    
    
    (217,022
    )Increase in accrued interest payable
    
    
    540,144
    
    
    
    350,939
    
    
    
    155,449Other, net
    
    
    (352,696
    )
    
    
    (142,067
    )
    
    
    (280,533
    )Net cash provided by operating activities
    
    
    4,294,033
    
    
    
    4,506,320
    
    
    
    3,964,985INVESTING ACTIVITIESDecrease in interest-bearing deposits in other institutions, net
    
    
    
    
    
    
    
    
    
    
    614,506Investment securities available for sale:Proceeds from repayments and maturities
    
    
    10,583,584
    
    
    
    11,109,971
    
    
    
    11,361,937Purchases
    
    
    (32,990,009
    )
    
    
    (16,932,389
    )
    
    
    (13,279,687
    )Proceeds from sales
    
    
    
    
    
    
    658,976
    
    
    
    Investment securities held to maturity:Proceeds from repayments and maturities
    
    
    
    
    
    
    95,643
    
    
    
    Proceeds from sale of securities
    
    
    102,942
    
    
    
    
    
    
    
    Increase in loans, net
    
    
    (20,959,699
    )
    
    
    (15,109,371
    )
    
    
    (18,346,125
    )Acquisition of subsidiary bank
    
    
    (1,828,301
    )
    
    
    
    
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (91,100
    )
    
    
    (93,643
    )
    
    
    (63,300
    )Purchase of bank-owned life insurance
    
    
    
    
    
    
    (1,000,000
    )
    
    
    Purchase of premises and equipment
    
    
    (570,065
    )
    
    
    (585,837
    )
    
    
    (455,570
    )Proceeds from the sale of other real estate owned
    
    
    61,229
    
    
    
    
    
    
    
    Deposit acquisition premium
    
    
    (2,124,212
    )
    
    
    
    
    
    
    Net cash used for investing activities
    
    
    (47,815,631
    )
    
    
    (21,856,007
    )
    
    
    (20,168,239
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    38,528,910
    
    
    
    21,600,553
    
    
    
    9,564,189Increase (decrease) in short-term borrowings, net
    
    
    (99,131
    )
    
    
    (5,101,176
    )
    
    
    4,839,151Proceeds from other borrowings
    
    
    2,000,000
    
    
    
    16,248,000
    
    
    
    7,000,000Repayment of other borrowings
    
    
    (8,967,419
    )
    
    
    (6,713,473
    )
    
    
    (4,105,113
    )Purchase of treasury stock
    
    
    (2,174,419
    )
    
    
    (238,534
    )
    
    
    Exercise of stock options
    
    
    14,182
    
    
    
    62,115
    
    
    
    71,386Common stock issued
    
    
    221,360
    
    
    
    305,711
    
    
    
    285,669Proceeds from dividend reinvestment plan
    
    
    360,838
    
    
    
    320,347
    
    
    
    245,506Tax effect of stock options
    
    
    12,695
    
    
    
    
    
    
    
    Cash dividends
    
    
    (1,469,752
    )
    
    
    (1,315,418
    )
    
    
    (1,188,146
    )Net cash received from deposit acquisition
    
    
    19,270,054
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    47,697,318
    
    
    
    25,168,125
    
    
    
    16,712,642Increase in cash and cash equivalents
    
    
    4,175,720
    
    
    
    7,818,438
    
    
    
    509,388CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    13,639,602
    
    
    
    5,821,164
    
    
    
    5,311,776CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    17,815,322
    
    
    $
    13,639,602
    
    
    $
    5,821,164SUPPLEMENTAL INFORMATIONCash paid during the year for:Interest on deposits and borrowings
    
    $
    12,910,196
    
    
    $
    8,216,503
    
    
    $
    6,499,165Income taxes
    
    
    850,000
    
    
    
    1,498,363
    
    
    
    1,540,000SUMMARY OF BUSINESS ACQUISITIONFair value of tangible assets acquired
    
    $
    42,657,925
    
    
    $
    
    
    
    $
    Fair value of core deposit intangible acquired
    
    
    103,781
    
    
    
    
    
    
    
    Fair value of liabilities assumed
    
    
    (38,408,610
    )
    
    
    
    
    
    
    Stock issued for the purchase of acquired companys common stock
    
    
    (3,662,750
    )
    
    
    
    
    
    
    Cash paid in the acquisition
    
    
    (3,887,110
    )
    
    
    
    
    
    
    Deferred tax asset
    
    
    889,361
    
    
    
    
    
    
    
    Goodwill recognized
    
    $
    (2,307,403
    )
    
    $
    
    
    
    $
    
  




---



##### 



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA 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. On April 19, 2007, Middlefield Banc Corp. acquired Emerald Bank (EB), an Ohio-chartered
commercial bank headquartered in Dublin, Ohio. The Company and its subsidiaries derive
substantially all of their income from banking and bank-related services, which includes
interest earnings on residential real estate, commercial mortgage, commercial and consumer
financings as well as interest earnings on investment securities and deposit services to its
customers through nine locations. The Company is supervised by the Board of Governors of the
Federal Reserve System, while the Banks are 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 EB (the Banks). Significant intercompany items have been eliminated in preparing the
consolidated financial statements.The financial statements have been prepared in conformity with U.S. generally accepted
accounting principles. In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
 Investment Securities
 Investment securities are classified at the time of purchase, based on managements intention
and ability, as securities held to maturity or securities available for sale. Debt securities
acquired with the intent and ability to hold to maturity are stated at cost adjusted for
amortization of premium and accretion of discount, which are computed using a level yield
method and recognized as adjustments of interest income. Certain other debt securities have
been classified as available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses for available-for-sale securities are reported as a separate component
of stockholders equity, net of tax, until realized. Realized security gains and losses are
computed using the specific identification method. Interest and dividends on investment
securities are recognized as income when earned.Common stock of the Federal Home Loan Bank (FHLB) represents ownership in an institution that
is wholly owned by other financial institutions. The is equity security is accounted for at cost
and classified with other assets.
 Loans
 Loans are reported at their principal amount net of the allowance for loan losses. Interest
income is recognized as income when earned on the accrual method. The accrual of interest is
discontinued on a loan when management believes, after considering economic and business
conditions, the borrowers financial condition is such that collection of interest is
doubtful. Interest received on nonaccrual loans is recorded as income or applied against
principal according to managements judgment as to the collectibility of such principal.Loan origination fees and certain direct loan origination costs are being deferred and the net
amount amortized as an adjustment of the related loans yield. Management is amortizing these
amounts over the contractual life of the related loans.
 




---



##### 



Allowance for Loan Losses
 The allowance for loan losses represents the amount which management estimates is adequate to
provide for probable loan losses inherent in its loan portfolio. The allowance method is used in
providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all
recoveries are credited to it. The allowance for loan losses is established through a provision for
loan losses which is charged to operations. The provision is based on managements periodic
evaluation of the adequacy of the allowance for loan losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses, the impact of
economic conditions on borrowers, and other relevant factors. The estimates used in determining the
adequacy of the allowance for loan losses, including the amounts and timing of future cash flows
expected on impaired loans, are particularly susceptible to significant change in the near term.A loan is considered impaired when it is probable the borrower will not repay the loan according to
the original contractual terms of the loan agreement. Management has determined that first mortgage
loans on one-to-four family properties and all consumer loans represent large groups of
smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience
insignificant payment delays, which are defined as 90 days or less, generally are not classified as
impaired. A loan is not impaired during a period of delay in payment if the Company expects to
collect all amounts due, including interest accrued, at the contractual interest rate for the
period of delay. All loans identified as impaired are evaluated independently by management. The
Company estimates credit losses on impaired loans based on the present value of expected cash flows
or the fair value of the underlying collateral if the loan repayment is expected to come from the
sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when it
is determined a realized loss has occurred. Until such time, an allowance for loan losses is
maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued
interest receivable unless otherwise required by the loan terms, except when an impaired loan is
also a nonaccrual loan, in which case the portion of the payment related to interest is recognized
as income.Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of
smaller-balance homogeneous loans and are measured for impairment collectively. Loans that
experience insignificant payment delays, which are defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of payment delays on a case-by-case
basis, taking into consideration all circumstances concerning the loan, the creditworthiness and
payment history of the borrower, the length of the payment delay, and the amount of shortfall in
relation to the principal and interest owed.
 Premises and Equipment
 Premises and equipment are stated at cost net of accumulated depreciation. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets, which range from 3 to 20
years for furniture, fixtures, and equipment and 3 to 40 years for buildings and leasehold
improvements. Expenditures for maintenance and repairs are charged against income as incurred.
Costs of major additions and improvements are capitalized.
 Goodwill
 Goodwill represents the excess of the cost of businesses acquired over the fair value of the net
assets acquired. The Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (FAS) No. 142, Goodwill and Other Intangible Assets.
This statement,
among other things, requires a two-step process for testing the impairment of goodwill on at least
an annual basis. This approach could cause more volatility in the Companys reported net income
because impairment losses, if any, could occur irregularly and in varying amounts. The Company
performs an annual impairment analysis of goodwill based on the fair value of the reporting unit
determined by estimating the expected present value of future cash flows.
 




