# EDGAR Filing Document

**Accession Number:** 0000836147
**File Stem:** 0001437749-23-006727
**Filing Date:** 2023-3
**Character Count:** 559752
**Document Hash:** 215e1bacc905eb632158c8221a6a1b5c
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001437749-23-006727.hdr.sgml**: 20241204

**ACCESSION NUMBER**: 0001437749-23-006727

**CONFORMED SUBMISSION TYPE**: 10-K

**PUBLIC DOCUMENT COUNT**: 152

**CONFORMED PERIOD OF REPORT**: 20221231

**FILED AS OF DATE**: 20230315

**DATE AS OF CHANGE**: 20230315

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** MIDDLEFIELD BANC CORP
- **CENTRAL INDEX KEY:** 0000836147
- **STANDARD INDUSTRIAL CLASSIFICATION:** STATE COMMERCIAL BANKS [6022]
- **IRS NUMBER:** 341585111
- **STATE OF INCORPORATION:** OH
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** 10-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-36613
- **FILM NUMBER:** 23736019

**BUSINESS ADDRESS:**
- **STREET 1:** 15985 E HIGH ST
- **STREET 2:** P O BOX 35
- **CITY:** MIDDLEFILED
- **STATE:** OH
- **ZIP:** 44062-9263
- **BUSINESS PHONE:** 4406321666

**MAIL ADDRESS:**
- **STREET 1:** 15985 EAST HIGH STREET
- **STREET 2:** P O BOX 35
- **CITY:** MIDDLEFIELD
- **STATE:** OH
- **ZIP:** 44062-9263

mbcn20221231c_10k.htm

**UNITED STATES** 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM **10-K**

**(Mark One)**

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| | |
|:---|:---|
| **☒** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|  | For the fiscal year ended December 31, 2022 |

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or

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| | |
|:---|:---|
| ☐ | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|  | For the transition period from ___________ to ___________ . |

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Commission file number 001-36613

![mbclogosm.jpg](mbclogosm.jpg)

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| |
|:---|
| **<u>Middlefield Banc Corp.</u>** |
| (Exact Name of Registrant as Specified in its Charter) |

---

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

---

---

| | |
|:---|:---|
|  | 440-632-1666 |
| Registrant's Telephone Number, Including Area Code | Registrant's Telephone Number, Including Area Code |

---

Securities Registered Pursuant To Section 12(b) Of The Act:

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| | | |
|:---|:---|:---|
| Title of Each Class | MBCN | Name of Each Exchange on Which Registered |
| Common Stock, Without Par Value | Trading Symbol | The NASDAQ Stock Market, LLC<br> (NASDAQ Capital Market) |

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**Securities registered pursuant to Section 12(g) of the Act:** None<br>

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

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

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

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

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

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

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

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

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value on June 30, 2022 of common stock held by non-affiliates of the registrant was approximately $139.9 million, based on the closing price of $25.20 per share of common stock as reported on the NASDAQ Capital Market.

As of March 14, 2023, there were 8,088,793 shares of common stock issued and outstanding.

**Documents Incorporated by Reference** Portions of the registrant's definitive proxy statement for the 2023 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Portions of the Annual Report to Shareholders for the year ended December 31, 2022 are incorporated by reference into Part I and Part II of this report.<br>

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**MIDDLEFIELD BANC CORP.**

**YEAR ENDED DECEMBER 31, 2022**

**INDEX TO FORM 10-K**

**Page**

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| | | |
|:---|:---|:---|
| **Part I** | **Part I** | **Part I** |
| Item 1. | Business | 3 |
| Item 1A. | Risk Factors | 20 |
| Item 1B. | Unresolved Staff Comments | 26 |
| Item 2. | Properties | 26 |
| Item 3. | Legal Proceedings | 27 |
| Item 4. | Mine Safety Disclosures | 27 |
| **Part II** | **Part II** | **Part II** |
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | 27 |
| Item 6. | [Reserved] | 27 |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 27 |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 27 |
| Item 8. | Financial Statements and Supplementary Data | 27 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 27 |
| Item 9A. | Controls and Procedures | 28 |
| Item 9B. | Other Information | 28 |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 28 |
| **Part III** | **Part III** | **Part III** |
| Item 10. | Directors, Executive Officers, and Corporate Governance | 28 |
| Item 11. | Executive Compensation | 28 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 29 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 29 |
| Item 14. | Principal Accountant Fees and Services | 29 |
| **Part IV** | **Part IV** | **Part IV** |
| Item 15. | Exhibits and Financial Statement Schedules | 29 |
| Item 16. | Form 10-K Summary | 34 |
| **SIGNATURES** | **SIGNATURES** | **SIGNATURES** |