---



##### 



Intangible Assets
 Intangible assets include core deposit intangibles, which are a measure of the value of consumer
demand and savings deposits acquired in business combinations accounted for as purchases. The core
deposit intangibles are being amortized to expense over a 10 year life on a straight-line basis.
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)
 Thee Company owns insurance on the lives of a certain group of key employees. The policies were
purchased to help off set 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 statements 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 no interest
income.
 Income Taxes
 The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets
and liabilities are reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
 Earnings Per Share
 The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per
share are calculated utilizing net income as reported in the numerator and average shares
outstanding in the denominator. The computation of diluted earnings per share differs in that the
dilutive effects of any stock options, warrants, and convertible securities are adjusted in the
denominator.
 Stock Options
 In December 2004, the FASB issued FAS No. 123R, Share-Based Payment,
which revised FAS 123,
Accounting for Stock-Based Compensation,and superseded APB Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25) and related interpretations. FAS 123R requires
the grant-date fair value of all share-based payment awards that are expected to vest, including
employee share options, to be recognized as employee compensation expense over the requisite
service period. The Company adopted FAS 123R on January 1, 2006, and applied the modified
prospective transition method. Under this transition method, the Company (1) did not restate any
prior periods and (2) is recognizing compensation expense for all share-based payment awards that
were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated
grant-date fair values and service periods used to prepare the FAS 123 pro forma disclosures.Prior to adopting FAS 123R, the Company accounted for share-based payment awards using the
intrinsic value method of APB 25 and related interpretations. Under APB 25, the Company did not
record compensation expense for employee share options, unless the awards were modified, because
the share options were granted with exercise prices equal to or greater than the fair value of our
stock on the date of grant. The following table illustrates the effect on reported net income and
earnings per share applicable to common shareholders for the years ended December 31, 2005, had we
accounted for our share-based compensation plans using the fair value method of FAS 123R:
 




---



##### 



2005Net income as reported:
    
    $
    3,701,332Less pro forma expense related to options
    
    
    60,259Pro forma net income
    
    $
    3,641,073Basic net income per common share:As reported
    
    $
    2.63Pro forma
    
    
    2.59Diluted net income per common share:As reported
    
    $
    2.59Pro forma
    
    
    2.55
 During the year ended December 31, 2007, the Company recorded $26,435 of compensation cost related
to unvested share-based compensation awards granted in 2006. As of December 31, 2007, there was
approximately $15,039 of unrecognized compensation cost related to unvested share-based
compensation awards granted. The at cost is expected to be recognized in 2008.FAS 123R requires that the cash flows from the tax benefits resulting from tax deductions in excess
of the compensation cost recognized for stock-based awards (excess tax benefits) be classified as
financing cash flows. Prior to the adoption of FAS 123R, such excess tax benefits were presented as
operating cash flows. Accordingly, there have been excess tax benefits of $12,695 that have been
classified as a financing cash inflow for the year ended December 31, 2007, in the Consolidated
Statement of Cash Flows.For purposes of computing pro forma results, the Company estimated the fair values of stock options
using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions
that can materially affect fair value estimates. Therefore, the pro forma results are estimates of
results of operations as if compensation expense had been recognized for the stock option plans.
The fair value of each option is amortized into compensation expense on a straight-line basis
between the grant date for the option and each vesting date. The fair value of each stock option
granted was estimated using the following weighted-average assumptions:
 Expected Dividend
    
    
    
    
    
    
    
    
    
    Expected LifeGrant Year
    
    Yield
    
    Risk-Free Interest Rate
    
    Expected Volatility
    
    (in years)2005
    
    
    2.35
    
    
    
    4.49
    
    
    
    18.05
    
    
    
    9.942006
    
    
    2.27
    
    
    
    4.67
    
    
    
    7.18
    
    
    
    9.942007
    
    
    2.53
    
    
    
    3.70  4.80
    
    
    
    4.09
    
    
    
    9.94
 The weighted-average fair value of each stock option granted for 2007, 2006, and 2005, was $3.35,
$7.19, and $9.49, respectively. The total intrinsic value of options exercised during the years
ended December 31, 2007, 2006, and 2005, was $2,717, $16,219, and $16,458, respectively.
 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, Federal funds sold, and Interest-bearing
deposits with other institutions with original maturities of less than 90 days.
 




---



##### 



Advertising Costs
 Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to
$316,112, $331,644, and $302,679, for 2007, 2006, and 2005, respectively.
 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.
 Recent Accounting Pronouncements
 In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations(FAS 141(R)),
which establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the
impact the adoption of the standard will have on the Companys results of operations.In September 2006, the FASB issued FAS No. 157, Fair Value Measurements,which provides enhanced
guidance for using fair value to measure assets and liabilities. The standard applies whenever
other standards require or permit assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. Early adoption is permitted. The Company is currently evaluating the
impact the adoption of the standard will have on the Companys results of operations.In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement
No. 115, which provides all
entities with an option to report selected financial assets and liabilities at fair value. The
objective of the FAS No. 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities
differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is
effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of FAS No. 157, Fair Value
Measurements.
The adoption of this standard is not expected to have a material effect on the Companys results of
operations or financial condition.In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51.FAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. Among other requirements, this
statement requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires disclosure, on
the face of the consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. FAS No. 160 is effective for fiscal
years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is
currently evaluating the impact the adoption of the standard will have on the Companys results of
operations.
 




---



##### 



In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task
Force Issue 06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements.The guidance is applicable to
endorsement split-dollar life insurance arrangements, whereby the employer owns and controls
the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires
that for a split-dollar life insurance arrangement within the scope of the Issue, an employer
should recognize a liability for future benefits in accordance with FAS No. 106 (if, in
substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12
(if the arrangement is, in substance, an individual deferred compensation contract) based on
the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning
after December 15, 2007. The adoption of this EITF is not expected to have a material effect on
the Companys results of operations or financial condition.In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (EITF 06-10),
Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements.EITF 06-10
provides guidance for determining a liability for the postretirement benefit obligation as well
as recognition and measurement of the associated asset on the basis of the terms of the
collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The adoption of this EITF is not expected to have a material effect on the
Companys results of operations or financial condition.In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (EITF 06-11),
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.EITF 06-11
applies to share-based payment arrangements with dividend protection features that entitle
employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend
equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends
paid on the underlying shares while an equity-classified share option is outstanding, when
those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R,
Share-Based Payment, and result in an income tax deduction for the employer. A consensus was
reached that a realized income tax benefit from dividends or dividend equivalents that are
charged to retained earnings and are paid to employees for equity-classified nonvested equity
shares, nonvested equity share units, and outstanding equity share options should be recognized
as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after December 15, 2007, and interim periods within those fiscal years. The Company
is currently evaluating the impact the adoption of the
EITF will have on the Companys results of operations.
 2. MERGERS AND ACQUISITIONS
 On November 15, 2006, Middlefield Banc Corp. entered into an Agreement and Plan of Merger for
the acquisition of Emerald Bank, an Ohio-chartered savings bank headquartered in Dublin, Ohio.
Middlefield Banc Corp. organized an interim bank subsidiary under Ohio commercial bank law to
carry out the merger with Emerald Bank. The Agreement and Plan of Merger was amended on January
3, 2007 to make the new interim bank subsidiary, known as EB Interim Bank, a party to the
agreement. At the effective time of the merger Emerald Bank merged into the new interim
subsidiary, which is the surviving corporation and which operates under the name Emerald Bank
as a wholly owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for
Emerald Bank totaled $7,326,890 with one half of the merger consideration payable in cash and
the other half in shares of Middlefield Banc Corp. common stock. The merger was approved by
both bank regulators and Emerald Bank stockholders. The transaction was completed on April 19,
2007. Emerald Bank operates as a separate banking subsidiary of Middlefield Banc Corp. under
the Emerald Bank name, employing a commercial bank charter.
 




---



##### 



The following unaudited pro forma condensed combined financial information presents the results of
operations of the Company had the merger taken place at January 1, 2006.
 Twelve Months Ended December 31,2007
    
    2006Interest income
    
    $
    25,712,096
    
    
    $
    21,374,586Interest expense
    
    
    14,041,702
    
    
    
    9,686,623Net interest income
    
    
    11,670,394
    
    
    
    11,687,963Provision for loan losses
    
    
    475,493
    
    
    
    232,654Net interest income after provisions for loan losses
    
    
    11,194,901
    
    
    
    11,455,309Noninterest income
    
    
    2,659,299
    
    
    
    2,444,991Noninterest expense
    
    
    10,385,875
    
    
    
    9,311,751Income before income taxes
    
    
    3,468,325
    
    
    
    4,588,549Provisions for income taxes
    
    
    639,923
    
    
    
    1,471,943Net income including restructuring charges
    
    
    2,828,402
    
    
    
    3,116,606Restructuring charges of $418,848, net of tax benefit of $142,408
    
    
    276,440
    
    
    
    Net income excluding restructuring charges
    
    $
    3,104,842
    
    
    $
    3,116,606Net loss per share including restructuring charges
    
    $
    1.82
    
    
    $
    2.09Basic
    
    $
    1.79
    
    
    $
    2.05DilutedNet income per share excluding restructuring chargesBasic
    
    $
    2.00
    
    
    $
    2.09Diluted
    
    $
    1.97
    
    
    $
    2.05
 Merger and restructuring charges are recorded in unaudited pro forma condensed combined financial
information, and include incremental costs to integrate Emerald Bank with the Companys operations.
These charges represent costs associated with these one-time activities and do not represent
ongoing costs of the fully integrated combined organization. These one-time charges, as shown in
the table below, were expensed as incurred at Emerald Bank prior to the acquisition.
 Twelve Months Ended December 31,2007Compensation and benefits
    
    $
    40,092Professional fees
    
    
    221,389Accleleration of contracts
    
    
    157,367$
    418,848
 On August 1, 2007, MBC completed its acquisition of certain deposit liabilities attributable to a
third-party financial institutions branch office located in Middlefield, Ohio. The acquisition
included management personnel and retail deposits of approximately $21 million. MBC recorded
goodwill and core deposit intangible of approximately $2.1 million.
 




---



##### 



3.
    
    EARNINGS PER SHAREThere are no convertible securities that would affect the numerator in calculating basic and
diluted earnings per share; therefore, net income as presented on the Consolidated Statement of
Income will be used as the numerator. The following table sets forth the composition of the
weighted-average common shares (denominator) used in the basic and diluted earnings per share
computation.
 2007
    
    2006
    
    2005Weighted-average common shares outstanding
    
    
    1,666,265
    
    
    
    1,586,463
    
    
    
    1,571,778Average treasury stock shares
    
    
    (110,667
    )
    
    
    (92,809
    )
    
    
    (89,333
    )Weighted-average common shares and common stock equivalents used to
calculate basic earnings per share
    
    
    1,555,598
    
    
    
    1,493,654
    
    
    
    1,482,445Additional common stock equivalents (stock options) used to calculate
diluted earnings per share
    
    
    21,649
    
    
    
    22,999
    
    
    
    22,225Weighted-average common shares and common stock equivalents used to
calculate diluted earnings per share
    
    
    1,577,247
    
    
    
    1,516,653
    
    
    
    1,504,670
 Options to purchase 25,897 shares of common stock at prices ranging from $36.73 to $40.24 were
outstanding during the year ended December 31, 2007 but were not included in the computation of
diluted earnings per share as they were anti-dilutive due to the strike price being greater
than the average market price as of December 31, 2007. For the year ended December 31, 2006,
there were no anti-dilutive options outstanding.4.
    
    STOCK DIVIDENDThe Board of Directors approved a 5 percent stock dividend to stockholders of record as of
December 1, 2007, payable December 15, 2007. As a result of the dividend, 73,547 additional
shares of the Companys common stock were issued, common stock was increased by $2,857,301, and
retained earnings decreased by $2,873,346.The Board of Directors approved a 5 percent stock dividend to stockholders of record as of
December 1, 2006, payable December 15, 2006. As a result of the dividend, 67,284 additional
shares of the Companys common stock were issued, common stock was increased by $2,842,749, and
retained earnings decreased by $2,859,600.The Board of Directors approved a 5 percent stock dividend to stockholders of record as of
December 1, 2005, payable December 14, 2005. As a result of the dividend, 63,549 additional
shares of the Companys common stock were issued, common stock was increased by $2,557,847, and
retained earnings decreased by $2,572,949.Fractional shares were paid in cash. All average shares outstanding and all per share amounts
included in the financial statements are based on the increased number of shares after giving
retroactive effects to the stock dividend.
 




---



##### 



5.
    
    INVESTMENT SECURITIES AVAILABLE FOR SALEThe amortized cost and fair values of securities available for sale are as follows:
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Fair2007
    
    Cost
    
    Gains
    
    Losses
    
    ValueU.S. government agency securities
    
    $
    7,872,500
    
    
    $
    55,058
    
    
    $
    (422
    )
    
    $
    7,927,136Obligations of states and political subdivisions:Taxable
    
    
    749,234
    
    
    
    
    
    
    
    (6,845
    )
    
    
    742,389Tax-exempt
    
    
    47,262,680
    
    
    
    188,253
    
    
    
    (522,389
    )
    
    
    46,928,544Mortgage-backed securities
    
    
    29,219,323
    
    
    
    161,252
    
    
    
    (334,940
    )
    
    
    29,045,635Total debt securities
    
    
    85,103,737
    
    
    $
    404,563
    
    
    $
    (864,596
    )
    
    $
    84,643,704Equity securities
    
    
    944,283
    
    
    
    396,477
    
    
    
    (16,700
    )
    
    
    1,324,060Total
    
    $
    86,048,020
    
    
    $
    801,040
    
    
    $
    (881,296
    )
    
    $
    85,967,764
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Fair2006
    
    Cost
    
    Gains
    
    Losses
    
    ValueU.S. government agency securities
    
    $
    7,253,348
    
    
    $
    1,911
    
    
    $
    (110,073
    )
    
    $
    7,145,186Obligations of states and political subdivisions:Taxable
    
    
    748,877
    
    
    
    
    
    
    
    (22,205
    )
    
    
    726,672Tax-exempt
    
    
    38,181,724
    
    
    
    139,789
    
    
    
    (353,231
    )
    
    
    37,968,282Mortgage-backed securities
    
    
    16,959,278
    
    
    
    377
    
    
    
    (490,850
    )
    
    
    16,468,805Total debt securities
    
    
    63,143,227
    
    
    $
    142,077
    
    
    $
    (976,359
    )
    
    $
    62,308,945Equity securities
    
    
    694,283
    
    
    
    48,207
    
    
    
    (3,300
    )
    
    
    739,190Total
    
    $
    63,837,510
    
    
    $
    190,284
    
    
    $
    (979,659
    )
    
    $
    63,048,135
 The amortized cost and fair value of debt securities at December 31, 2007, 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
    
    FairCost
    
    ValueDue in one year or less
    
    $
    4,299,248
    
    
    $
    4,302,375Due after one year through five years
    
    
    10,281,031
    
    
    
    10,303,416Due after five years through ten years
    
    
    14,313,463
    
    
    
    14,356,532Due after ten years
    
    
    56,209,995
    
    
    
    55,681,381Total
    
    $
    85,103,737
    
    
    $
    84,643,704
 Investment securities with approximate carrying values of $23,974,806 and $21,121,334 at December
31, 2007 and 2006, respectively, were pledged to secure deposits and other purposes as required by
law.Proceeds from sales of investment securities available for sale and gross losses realized were
$658,976 and $5,868, respectively, during 2006. There were no sales of investment securities
available for sale during 2007 and 2005.
 




---



##### 



6.
    
    INVESTMENT SECURITIES HELD TO MATURITY
  Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Fair2006
    
    Cost
    
    Gains
    
    Losses
    
    ValueObligations of states and political subdivisions:
    
    $
    125,853
    
    
    $
    8,453
    
    
    $
    
    
    
    $
    134,306Total
    
    $
    125,853
    
    
    $
    8,453
    
    
    
    
    
    
    $
    134,306
  7.
    
    UNREALIZED LOSSES ON SECURITIES
  Less than Twelve Months
    
    Twelve Months or Greater
    
    TotalGross
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized2007
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesU.S. government agency securities
    
    $
    
    
    
    $
    
    
    
    $
    498,930
    
    
    $
    (422
    )
    
    $
    498,930
    
    
    $
    (422
    )Obligations of states and political subdivisions
    
    
    12,102,406
    
    
    
    (223,753
    )
    
    
    19,818,047
    
    
    
    (305,481
    )
    
    
    31,920,453
    
    
    
    (529,234
    )Mortgage-backed securities
    
    
    4,753,699
    
    
    
    (42,609
    )
    
    
    12,503,364
    
    
    
    (292,331
    )
    
    
    17,257,063
    
    
    
    (334,940
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    29,250
    
    
    
    (16,700
    )
    
    
    29,250
    
    
    
    (16,700
    )Total
    
    $
    16,856,105
    
    
    $
    (266,362
    )
    
    $
    32,849,591
    
    
    $
    (614,934
    )
    
    $
    49,705,696
    
    
    $
    (881,296
    )
 Less than Twelve Months
    
    Twelve Months or Greater
    
    TotalGross
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized2006
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesU.S. government agency securities
    
    $
    495,470
    
    
    $
    (2,518
    )
    
    $
    5,995,855
    
    
    $
    (107,555
    )
    
    $
    6,491,325
    
    
    $
    110,073
    )Obligations of states and political subdivisions
    
    
    12,725,091
    
    
    
    (149,101
    )
    
    
    12,310,231
    
    
    
    (226,335
    )
    
    
    25,035,322
    
    
    
    (375,436
    )Mortgage-backed securities
    
    
    486,318
    
    
    
    (11,214
    )
    
    
    15,927,958
    
    
    
    (479,636
    )
    
    
    16,414,276
    
    
    
    (490,850
    )Equity securities
    
    
    42,650
    
    
    
    (3,300
    )
    
    
    
    
    
    
    
    
    
    
    42,650
    
    
    
    (3,300
    )Total
    
    $
    13,749,529
    
    
    $
    (166,133
    )
    
    $
    34,234,044
    
    
    $
    (813,526
    )
    
    $
    47,983,573
    
    
    $
    (979,659
    )
  2007 Annual Report 




---



##### 



8.
    
    LOANS
  2007
    
    2006Commercial and industrial
    
    $
    67,009,564
    
    
    $
    68,496,089Real estate  construction
    
    
    6,704,054
    
    
    
    2,457,928Real estate  mortgage:Residential
    
    
    193,514,047
    
    
    
    162,916,830Commercial
    
    
    36,818,070
    
    
    
    9,948,568Consumer installment
    
    
    5,400,187
    
    
    
    5,371,119309,445,922
    
    
    
    249,190,534Less allowance for loan losses
    
    
    3,299,276
    
    
    
    2,848,887Net loans
    
    $
    306,146,646
    
    
    $
    246,341,647
    2007
    
    200690 days or more past due and accruing interest
    
    $
    1,917,480
    
    
    $
    208,778Nonaccrual loans
    
    
    3,744,451
    
    
    
    1,180,248Total nonperforming loans
    
    $
    5,661,931
    
    
    $
    1,389,026
  2007
    
    2006Impaired loans with a related allowance for loan loss
    
    $
    2,481,272
    
    
    $
    289,754Impaired loans without a related allowance for loan loss
    
    
    
    
    
    
    Related allowance for loan loss
    
    
    348,006
    
    
    
    71,214Average recorded investment in impaired loans
    
    
    1,117,297
    
    
    
    231,376Interest income recognized
    
    
    126,305
    
    
    
    3,177
 




---



##### 



9.
    
    ALLOWANCE FOR LOAN LOSSES
  2007
    
    2006Balance, January 1
    
    $
    2,848,887
    
    
    $
    2,841,098Add:Additions from acquisitions
    
    
    436,063
    
    
    
    Provisions charged to operations
    
    
    429,391
    
    
    
    60,000Recoveries
    
    
    13,839
    
    
    
    28,663Less loans charged off
    
    
    428,904
    
    
    
    80,874Balance, December 31
    
    $
    3,299,276
    
    
    $
    2,848,887
 10.
    
    PREMISES AND EQUIPMENT
  2007
    
    2006Land and land improvements
    
    $
    1,537,930
    
    
    $
    1,537,930Building and leasehold improvements
    
    
    7,620,924
    
    
    
    7,149,204Furniture, fixtures, and equipment
    
    
    3,801,814
    
    
    
    3,335,68112,960,668
    
    
    
    12,022,815Less accumulated depreciation and amortization
    
    
    5,915,983
    
    
    
    5,280,350Total
    
    $
    7,044,685
    
    
    $
    6,742,465
  11.
    
    GOODWILL AND INTANGIBLE ASSETS
   




---



##### 



2008
    
    $
    28,5882009
    
    
    28,5882010
    
    
    28,5882011
    
    
    28,5882012
    
    
    28,588Thereafter
    
    
    131,028$
    273,968
 12.
    
    OTHER ASSETSThe components of other assets are as follows:
 2007
    
    2006FHLB stock
    
    $
    1,731,000
    
    
    $
    1,507,300Accrued interest on investment securities
    
    
    475,043
    
    
    
    346,099Accrued interest on loans
    
    
    1,065,391
    
    
    
    764,656Deferred tax asset, net
    
    
    1,398,408
    
    
    
    847,456Other
    
    
    1,104,210
    
    
    
    492,573Total
    
    $
    5,774,052
    
    
    $
    3,958,084
 13.
    
    DEPOSITSTime deposits at December 31, 2007, mature $138,146,533, $49,097,203, $6,501,675, $3,675,906,
and $5,002,531, during 2008, 2009, 2010, 2011, and 2012, respectively.The aggregate amount of time certificates of deposit with a minimum denomination of $100,000
and individual retirement accounts with a minimum denomination of $250,000 was $38,357,201 and
$2,395,334, respectively, at December 31, 2007. Time certificates of deposit in excess of
$100,000 and individual retirement accounts in excess of $250,000 are not federally insured.Maturities on time deposits of $100,000 or more at December 31, 2007, are as follows:
 Within three months
    
    $
    8,431,158Beyond three but within six months
    
    
    8,615,730Beyond six but within twelve months
    
    
    15,291,877Beyond one year
    
    
    18,677,293Total
    
    $
    51,016,058
 




---



##### 



14.
    