---

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**Part I**

**<u>Item</u><u>1</u>** <u>—</u> **<u>Business</u>**

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

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

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

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

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

• credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors

• changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market

• increased cybersecurity risk, including potential business disruptions or financial losses

• changes in accounting standards, rules and interpretations and the related impact on our financial statements, including the effects from our adoption of the current expected credit losses ("CECL") model on January 1, 2023

• inflation, interest rate, market, and monetary fluctuations

• the development and acceptance of new products and services of the Company and subsidiaries and the perceived overall value of these products and services by customers, including the features, pricing, and quality compared to competitors' products and services

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

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

• changes in consumer spending and saving habits

• the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, disruptions in our customers' supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs

• other risks and uncertainties detailed in this Annual Report on Form 10-K and, from time to time, in our other filings with the Securities and Exchange Commission ("SEC")

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

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

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

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

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

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (<u>https://www.sec.gov/</u>).

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

On December 1, 2022, the Company completed its merger with Liberty Bancshares, Inc. ("Liberty'), pursuant to a previously announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company's common stock in exchange for each share of Liberty common stock they owned immediately before the merger. The Company issued 2,561,513 shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million. Upon closing, Liberty's bank subsidiary was merged into MBC, and Liberty's six full-service bank offices, in Ada and Kenton in Hardin County, in Bellefontaine and Bellefontaine South in Logan County, in Marysville in Union County, and in Westerville in Franklin County, became offices of MBC.

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

MBC's loan products include operational and working capital loans, loans to finance capital purchases, term business loans, residential construction loans, selected guaranteed or subsidized loan programs for small businesses, professional loans, residential and mortgage loans, agricultural loans, and consumer installment loans to make home improvements and to purchase automobiles, boats, and other personal expenditures.

On March 13, 2019, MBC established a wholly-owned subsidiary named Middlefield Investments, Inc. (MI), headquartered in Middlefield, Ohio. This operating subsidiary exists to hold and manage an investment portfolio. At December 31, 2022, MI's assets consist of a cash account, investments, and related accrued interest accounts. MI may only hold and manage investments and may not engage in any other activity without prior approval of the Ohio Division of Financial Institutions. In the first quarter of 2022, MBC established a wholly-owned subsidiary named MB Insurance Services (MIS). This operating subsidiary exists to offer retail and business customers a variety of insurance services, including home, renters, automobile, pet, identity theft, travel, and professional liability insurance. At December 31, 2022, MIS's assets consist of a cash account, a prepaid asset, and an accounts receivable. As a result of the bank merger, Middlefield Banc Corp. acquired a 100% ownership interest in LBSI Insurance, LLC ("LBSI"), a wholly-owned financial subsidiary of Liberty National Bank. LBSI is no longer in operation following the merger, and it is the Bank's intention to merge it with and into its own insurance subsidiary. All significant intercompany items have been eliminated between MBC and these subsidiaries.

***EMORECO*** Organized in 2009 as an Ohio corporation under the name EMORECO, Inc. and wholly owned by the Company, the purpose of the asset resolution subsidiary is to maintain, manage, and dispose of nonperforming loans and other real estate owned ("OREO") acquired by the subsidiary bank as the result of borrower default on real estate-secured loans. On December 31, 2022, EMORECO's assets consist of one cash account. According to federal law governing bank holding companies, real estate must be disposed of within two years of acquisition, although limited extensions may be granted by the Federal Reserve Bank. A holding company subsidiary has limited real estate investment powers. EMORECO may only manage and maintain property and may not improve or develop property without the advance approval of the Federal Reserve Bank.

**Market Area** MBC's footprint across twelve counties is home to 4.07 million people – more than one-third of Ohio's population – and 41.44% of Ohio's gross domestic product ("GDP"). MBC's product offering is geared toward traditional banking business delivered to both consumers and businesses located in the Columbus metro area, Northeast Ohio, and Western Ohio. MBC's current strategy is aimed at using a strong deposit relationship in the more rural markets of Northeast Ohio and Western Ohio to fund loan growth and build scale in the metro markets of Cleveland/Akron and Columbus.