    SHORT-TERM BORROWINGSThe outstanding balances and related information of short-term borrowings, which includes
securities sold under agreements to repurchase and federal funds purchased, are summarized as
follows:
 2007
    
    2006Balance at year-end
    
    $
    1,510,607
    
    
    $
    1,609,738Average balance outstanding
    
    
    2,383,902
    
    
    
    3,281,340Maximum month-end balance
    
    
    5,768,057
    
    
    
    8,245,406Weighted-average rate at year-end
    
    
    2.96
    %
    
    
    4.35
    %Weighted-average rate during the year
    
    
    3.89
    %
    
    
    5.10
    %
   15.
    
    OTHER BORROWINGSOther borrowings consist of advances from the FHLB as follows:
 Weighted-Maturity range
    
    average
    
    Stated interest rate rangeDescription
    
    from
    
    to
    
    interest rate
    
    from
    
    to
    
    2007
    
    2006Fixed rate
    
    
    06/27/06
    
    
    
    11/17/10
    
    
    
    5.10
    %
    
    
    4.70
    %
    
    
    5.38
    %
    
    $
    5,250,000
    
    
    $
    7,000,000Fixed rate amortizing
    
    
    06/01/09
    
    
    
    06/01/25
    
    
    
    4.13
    
    
    
    2.70
    
    
    
    5.51
    
    
    
    8,897,319
    
    
    
    12,864,738Convertible
    
    
    09/04/08
    
    
    
    10/09/12
    
    
    
    4.26
    
    
    
    4.14
    
    
    
    6.45
    
    
    
    10,000,000
    
    
    
    8,000,000Junior subordinated
debt
    
    
    12/21/37
    
    
    
    12/21/37
    
    
    
    6.58
    
    
    
    6.58
    
    
    
    6.58
    
    
    
    8,248,000
    
    
    
    8,248,000$
    32,395,319
    
    
    $
    36,112,738
  Year Ending December 31,2007Weighted-Amount
    
    Average Rate2008
    
    $
    11,839,778
    
    
    
    5.06
    %2009
    
    
    4,186,199
    
    
    
    4.562010
    
    
    3,842,373
    
    
    
    5.402011
    
    
    802,624
    
    
    
    3.702012
    
    
    2,555,243
    
    
    
    4.04Beyond 2012
    
    
    9,169,102
    
    
    
    6.31$
    32,395,319
    
    
    
    5.28
    %
 




---



##### 



16.
    
    OTHER LIABILITIES
  2007
    
    2006Accrued interest payable
    
    $
    1,509,575
    
    
    $
    888,855Other
    
    
    978,171
    
    
    
    726,246Total
    
    $
    2,487,746
    
    
    $
    1,615,101
 17.
    
    INCOME TAXES
  2007
    
    2006
    
    2005Current payable
    
    $
    698,915
    
    
    $
    1,530,001
    
    
    $
    1,500,495Deferred
    
    
    97,308
    
    
    
    (58,058
    )
    
    
    (85,339
    )Total provision
    
    $
    796,223
    
    
    $
    1,471,943
    
    
    $
    1,415,156
 




---



##### 



2007
    
    2006Deferred tax assets:Allowance for loan losses
    
    $
    1,008,069
    
    
    $
    899,689Net unrealized loss on securities
    
    
    27,287
    
    
    
    268,386Supplemental retirement plan
    
    
    123,339
    
    
    
    93,045Origination costs
    
    
    25,115
    
    
    
    Net operating losses of subsidiary
    
    
    606,806
    
    
    
    Gross deferred tax assets
    
    
    1,790,616
    
    
    
    1,261,120Deferred tax liabilities:Deferred origination fees, net
    
    
    55,637
    
    
    
    106,328Premises and equipment
    
    
    113,170
    
    
    
    116,635Net unrealized gain on securities
    
    
    
    
    
    
    Other
    
    
    223,400
    
    
    
    190,701Gross deferred tax liabilities
    
    
    392,207
    
    
    
    413,664Net deferred tax assets
    
    $
    1,398,409
    
    
    $
    847,456
   2007
    
    2006
    
    2005% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofPre-tax
    
    
    
    
    
    Pre-tax
    
    
    
    
    
    Pre-taxAmount
    
    Income
    
    Amount
    
    Income
    
    Amount
    
    IncomeProvision at statutory rate
    
    $
    1,418,332
    
    
    
    34.0
    %
    
    $
    1,821,105
    
    
    
    34.0
    %
    
    $
    1,739,606
    
    
    
    34.0
    %Tax-free income
    
    
    (702,124
    )
    
    
    (16.8
    )
    
    
    (437,874
    )
    
    
    (8.2
    )
    
    
    (295,146
    )
    
    
    5.8Nondeductible interest expense
    
    
    102,830
    
    
    
    2.5
    
    
    
    54,673
    
    
    
    1.0
    
    
    
    38,639
    
    
    
    0.8Other
    
    
    (22,816
    )
    
    
    (0.6
    )
    
    
    34,039
    
    
    
    0.6
    
    
    
    (67,923
    )
    
    
    (1.4
    )Actual tax expense and effective rate
    
    
    796,222
    
    
    
    19.1
    %
    
    $
    1,471,943
    
    
    
    27.5
    %
    
    $
    1,415,176
    
    
    
    27.6
    %
  




---



##### 



18.
    
    EMPLOYEE BENEFITS
 Retirement Plan
  Supplemental Retirement Plan
   Directors Retirement Plan2007
    
    2006
    
    2005Components of net periodic pension costsService cost
    
    $
    11,991
    
    
    $
    9,510
    
    
    $
    12,756Interest cost
    
    
    12,189
    
    
    
    9,791
    
    
    
    9,948Net periodic pension cost
    
    $
    24,180
    
    
    $
    19,301
    
    
    $
    22,704
 Executive Deferred Compensation Plan
  Stock Option and Restricted Stock Plan
  




---



##### 



Weighted-
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    averageExercise
    
    
    
    
    
    Exercise2007
    
    Price
    
    2006
    
    PriceOutstanding, January 1
    
    
    77,287
    
    
    $
    26.23
    
    
    
    81,921
    
    
    $
    25.51Granted
    
    
    14,840
    
    
    
    37.27
    
    
    
    3,675
    
    
    
    38.33Exercised
    
    
    (565
    )
    
    
    25.10
    
    
    
    (2,689
    )
    
    
    24.05Forfeited
    
    
    (3,351
    )
    
    
    22.11
    
    
    
    (5,620
    )
    
    
    26.43Outstanding, December 31
    
    
    88,211
    
    
    $
    28.34
    
    
    
    77,287
    
    
    
    26.23Exercisable at year-end
    
    
    83,724
    
    
    
    27.86
    
    
    
    73,612
    
    
    
    25.52
  Outstanding
    
    
    
    
    
    ExercisableContractual
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Average
    
    Exercise
    
    
    
    
    
    ExerciseGrant Date
    
    Price
    
    Shares
    
    Life
    
    Price
    
    Shares
    
    PriceJune 14, 1999
    
    $
    23.70
    
    
    
    3,736
    
    
    
    1.45
    
    
    $
    23.70
    
    
    
    3,736
    
    
    $
    23.70November 23, 1999
    
    
    23.12
    
    
    
    2,934
    
    
    
    1.90
    
    
    
    23.12
    
    
    
    2,934
    
    
    
    23.12December 11, 2000
    
    
    17.90
    
    
    
    10,941
    
    
    
    2.95
    
    
    
    17.90
    
    
    
    10,941
    
    
    
    17.90December 9, 2002
    
    
    22.33
    
    
    
    9,806
    
    
    
    4.94
    
    
    
    22.33
    
    
    
    9,806
    
    
    
    22.33December 8, 2003
    
    
    24.29
    
    
    
    20,917
    
    
    
    5.94
    
    
    
    24.29
    
    
    
    20,917
    
    
    
    24.29May 12, 2004
    
    
    27.36
    
    
    
    907
    
    
    
    6.33
    
    
    
    27.36
    
    
    
    907
    
    
    
    27.36December 13, 2004
    
    
    30.45
    
    
    
    13,073
    
    
    
    6.95
    
    
    
    30.45
    
    
    
    13,073
    
    
    
    30.45December 14, 2005
    
    
    36.73
    
    
    
    8,595
    
    
    
    7.95
    
    
    
    36.73
    
    
    
    8,595
    
    
    
    36.73December 10, 2006
    
    
    40.24
    
    
    
    3,675
    
    
    
    8.95
    
    
    
    40.24
    
    
    
    3,675
    
    
    
    40.24April 19, 2007
    
    
    37.33
    
    
    
    9,140
    
    
    
    9.31
    
    
    
    37.33
    
    
    
    9,140
    
    
    
    37.73May 16, 2007
    
    
    37.48
    
    
    
    1,337
    
    
    
    9.41
    
    
    
    37.48
    
    
    
    
    
    
    
    37.48December 10, 2007
    
    
    37.00
    
    
    
    3,150
    
    
    
    9.95
    
    
    
    37.00
    
    
    
    
    
    
    
    37.0088,211
    
    
    
    
    
    
    
    
    
    
    
    83,724
  




---



##### 



19.
    
    COMMITMENTS
 In the normal course of business, there are various outstanding commitments and certain contingent
liabilities which are not reflected in the accompanying consolidated financial statements. These
commitments and contingent liabilities represent financial instruments with off-balance sheet risk.
The contract or notional amounts of those instruments reflect the extent of involvement in
particular types of financial instruments which were composed of the following:
 2007
    
    2006Commitments to extend credit
    
    $
    49,375,176
    
    
    $
    46,092,201Standby letters of credit
    
    
    466,647
    
    
    
    121,598Total
    
    $
    49,841,823
    
    
    $
    46,213,799
 These instruments involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the Consolidated Balance Sheet. The Companys exposure to credit loss,
in the event of nonperformance by the other parties to the financial instruments, is represented by
the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval and review procedures and collateral requirements
as deemed necessary. Commitments generally have fixed expiration dates within one year of their
origination.Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Performance letters of credit represent conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party. These
instruments are issued primarily to support bid or performance-related contracts. The coverage
period for these instruments is typically a one-year period with an annual renewal option subject
to prior approval by management. Fees earned from the issuance of these letters are recognized over
the coverage period. For secured letters of credit, the collateral is typically Bank deposit
instruments or customer business assets.
 20.
    
    REGULATORY RESTRICTIONS
 Loans
 Federal law prevents the Company from borrowing from the Banks unless the loans are secured by
specific obligations. Further, such secured loans are limited in amount of 10 percent of the
Banks common stock and capital surplus.
 Dividends
 MBC and EB are subject to dividend restrictions that generally limit the amount of dividends
that can be paid by an Ohio state-chartered bank. Under the Ohio Banking Code, cash dividends
may not exceed net profits as defined for that year combined with retained net profits for the
two preceding years less any required transfers to surplus. Under this formula, for MBC, the
amount available for payment of dividends for 2008 approximates $4,475,000 plus 2008 profits
retained up to the date of the dividend declaration. For EB, the amount available for payment
of dividends for 2008 approximates $33,000 plus 2008 profits retained up to the date of the
dividend declaration.
 




---



##### 



21.
    
    REGULATORY CAPITAL
 Federal regulations require the Company and the Banks to maintain minimum amounts of
capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios
of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total
assets.In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement
Act (FDICIA) established five capital categories ranging from well capitalized to
critically undercapitalized. Should any institution fail to meet the requirements to be
considered adequately capitalized, it would become subject to a series of increasingly
restrictive regulatory actions.As of December 31, 2007 and 2006, the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be classified as a well capitalized
financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios
must be at least 10 percent, 6 percent, and 5 percent, respectively.The Companys and its subsidiaries actual capital ratios are presented in the following table
that shows that all regulatory capital requirements were met as of December 31, 2007.
 Middlefield Banc Corp.
    
    The Middlefield Banking Co.
    
    Emerald BankDecember 31,
    
    December 31,
    
    December 31,2007
    
    2007
    
    2007Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital (to Risk-Weighted Assets)Actual
    
    $
    42,664,943
    
    
    
    14.56
    %
    
    $
    32,028,171
    
    
    
    12.67
    %
    
    $
    7,777,400
    
    
    
    19.50
    %For Capital Adequacy Purposes
    
    
    23,441,926
    
    
    
    8.00
    
    
    
    20,230,160
    
    
    
    8.00
    
    
    
    3,190,160
    
    
    
    8.00To Be Well Capitalized
    
    
    29,302,408
    
    
    
    10.00
    
    
    
    25,287,700
    
    
    
    10.00
    
    
    
    3,987,700
    
    
    
    10.00Tier I Capital (to Risk-Weighted Assets)Actual
    
    $
    39,194,767
    
    
    
    13.38
    %
    
    $
    29,205,547
    
    
    
    11.55
    %
    
    $
    7,300,748
    
    
    
    18.31
    %For Capital Adequacy Purposes
    
    
    11,720,963
    
    
    
    4.00
    
    
    
    10,115,080
    
    
    
    4.00
    
    
    
    1,595,080
    
    
    
    4.00To Be Well Capitalized
    
    
    17,581,445
    
    
    
    6.00
    
    
    
    15,172,620
    
    
    
    6.00
    
    
    
    2,392,620
    
    
    
    6.00Tier I Capital (to Average Assets)Actual
    
    $
    39,194,767
    
    
    
    9.23
    %
    
    $
    29,205,547
    
    
    
    7.82
    %
    
    $
    7,300,748
    
    
    
    14.38
    %For Capital Adequacy Purposes
    
    
    16,990,099
    
    
    
    4.00
    
    
    
    14,946,917
    
    
    
    4.00
    
    
    
    2,030,504
    
    
    
    4.00To Be Well Capitalized
    
    
    21,237,623
    
    
    
    5.00
    
    
    
    18,683,646
    
    
    
    5.00
    
    
    
    2,538,130
    
    
    
    5.00
 




---



##### 



The Companys and MBCs actual capital ratios are presented in the following table that shows that
all regulatory capital requirements were met as of December 31, 2006.
 Middlefield Banc Corp.
    
    The Middlefield Banking Co.December 31,
    
    December 31,2006
    
    2006Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital (to Risk-Weighted Assets)Actual
    
    $
    41,978,838
    
    
    
    18.05
    %
    
    $
    32,220,571
    
    
    
    13.88
    %For Capital Adequacy Purposes
    
    
    18,605,783
    
    
    
    8.00
    
    
    
    18,568,960
    
    
    
    8.00To Be Well Capitalized
    
    
    23,257,229
    
    
    
    10.00
    
    
    
    23,211,200
    
    
    
    10.00Tier I Capital (to Risk-Weighted Assets)Actual
    
    $
    39,109,743
    
    
    
    16.82
    %
    
    $
    29,371,684
    
    
    
    12.65
    %For Capital Adequacy Purposes
    
    
    9,302,892
    
    
    
    4.00
    
    
    
    9,284,480
    
    
    
    4.00To Be Well Capitalized
    
    
    13,954,337
    
    
    
    6.00
    
    
    
    13,926,720
    
    
    
    6.00Tier I Capital (to Average Assets)Actual
    
    $
    39,109,743
    
    
    
    11.82
    %
    
    $
    29,371,684
    
    
    
    8.89
    %For Capital Adequacy Purposes
    
    
    13,236,186
    
    
    
    4.00
    
    
    
    13,221,051
    
    
    
    4.00To Be Well Capitalized
    
    
    16,545,233
    
    
    
    5.00
    
    
    
    16,526,314
    
    
    
    5.00
 22.
    
    FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
 The estimated fair value of the Companys financial instruments at December 31 are as follows:
 2007
    
    2006Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    17,815,322
    
    
    $
    17,815,322
    
    
    $
    13,639,602
    
    
    $
    13,639,602Investment securities:Available for sale
    
    
    85,967,764
    
    
    
    85,967,764
    
    
    
    63,048,135
    
    
    
    63,048,135Held to maturity
    
    
    
    
    
    
    
    
    
    
    125,853
    
    
    
    134,306Net loans
    
    
    306,146,646
    
    
    
    307,323,642
    
    
    
    246,341,647
    
    
    
    242,583,242Bank-owned life insurance
    
    
    7,153,381
    
    
    
    7,153,381
    
    
    
    6,872,743
    
    
    
    6,872,743Federal Home Loan Bank stock
    
    
    1,731,000
    
    
    
    1,731,000
    
    
    
    1,507,300
    
    
    
    1,507,300Accrued interest receivable
    
    
    1,540,434
    
    
    
    1,540,434
    
    
    
    1,110,755
    
    
    
    1,110,755Financial liabilities:Deposits
    
    $
    362,918,000
    
    
    $
    364,271,994
    
    
    $
    271,050,193
    
    
    $
    270,101,193Short-term borrowings
    
    
    1,510,607
    
    
    
    1,510,607
    
    
    
    1,609,738
    
    
    
    1,609,738Other borrowings
    
    
    32,395,319
    
    
    
    32,262,319
    
    
    
    36,112,738
    
    
    
    36,139,369Accrued interest payable
    
    
    1,509,575
    
    
    
    1,509,575
    
    
    
    888,855
    
    
    
    888,855
 




---



##### 



Financial instruments are defined as cash, evidence of ownership interest in an entity, or a
contract which creates an obligation or right to receive or deliver cash or another financial
instrument from/to a second entity on potentially favorable or unfavorable terms.Fair value is defined as the amount at which a financial instrument could be exchanged in a current
transaction between willing parties other than in a forced liquidation sale. If a quoted market
price is available for a financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.If no readily available market exists, the fair value estimates for financial instruments should be
based upon managements judgment regarding current economic conditions, interest rate risk,
expected cash flows, future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. Since many of these assumptions result from
judgments made by management based upon estimates which are inherently uncertain, the resulting
estimated fair values may not be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in assumptions on which the estimated fair values are
based may have a significant impact on the resulting estimated fair values.As certain assets such as deferred tax assets and premises and equipment are not considered
financial instruments, the estimated fair value of financial instruments would not represent the
full value of the Company.The Company employed simulation modeling in determining the estimated fair value of financial
instruments for which quoted market prices were not available based upon the following assumptions:Cash and Cash Equivalents, Federal Funds Sold, Interest-Bearing Deposits in Other Institutions,
Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term
BorrowingsThe fair value is equal to the current carrying value.
 Bank-Owned Life Insurance
 The fair value is equal to the cash surrender value of the life insurance policies.
 Investment Securities
 The fair value of investment securities available for sale and held to maturity is equal to the
available quoted market price. If no quoted market price is available, fair value is estimated
using the quoted market price for similar securities.
 Loans, Deposits, and Other Borrowings
 The fair value of loans, certificates of deposit, and other borrowings is estimated by discounting
the future cash flows using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses, noninterest income,
credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued
at the amount payable on demand as of year-end.
 




---



##### 



Commitments to Extend Credit
 These financial instruments are generally not subject to sale, and estimated fair values are not
readily available. The carrying value, represented by the net deferred fee arising from the
unrecognized commitment or letter of credit, and the fair value, determined by discounting the
remaining contractual fee over the term of the commitment using fees currently charged to enter
into similar agreements with similar credit risk, are not considered material for disclosure. The
contractual amounts of unfunded commitments and letters of credit are presented in Note 17.
 23.
    