MBC's eleven Northeast Ohio branches are located in Ashtabula, Cuyahoga, Geauga, Portage, Summit, and Trumbull counties. Our four Western Ohio branches are located in Hardin and Logan counties. Our six Central Ohio branches are located in Delaware, Franklin, Madison, and Union counties. We have a loan production office in Mentor located in Lake County. Lake County is contiguous to Ashtabula, Cuyahoga, and Geauga counties in our Northeast Ohio market. The most recent Federal Deposit Insurance Corporation (the "FDIC") market share data available from June 30, 2022 shows we had a deposit market share of approximately 18.47% in Geauga County, which represented the second largest market share in Geauga County, 3.47% in Ashtabula County, 0.11% in Cuyahoga County, 0.32% in Delaware County, 0.12% in Franklin County, 43.98% in Hardin County, which represented the largest market share in Hardin County, 11.26% in Logan County, which represented the third largest market share in Logan County, 1.52% in Madison County, 5.34% in Portage County, 0.37% in Summit County, 1.76% in Trumbull County, and 2.21% in Union County. According to the most recent information available from the U.S. Department of Commerce Bureau of Economic Analysis, nine of these twelve counties are ranked in the top half of Ohio counties measured by per capita personal income by county for 2019 through 2021.

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![m02.jpg](m02.jpg)

The economy of MBC's Northeast Ohio market is centered around manufacturing and agriculture and includes a large Amish population. MBC's headquarters, main banking office, and three additional branches are located in Geauga County. Geauga County is the center of the 4th largest Amish population in the world. With a 2021 per capita personal income of $78,294, Geauga County is ranked second highest among Ohio's 88 counties.

MBC's market area in Northeast Ohio benefits from the area's proximity to Cleveland in Cuyahoga County. Cuyahoga County is Ohio's second most populous county and boasts the second largest economy in Ohio measured by GDP. Cuyahoga County's 2021 GDP of nearly $90.5 billion is greater than the total GDP of 13 states and ranks 33rd of 3,108 counties nationally. In analysis of county-level GDP data from the U.S. Bureau of Economic Analysis, the Cleveland State University College of Urban Affairs analyzed per capita gross domestic product for the Cleveland metro area (an area covering Cuyahoga, Geauga, Lake, Lorain and Medina Counties) compared to 14 large metro areas including the seven fastest-growing of the large metro areas nationally from 2001 through 2018. Cuyahoga County ranked 88th for annual GDP growth per capita from 2000 to 2018, ahead of the home counties of cities experiencing greater population growth such as Charlotte, Indianapolis, and Phoenix. In that same time period from 2000 to 2018, Cuyahoga County ranked 474th out of the 500 largest counties in the U.S. for population change.

MBC's market area in Central Ohio benefits from the area's proximity to Columbus in Franklin County. Franklin County is Ohio's most populous county and has the largest GDP of Ohio's 88 counties. Columbus is the state capital, the largest city in Ohio, and the 14th largest city in the U.S. The Columbus metro area has experienced strong population growth in the last decade. According to the U.S. Census Bureau, Columbus saw the eleventh largest numeric population increase between July 1, 2017 and July 1, 2018 in the U.S. – making Columbus the only city in the Midwest on the top 15 list. The employment growth rate for the Columbus metro area has been greater than Ohio's employment growth rate, responsible for one in every three new jobs in Ohio. Since 2015, construction has been the fastest-growing sector in the Columbus metro area. Per capita personal income in the Columbus metro area continues to be above the statewide level for Ohio. According to the 2020 U.S. Census, the Columbus metro area accounts for 18% of Ohio's population and experienced the largest percentage increase of Midwest metro areas with a population of one million people since the 2010 U.S. Census. From 2000 to 2020, the Columbus metro area saw a 25% increase in population relative to Ohio's 3% increase in the same time period. Among the ten counties that comprise the Columbus metro area are the four Central Ohio counties where MBC has branches (Delaware, Franklin, Madison, and Union counties). Among the 51 metropolitan areas that the U.S. Census Bureau estimated to have more than one million people in 2020, Columbus ranked 17th in population growth since 2010. The population in the ten-county area centered around Franklin County increased by more than 230,000 to reach an estimated 2,138,946 in 2020, an increase of 12.2% over 10 years. Among all 263 metropolitan statistical areas the Census Bureau tracks, Columbus ranked 59th in population growth from 2010 to 2020 and 94th since 2019 (+0.63%).

Based on the most recent data available for 2021, Delaware County had the highest per capita personal income at $83,603 among Ohio's 88 counties. Union County, which is contiguous to Delaware County, had the 13th fastest-growing housing market in the U.S. according to the U.S. Census Bureau's data on the nation's 100 fastest growing counties with 5,000 or more housing units from July 1, 2018 to July 1, 2019. From 2018 to 2019, the number of housing units in Union County jumped 4%, in part due to growth in Dublin, Jerome Township, and Plain City as well as Honda's facilities in Marysville. From July 1, 2020 to July 1, 2021, Union County remains in the top 100 fastest-growing counties with 5,000 or more housing units as the 37th fastest-growing housing market in the U.S. Union County is the only Ohio county among the nation's 100 fastest-growing counties with 5,000 or more housing units.