    PARENT COMPANY
 Following are condensed financial statements for the Company.
 December 31,CONDENSED BALANCE SHEET
    
    2007
    
    2006ASSETSCash and due from banks
    
    $
    1,199,416
    
    
    $
    8,265,187Interest-bearing deposits in other institutions
    
    
    110,387
    
    
    
    546,454Investment securities available for sale
    
    
    1,324,060
    
    
    
    739,190Other assets
    
    
    420,175
    
    
    
    371,177Investment in subsidiary bank
    
    
    40,452,190
    
    
    
    28,821,058TOTAL ASSETS
    
    $
    43,506,228
    
    
    $
    38,743,066LIABILITIESTrust Preferred Securities
    
    $
    8,248,000
    
    
    $
    8,248,000Other liabilities
    
    
    296,844
    
    
    
    31,132STOCKHOLDERS EQUITY
    
    
    34,961,384
    
    
    
    30,463,934TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    43,506,228
    
    
    $
    38,743,066
 




---



##### 



Year Ended December 31,CONDENSED STATEMENT OF INCOME
    
    2007
    
    2006
    
    2005INCOMEDividends from subsidiary banks
    
    $
    2,018,050
    
    
    $
    1,277,306
    
    
    $
    1,999,052Interest income
    
    
    154,199
    
    
    
    19,931
    
    
    
    12,017Other
    
    
    6,965
    
    
    
    
    
    
    
    TOTAL INCOME
    
    
    2,179,214
    
    
    
    1,297,237
    
    
    
    2,011,069EXPENSESInterest expensed
    
    
    535,280
    
    
    
    18,387
    
    
    
    54,107Other
    
    
    269,861
    
    
    
    180,651
    
    
    
    163,275TOTAL INCOME
    
    
    805,141
    
    
    
    199,038
    
    
    
    217,382Income before income tax benefit
    
    
    1,374,073
    
    
    
    1,098,199
    
    
    
    1,793,687Income tax benefit
    
    
    (218,952
    )
    
    
    (60,644
    )
    
    
    (69,844
    )Income before equity in undistributed net income of subsidiaries
    
    
    1,593,025
    
    
    
    1,158,843
    
    
    
    1,863,531Equity in undistributed net income of subsidiaries
    
    
    1,782,318
    
    
    
    2,725,404
    
    
    
    1,837,801NET INCOME
    
    $
    3,375,343
    
    
    $
    3,884,247
    
    
    $
    3,701,332
 Year Ended December 31,CONDENSED STATEMENT OF CASH FLOWS
    
    2007
    
    2006
    
    2005OPERATING ACTIVITIESNet income
    
    $
    3,375,343
    
    
    $
    3,884,247
    
    
    $
    3,701,332Adjustments to reconcile net income to net cash provided by operating activities:Equity in undistributed net income of Middlefield Banking Company
    
    
    (1,775,975
    )
    
    
    (2,725,404
    )
    
    
    (1,837,801
    )Equity in undistributed net income of Emerald Bank
    
    
    (32,780
    )
    
    
    
    
    
    
    Compensation expense on stock options
    
    
    26,435
    
    
    
    
    
    
    
    Other
    
    
    102,856
    
    
    
    15,865
    
    
    
    Net cash provided by operating activities
    
    
    1,695,879
    
    
    
    1,174,708
    
    
    
    1,863,531INVESTING ACTIVITIESDecrease in interest-bearing deposits in other institutions
    
    
    
    
    
    
    
    
    
    
    614,506Deferred acquisition costs
    
    
    
    
    
    
    (123,175
    )
    
    
    Investment in unconsolidated subsidiary
    
    
    
    
    
    
    (248,000
    )
    
    
    Purchase of investment securities
    
    
    (250,000
    )
    
    
    (250,020
    )
    
    
    (45,944
    )Net assets of Emerald Bank acquired
    
    
    (5,912,621
    )
    
    
    
    
    
    
    Net cash provided by (used for)
    
    
    (6,162,621
    )
    
    
    (621,195
    )
    
    
    568,562FINANCING ACTIVITIESNet increase in short term borrowing
    
    
    
    
    
    
    
    
    
    
    (1,200,000
    )Issuance of trust-preferred securities
    
    
    
    
    
    
    8,248,000
    
    
    
    Purchase of treasury stock
    
    
    (2,174,419
    )
    
    
    (238,534
    )
    
    
    Exercise of stock options
    
    
    14,182
    
    
    
    62,115
    
    
    
    71,386Common stock issued
    
    
    221,360
    
    
    
    305,711
    
    
    
    285,669Proceeds from dividend reinvestment plan
    
    
    360,838
    
    
    
    320,347
    
    
    
    245,506Tax effect of stock options
    
    
    12,695
    
    
    
    
    
    
    
    Cash dividends
    
    
    (1,469,752
    )
    
    
    (1,315,418
    )
    
    
    (1,188,146
    )Net cash provided by (used for) financing activities
    
    
    (3,035,096
    )
    
    
    7,382,221
    
    
    
    (1,785,585
    )Increase (decrease) in cash
    
    
    (7,501,838
    )
    
    
    7,935,734
    
    
    
    646,508CASH AT BEGINNING OF YEAR
    
    
    8,811,641
    
    
    
    875,907
    
    
    
    229,399CASH AT END OF YEAR
    
    $
    1,309,803
    
    
    $
    8,811,641
    
    
    $
    875,907
 




---



##### 



24.
    
    SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
 Three Months EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2007
    
    2007
    
    2007
    
    2007Total interest income
    
    $
    5,391,747
    
    
    $
    6,235,712
    
    
    $
    6,573,178
    
    
    $
    6,671,297Total interest expense
    
    
    2,779,298
    
    
    
    3,359,372
    
    
    
    3,666,111
    
    
    
    3,726,138Net interest income
    
    
    2,612,449
    
    
    
    2,876,340
    
    
    
    2,907,067
    
    
    
    2,945,159Provision for loan losses
    
    
    45,000
    
    
    
    69,391
    
    
    
    60,000
    
    
    
    255,000Net interest income after provision for loan losses
    
    
    2,567,449
    
    
    
    2,806,949
    
    
    
    2,847,067
    
    
    
    2,690,159Total noninterest income
    
    
    621,628
    
    
    
    648,243
    
    
    
    653,810
    
    
    
    708,911Total noninterest expense
    
    
    2,273,702
    
    
    
    2,320,833
    
    
    
    2,416,933
    
    
    
    2,361,182Income before income taxes
    
    
    915,375
    
    
    
    1,134,359
    
    
    
    1,083,944
    
    
    
    1,037,888Income taxes
    
    
    163,000
    
    
    
    235,128
    
    
    
    223,000
    
    
    
    175,095Net income
    
    $
    752,375
    
    
    $
    899,231
    
    
    $
    860,944
    
    
    $
    862,793Per share data:Net incomeBasic
    
    $
    0.51
    
    
    $
    0.57
    
    
    $
    0.54
    
    
    $
    0.55Diluted
    
    
    0.49
    
    
    
    0.56
    
    
    
    0.54
    
    
    
    0.55Average shares outstandingBasic
    
    
    1,497,417
    
    
    
    1,578,583
    
    
    
    1,585,225
    
    
    
    1,561,771Diluted
    
    
    1,519,911
    
    
    
    1,600,045
    
    
    
    1,604,693
    
    
    
    1,582,872
 Three Months EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2006
    
    2006
    
    2006
    
    2006Total interest income
    
    $
    4,560,636
    
    
    $
    4,790,313
    
    
    $
    4,976,078
    
    
    $
    5,167,523Total interest expense
    
    
    1,874,659
    
    
    
    2,037,549
    
    
    
    2,217,481
    
    
    
    2,437,753Net interest income
    
    
    2,685,977
    
    
    
    2,752,764
    
    
    
    2,758,597
    
    
    
    2,729,770Provision for loan losses
    
    
    75,000
    
    
    
    75,000
    
    
    
    90,000
    
    
    
    (180,000
    )Net interest income after provision for loan losses
    
    
    2,610,977
    
    
    
    2,677,764
    
    
    
    2,668,597
    
    
    
    2,909,770Total noninterest income
    
    
    550,326
    
    
    
    594,655
    
    
    
    643,602
    
    
    
    638,872Total noninterest expense
    
    
    2,035,731
    
    
    
    1,898,032
    
    
    
    2,042,405
    
    
    
    1,962,205Income before income taxes
    
    
    1,125,572
    
    
    
    1,374,387
    
    
    
    1,269,794
    
    
    
    1,586,437Income taxes
    
    
    308,000
    
    
    
    386,587
    
    
    
    339,000
    
    
    
    438,356Net income
    
    $
    817,572
    
    
    $
    987,800
    
    
    $
    930,794
    
    
    $
    1,148,081Per share data:Net incomeBasic
    
    $
    0.55
    
    
    $
    0.67
    
    
    
    0.62
    
    
    
    0.77Diluted
    
    
    0.55
    
    
    
    0.65
    
    
    
    0.61
    
    
    
    0.76Average shares outstandingBasic
    
    
    1,485,579
    
    
    
    1,484,640
    
    
    
    1,490,251
    
    
    
    1,496,935Diluted
    
    
    1,509,247
    
    
    
    1,509,173
    
    
    
    1,514,875
    
    
    
    1,519,289
 




---



##### 










---



##### 



Overview
     Significant Financial Events in 2007
   




---



##### 



Critical Accounting Policies
 Allowance for loan losses
    Changes in Financial Condition
 General.
   




---



##### 



Cash on hand, Interest-earning deposits and Federal funds sold.
 Securities.
   Loans receivable.
   




---



##### 



FHLB stock.
 Bank-owned life insurance.
 Deposits.
  Borrowed funds.
 Stockholders equity.
  




---



##### 



Changes in Results of Operations
 2007 Results Compared to 2006 Results
 General.
 Average Balance Sheet and Yield/Rate Analysis.
 




---



##### 



For The Year Ended December 31,2007
    
    2006
    
    2005Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/Cost
    
    Balance
    
    Interest
    
    Yield/Cost
    
    Balance
    
    Interest
    
    Yield/Cost(Dollars in thousands)
    
    (Dollars in thousands)
    
    (Dollars in thousands)Interest-earning assets:Loans receivable
    
    $
    288,022
    
    
    $
    21,063
    
    
    
    7.31
    %
    
    $
    240,452
    
    
    $
    17,093
    
    
    
    7.11
    %
    
    $
    222,926
    
    
    $
    15,041
    
    
    
    6.75
    %Investments securities
    
    
    74,820
    
    
    
    3,040
    
    
    
    5.28
    %
    
    
    57,520
    
    
    
    2,181
    
    
    
    4.72
    %
    
    
    59,370
    
    
    
    2,218
    
    
    
    4.49
    %Interest-bearing deposits
with other banks
    
    
    13,829
    
    
    
    770
    
    
    
    5.57
    %
    
    
    4,503
    
    
    
    221
    
    
    
    4.91
    %
    
    
    2,698
    
    
    
    120
    
    
    
    4.45
    %Total interest-earning assets
    
    
    376,671
    
    
    
    24,873
    
    
    
    6.85
    %
    
    
    302,475
    
    
    
    19,495
    
    
    
    6.62
    %
    
    
    284,994
    
    
    
    17,379
    
    
    
    6.25
    %Noninterest-earning assets
    
    
    21,307
    
    
    
    
    
    
    
    
    
    
    
    16,231
    
    
    
    
    
    
    
    
    
    
    
    16,926Total assets
    
    
    397,979
    
    
    
    
    
    
    
    
    
    
    
    318,706
    
    
    
    
    
    
    
    
    
    
    
    301,920Interest-bearing liabilities:Interest-bearing demand
deposits
    
    $
    15,541
    
    
    
    359
    
    
    
    2.31
    %
    
    
    11,280
    
    
    
    133
    
    
    
    1.18
    %
    
    
    9,371
    
    
    
    75
    
    
    
    0.80
    %Money market deposits
    
    
    25,057
    
    
    
    1,026
    
    
    
    4.09
    %
    
    
    13,675
    
    
    
    374
    
    
    
    2.73
    %
    
    
    15,016
    
    
    
    297
    
    
    
    1.98
    %Savings deposits
    
    
    68,882
    
    
    
    1,695
    
    
    
    2.46
    %
    
    
    57,831
    
    
    
    910
    
    
    
    1.57
    %
    
    
    69,680
    
    
    
    1,047
    
    
    
    1.50
    %Certificates of deposit
    
    
    172,552
    
    
    
    8,581
    
    
    
    4.97
    %
    
    
    135,763
    
    
    
    5,740
    
    
    
    4.23
    %
    
    
    115,969
    
    
    
    4,101
    
    
    
    3.54
    %Borrowings
    
    
    36,639
    
    
    
    1,870
    
    
    
    5.10
    %
    
    
    30,767
    
    
    
    1,410
    
    
    
    4.58
    %
    
    
    26,577
    
    
    
    1,135
    
    
    
    4.27
    %Total
interest-bearing liabilities
    
    
    318,671
    
    
    
    13,531
    
    
    
    4.25
    %
    
    
    249,316
    
    
    
    8,567
    
    
    
    3.44
    %
    
    
    236,613
    
    
    
    6,655
    
    
    
    2.81
    %Noninterest-bearing liabilitiesOther liabilities
    
    
    45,769
    
    
    
    
    
    
    
    
    
    
    
    40,799
    
    
    
    
    
    
    
    
    
    
    
    39,682Stockholders equity
    
    
    33,539
    
    
    
    
    
    
    
    
    
    
    
    28,591
    
    
    
    
    
    
    
    
    
    
    
    25,625Total liabilities and
stockholders equity
    
    $
    397,979
    
    
    
    
    
    
    
    
    
    
    $
    318,706
    
    
    
    
    
    
    
    
    
    
    $
    301,920Net interest income
    
    
    
    
    
    $
    11,342
    
    
    
    
    
    
    
    
    
    
    $
    10,928
    
    
    
    
    
    
    
    
    
    
    $
    10,724Interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    2.60
    %
    
    
    
    
    
    
    
    
    
    
    3.19
    %
    
    
    
    
    
    
    
    
    
    
    3.44
    %Net yield on interest-earning
assets (2)
    
    
    
    
    
    
    
    
    
    
    3.25
    %
    
    
    
    
    
    
    
    
    
    
    3.79
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %Ratio of average interest-
earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    118.20
    %
    
    
    
    
    
    
    
    
    
    
    121.32
    %
    
    
    
    
    
    
    
    
    
    
    120.45
    %
 
 (1)
    
    Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.(2)
    
    Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 




---



##### 



2007 versus 2006
    
    2006 versus 2005Increase (decrease) due to
    
    Increase (decrease) due toVolume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(Dollars in thousands)
    
    (Dollars in thousands)Interest incomeLoans receivable
    
    $
    3,382
    
    
    $
    588
    
    
    $
    3,970
    
    
    $
    63
    
    
    $
    1,989
    
    
    $
    2,052Investments securities
    
    
    817
    
    
    
    42
    
    
    
    859
    
    
    
    (4
    )
    
    
    (33
    )
    
    
    (37
    )Other interest-earning assets
    
    
    458
    
    
    
    91
    
    
    
    549
    
    
    
    8
    
    
    
    93
    
    
    
    101Total interest-earning assets
    
    
    4,656
    
    
    
    722
    
    
    
    5,378
    
    
    
    67
    
    
    
    2,049
    
    
    
    2,116Interest expenseInterest-bearing demand deposits
    
    
    50
    
    
    
    176
    
    
    
    226
    
    
    
    7
    
    
    
    51
    
    
    
    19Money market deposits
    
    
    311
    
    
    
    341
    
    
    
    652
    
    
    
    (10
    )
    
    
    87
    
    
    
    20Savings deposits
    
    
    174
    
    
    
    611
    
    
    
    785
    
    
    
    (8
    )
    
    
    (129
    )
    
    
    17Certificates of deposit
    
    
    1,555
    
    
    
    1,286
    
    
    
    2,841
    
    
    
    137
    
    
    
    1,502
    
    
    
    558Other interest-bearing liabilities
    
    
    269
    
    
    
    191
    
    
    
    460
    
    
    
    13
    
    
    
    262
    
    
    
    272Total interest-bearing liabilities
    
    
    2,360
    
    
    
    2,604
    
    
    
    4,964
    
    
    
    139
    
    
    
    1,773
    
    
    
    886Change in net interest income
    
    $
    2,296
    
    
    $
    (1,882
    )
    
    $
    414
    
    
    $
    (72
    )
    
    $
    276
    
    
    $
    204
  Net interest income.
   Interest income.
 




---



##### 



Interest expense. th
 Loan Loss Provision.
 Non-interest income.
 Non-interest expense.
 Provision for Income Taxes.
 




---



##### 



2006 Results Compared to 2005 Results
 General.
 Net interest income.
 Interest income.
   Interest expense.
 Loan Loss Provision.
 




---



##### 



Noninterest income.
 Noninterest expense.
  Sarbanes-Oxley Act of 2002 Public Company
Accounting Reform and Investor Protection Act of 2002.
 Provision for Income Taxes.
 Asset and Liability Management
   




---



##### 



Interest Rate Sensitivity Simulation Analysis
    Net interest income simulation.
 Portfolio equity simulation.
  Increase
    
    Decrease+200 BP
    
    -200 BPNet interest incomeincrease(decrease)
    
    
    1.90
    %
    
    
    (5.90
    )%Portfolio equityincrease(decrease)
    
    
    (5.20
    )%
    
    
    (8.20
    )%
 Allowance for Loan Losses.
 




---



##### 



Accounting by Creditors for
Impairment of a Loan, Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures.
   




---



##### 



The following table sets forth information concerning the Companys allowance for loan losses at
the dates and for the periods presented.
 For the Years Ended December 31,2007
    
    2006
    
    2005(Dollars in thousands)Allowance balance at beginning of period
    
    $
    2,849
    
    
    $
    2,841
    
    
    $
    2,623Loans charged off:Commercial and industrial
    
    
    (251
    )
    
    
    (8
    )
    
    
    (103
    )Real estate-construction
    
    
    
    
    
    
    
    
    
    
    Real estate-mortgage:
    
    
    
    
    
    
    
    
    
    
    Residential
    
    
    (26
    )
    
    
    
    
    
    
    (15
    )Commercial
    
    
    
    
    
    
    
    
    
    
    Consumer installment
    
    
    (151
    )
    
    
    (72
    )
    
    
    (61
    )Total loans charged off
    
    
    (428
    )
    
    
    (80
    )
    
    
    (179
    )Recoveries of loans previously charged off:Commercial and industrial
    
    
    
    
    
    
    
    
    
    
    64Real estate-construction
    
    
    
    
    
    
    
    
    
    
    Real estate-mortgage:
    
    
    
    
    
    
    
    
    
    
    Residential
    
    
    
    
    
    
    
    
    
    
    17Commercial
    
    
    
    
    
    
    
    
    
    
    Consumer installment
    
    
    13
    
    
    
    28
    
    
    
    14Total recoveries
    
    
    13
    
    
    
    28
    
    
    
    95Net loans charged off
    
    
    (415
    )
    
    
    (52
    )
    
    
    (84
    )Provision for loan losses
    
    
    429
    
    
    
    60
    
    
    
    302Allowance balance at end of period
    
    $
    3,299
    
    
    $
    2,849
    
    
    $
    2,841Loans outstanding:Average
    
    $
    288,022
    
    
    $
    240,452
    
    
    $
    222,926End of period
    
    
    309,446
    
    
    
    249,191
    
    
    
    234,055Ratio of allowance for loan losses to loans outstanding at end of period
    
    
    1.07
    %
    
    
    1.14
    %
    
    
    1.21
    %Net charge offs to average loans
    
    
    (0.14
    )
    
    
    (0.02
    )
    
    
    (0.04
    )
 




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##### 



The following table illustrates the allocation of the Companys allowance for probable loan losses
for each category of loan for each reported period. The allocation of the allowance to each category
is not necessarily indicative of future loss in a particular category and does not restrict our use
of the allowance to absorb losses in other loan categories.
 At December 31,2007
    
    2006
    
    2005Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    Loans in Each
    
    
    
    
    
    Loans in EachCategory to
    
    
    
    
    
    Category to
    
    
    
    
    
    Category toAmount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans(Dollars In thousands)
    
    (Dollars In thousands)
    
    (Dollars In thousands)Type of Loans:Commercial and industrial
    
    $
    1,060
    
    
    
    21.7
    %
    
    $
    1,126
    
    
    
    27.5
    %
    
    $
    1,151
    
    
    
    27.6
    %Real estate construction
    
    
    99
    
    
    
    2.2
    
    
    
    25
    
    
    
    1.0
    
    
    
    50
    
    
    
    1.2Mortgage:Residential
    
    
    1,527
    
    
    
    62.5
    
    
    
    1,147
    
    
    
    65.4
    
    
    
    965
    
    
    
    64.9Commercial
    
    
    512
    
    
    
    11.9
    
    
    
    158
    
    
    
    4.0
    
    
    
    297
    
    
    
    3.5Consumer installment
    
    
    101
    
    
    
    1.7
    
    
    
    116
    
    
    
    2.1
    
    
    
    128
    
    
    
    2.8Unallocated
    
    
    
    
    
    
    
    
    
    
    277
    
    
    
    
    
    
    
    250
    
    
    
    Total
    
    $
    3,299
    
    
    
    100
    %
    
    $
    2,849
    
    
    
    100
    %
    
    $
    2,841
    
    
    
    100
    %
 Accrual of interest is discontinued on a loan when management believes, after considering economic
and business conditions, the borrowers financial condition is such that collection of interest is
doubtful. Payments received on non-accrual loans are recorded as income or applied against
principal according to managements judgment as to the collectibility of principal.A loan is considered impaired when it is probable the borrower will not repay the loan according to
the original contractual terms of the loan agreement. Management has determined that first mortgage
loans on one-to-four family properties and all consumer loans represent large groups of
smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience
insignificant payment delays, which are defined as 90 days or less, generally are not classified as
impaired. A loan is not impaired during a period of delay in payment if the Company expects to
collect all amounts due, including interest accrued at the contractual interest rate for the period
of delay. Management evaluates all loans identified as impaired individually. The Company estimates
credit losses on impaired loans based on the present value of expected cash flows, or the fair
value of the underlying collateral if loan repayment is expected to come from the sale or operation
of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a
realized loss has occurred. Until that time, an allowance for loan losses is maintained for
estimated losses.Unless otherwise required by the loan terms, cash receipts on impaired loans are applied first to
accrued interest receivable, except when an impaired loan is also a non-accrual loan, in which case
the portion of the payment related to interest is recognized as income.Nonperforming loans as a percentage of total loans at December 31, 2007 increased 1.83% from 0.56%
for 2006. The Company had non-accrual loans of $3,744,000 and $1,180,000 at December 31, 2007 and
2006, respectively. Interest income recognized on non-accrual loans during all of the periods was
insignificant. Management does not believe the non-accrual loans or any amounts classified as
nonperforming had a significant effect on operations or liquidity in 2007. Furthermore, management
is not aware of any trends or uncertainties related to any loans classified as doubtful or
substandard that might have a material effect on earnings, liquidity, or capital resources.
Management is not aware of any information pertaining to material credits that would cause it to
doubt the ability of borrowers to comply with repayment terms.
 




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##### 



The following table summarizes nonperforming assets by category.
 At December 31,2007
    
    2006
    
    2005Loans accounted for on a nonaccrual basis:Commercial and industrial
    
    $
    1,231
    
    
    $
    200
    
    
    $
    859Real estate-construction
    
    
    643
    
    
    
    
    
    
    
    Real estate-mortgage:Residential
    
    
    1,825
    
    
    
    952
    
    
    
    607Commercial
    
    
    33
    
    
    
    
    
    
    
    Consumer installment
    
    
    12
    
    
    
    28
    
    
    
    21Total nonaccrual loans
    
    
    3,744
    
    
    
    1,180
    
    
    
    1,487Accruing loans which are contractually past due 90 days or more:Commercial and industrial
    
    
    574
    
    
    
    90
    
    
    
    248Real estate-construction
    
    
    
    
    
    
    
    
    
    
    Real estate-mortgage:Residential
    
    
    1,333
    
    
    
    
    
    
    
    70Commercial
    
    
    
    
    
    
    110
    
    
    
    Consumer installment
    
    
    11
    
    
    
    9
    
    
    
    9Total accruing loans which are contractually past due 90 days or more:
    
    
    1,918
    
    
    
    209
    
    
    
    327Total non-performing loans
    
    
    5,662
    
    
    
    1,389
    
    
    
    1,814Real estate owned
    
    
    
    
    
    
    
    
    
    
    Other non-performing assets
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets
    
    $
    5,662
    
    
    $
    1,389
    
    
    $
    1,814Total non-performing loans to total loans
    
    
    1.83
    %
    
    
    0.56
    %
    
    
    0.78
    %Total non-performing loans to total assets
    
    
    1.30
    %
    
    
    0.41
    %
    
    
    0.58
    %Total non-performing assets to total assets
    
    
    1.30
    %
    
    
    0.41
    %
    
    
    0.58
    %
 (1)
    
    Represents accruing loans delinquent greater than 90 days that are considered by management to be well secured and that are in the process of collection.
 Liquidity and Capital ResourcesLiquidity.Liquidity management for the Company is measured and monitored on both a short and
long-term basis, allowing management to better understand and react to emerging balance sheet
trends. After assessing actual and projected cash flow needs, management seeks to obtain
funding at the most economical cost to the Company. Both short and long-term liquidity needs
are addressed by maturities and sales of investments securities, loan repayments and
maturities, and liquidating money market investments such as federal funds sold. The use of
these resources, in conjunction with access to credit, provides the core ingredients for
satisfying depositor, borrower, and creditor needs.The Companys liquid assets consist of cash and cash equivalents, which include investments in
very short-term investments (i.e. federal funds sold), and investment securities classified as
available for sale. The level of these assets is dependent on the Companys operating,
investing, and financing activities during any given period. At December 31, 2007, cash and
cash equivalents totaled $17.8 million or 4.1% of total assets while investment securities
classified as available for sale totaled $86.0 million or 19.8% of total assets. Management
believes that the liquidity needs of the Company are satisfied by the current balance of cash
and cash equivalents, readily available access to traditional funding sources, FHLB advances,
junior subordinated debt, 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.
 




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##### 



Operating activities provided net cash of $4.3 million, $4.5 million, and $4.0 million for 2007,
2006, and 2005, respectively, generated principally from net income of $3.4 million, $3.9 million,
and $3.7 million in each of these respective periods.Investing activities consist primarily of loan originations and repayments and investment purchases
and maturities. These cash usages primarily consisted of loan originations of $21.0 million, as
well as investment purchases of $33.0 million. Partially offsetting the usage of investment
activities is $10.6 million of proceeds from investment security maturities and repayments. For the
same period ended 2006, investing activities used $21.9 million in funds, principally for the net
origination of loans and the purchase of investment securities of $15.1 million and $16.9 million,
respectively. During the same period ended 2005, cash usages primarily consisted of loan
originations of $18.4 million, as well as investment purchases of $13.3 million.Financing activities consist of the solicitation and repayment of customer deposits, borrowings and
repayments, treasury stock activity, and the payment of dividends. During 2007, net cash provided
by financing activities totaled $47.7 million, principally derived from an increase in deposit
accounts in general, and certificates specifically. Also contributing to this influx of cash was
proceeds from deposit acquisition of $19.3 million. During 2006, net cash provided by financing
activities totaled $25.2 million, principally derived from an increase in deposit accounts. During
the same period ended 2005, net cash provided by financing activities was $16.7 million,
principally derived from an increase in deposit accounts.Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid
by competitors, and similar matters. Management monitors projected liquidity needs and determines
the level desirable, based in part on the Companys commitment to make loans, as well as
managements assessment of the Companys ability to generate funds. The Company anticipates that it
will have sufficient liquidity to satisfy estimated short-term and long-term funding needs.Capital Resources.The Companys primary source of capital has been retained earnings.
Historically, the Company has generated net retained income to support normal growth and expansion.
Management has developed a capital planning policy to not only ensure compliance with regulations,
but also to ensure capital adequacy for future expansion.The Company and its subsidiaries are subject to federal regulations imposing minimum capital
requirements. Management monitors both the Companys and Banks Total risk-based, Tier I risk-based
and Tier I leverage capital ratios to assess compliance with regulatory guidelines. At December 31,
2007, both the Company and its subsidiaries exceeded the minimum risk-based and leverage capital
ratio requirements. The Companys Total risk-based, Tier I risk-based and Tier I leverage ratios
were 14.56%, 13.38%, and 9.23% at December 31, 2007. MBCs Total risk-based, Tier I risk-based and
Tier I leverage ratios were 12.67%, 11.55%, and 7.82%, and EBs were 19.50%, 18.31%, and 14.38%,
respectively, at December 31, 2007.
 




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##### 



Managements Discussion and Analysis
of Financial Condition and Results of Operations Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters
  CashHigh
    
    Low
    
    DividendsBid
    
    Bid
    
    per share2007First Quarter
    
    $
    39.760
    
    
    $
    36.430
    
    
    $
    0.229Second Quarter
    
    $
    38.100
    
    
    $
    36.330
    
    
    $
    0.229Third Quarter
    
    $
    37.380
    
    
    $
    36.190
    
    
    $
    0.233Fourth Quarter
    
    $
    38.810
    
    
    $
    36.000
    
    
    $
    0.2452006First Quarter
    
    $
    38.095
    
    
    $
    37.189
    
    
    $
    0.213Second Quarter
    
    $
    37.642
    
    
    $
    37.642
    
    
    $
    0.213Third Quarter
    
    $
    36.869
    
    
    $
    37.869
    
    
    $
    0.218Fourth Quarter
    
    $
    40.238
    
    
    $
    40.238
    
    
    $
    0.229
 Comparative Performance Graph.
 




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##### 



COMPARISON OF THE CUMULATIVE TOTAL RETURN OF MIDDLEFIELD BANC CORP.,
THE SNL $100M  $500M OTC-BB AND PINK BANKS INDEX, AND THE NASDAQ  TOTAL US
FROM December 31, 2002, TO DECEMBER 31, 2007
 Total
Return Performance
 
 Period EndingIndex
    
    12/31/02
    
    12/31/03
    
    12/31/04
    
    12/31/05
    
    12/31/06
    
    12/31/07Middlefield Banc Corp.
    
    
    100.00
    
    
    
    113.71
    
    
    
    145.06
    
    
    
    173.73
    
    
    
    192.24
    
    
    
    177.59NASDAQ Composite
    
    
    100.00
    
    
    
    150.01
    
    
    
    162.89
    
    
    
    165.13
    
    
    
    180.85
    
    
    
    198.60SNL Bank Pink $100M-$500M Index
    
    
    100.00
    
    
    
    135.83
    
    
    
    164.17
    
    
    
    182.32
    
    
    
    199.57
    
    
    
    178.22
 




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##### 



Shareholder Information Corporate Headquarters
  
 Form 10-K and 10-Q Availability
  
 Market Makers
  
 
 
 Notice of Annual Meeting
  
 Transfer Agent and Registrar
 
 Independent Auditors
 
 Internet Information
  Dividend Payment Dates
  




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##### 



Shareholder Information Dividend Reinvestment and Stock Purchase Plan
  Direct Deposit of Dividends
  Market for Middlefields Common Equity & Related
Stockholder Matters
  CashHigh
    
    Low
    
    DividendsBid
    
    Bid
    
    per share2007First Quarter
    
    $
    39.760
    
    
    $
    36.430
    
    
    $
    0.229Second Quarter
    
    $
    38.100
    
    
    $
    36.330
    
    
    $
    0.229Third Quarter
    
    $
    37.380
    
    
    $
    36.190
    
    
    $
    0.233Fourth Quarter
    
    $
    38.810
    
    
    $
    36.000
    
    
    $
    0.2452006First Quarter
    
    $
    38.095
    
    
    $
    37.189
    
    
    $
    0.213Second Quarter
    
    $
    37.642
    
    
    $
    37.642
    
    
    $
    0.213Third Quarter
    
    $
    37.869
    
    
    $
    37.869
    
    
    $
    0.218Fourth Quarter
    
    $
    40.238
    
    
    $
    40.238
    
    
    $
    0.229
 




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##### 








---



#####