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The following table summarizes unemployment percentage rates in the Ohio counties where we operate retail banking centers, Ohio, and the U.S. average on a comparative basis as of December 31, 2021, and December 31, 2022.

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| | | | |
|:---|:---|:---|:---|
| **Ohio County** | **Dec-21**<br> **Unemployment %** | **Dec-22** <br> **Unemployment %** | **2021-2022%** <br> **Change**  |
| Ashtabula County | 4.1 | 4.3 | 0.2 |
| Cuyahoga County | 4.9 | 3.6 | -1.3 |
| Delaware County | 2.4 | 2.6 | 0.2 |
| Franklin County | 3.0 | 3.1 | 0.1 |
| Geauga County | 3.6 | 2.9 | -0.7 |
| Hardin County | 3.4 | 3.3 | -0.1 |
| Logan County | 3.0 | 3.2 | 0.2 |
| Madison County | 2.6 | 2.9 | 0.3 |
| Portage County | 3.4 | 3.7 | 0.3 |
| Summit County | 3.7 | 3.9 | 0.2 |
| Trumbull County | 4.5 | 4.7 | 0.2 |
| Union County | 2.4 | 2.6 | 0.2 |
| **12 Counties Average** | **3.4** | **3.4** | **0** |
| **Ohio** | **4.5** | **4.2** | **-0.3** |
| **United States** | **3.9** | **3.5** | **-0.4** |

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Ohio Department of Job and Family Services Bureau of Labor Market Information non-seasonally adjusted unemployment rates as of December 2021. The December 2022 unemployment rate is classified as preliminary as of January 24, 2023.

The average unemployment rate of MBC's twelve-county market area is less than Ohio's unemployment rate. As of December 2022, the bank's market area average unemployment rate is less than the national average, and the State of Ohio has an unemployment rate that is greater than the national average. Ashtabula, Cuyahoga, Portage, Summit and Trumbull are the counties in MBC's market area with unemployment rates above the national average as of December 2022. With a 1.3% decrease on a twelve-month basis, Cuyahoga County experienced the most significant change in the unemployment rate from December 2021 to December 2022.

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

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

*Lending Limit* Although Ohio law imposes no material restrictions on the types of loans the Bank may make, real estate-based lending has historically been the Bank's primary focus. For prudential reasons, we avoid lending on the security of real estate located outside our market area. Ohio law does restrict the amount of loans an Ohio-chartered bank may make, generally limiting credit to any single borrower to less than 15% of capital. An additional margin of 10% of capital is allowed for loans fully secured by readily marketable collateral. This 15% legal lending limit has not been a material restriction on lending. We can accommodate loan volumes exceeding the legal lending limit by selling loan participations to other banks. As of December 31, 2022, MBC's 15%-of-capital limit on loans to a single borrower was approximately $30.0 million.

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

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

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  |  | Due after one | Due after five |  |  |
|  | Due in one | years through | years through | Due after |  |
|  | year or less | five years | fifteen years | fifteen years | Total |
| (Dollars in thousands) |  |  |  |  |  |
| Commercial real estate: |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Owner occupied | $14919 | $18230 | $83510 | $75089 | $191748 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Non-owner occupied | 43484 | 95365 | 148283 | 93448 | 380580 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Multifamily | 1948 | 6652 | 30412 | 19239 | 58251 |
| Residential real estate | 1826 | 6097 | 52241 | 236144 | 296308 |
| Commercial and industrial | 26246 | 59209 | 65905 | 44242 | 195602 |
| Home equity lines of credit | 2889 | 4395 | 24702 | 96079 | 128065 |
| Construction and other | 11096 | 24796 | 30891 | 27416 | 94199 |
| Consumer installment | 800 | 2906 | 1683 | 2730 | 8119 |
|  | $103208 | $217650 | $437627 | $594387 | $1352872 |

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

The following table shows the dollar amount of all loans due after December 31, 2023 that have predetermined interest rates and the dollar amount of all loans due after December 31, 2023 that have floating or adjustable rates.

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| | | | |
|:---|:---|:---|:---|
|  | Fixed | Adjustable |  |
|  | Rate | Rate | Total |
| (Dollars in thousands) |  |  |  |
| Commercial real estate: |  |  |  |
| Owner occupied | $40354 | $136475 | $176829 |
| Non-owner occupied | 105954 | 231142 | 337096 |
| Multifamily | 6406 | 49897 | 56303 |
| Residential real estate | 113167 | 181315 | 294482 |
| Commercial and industrial | 95170 | 74186 | 169356 |
| Home equity lines of credit | 117 | 125059 | 125176 |
| Construction and other | 5345 | 77758 | 83103 |
| Consumer installment | 2746 | 4573 | 7319 |
|  | $369259 | $880405 | $1249664 |

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***Residential Real Estate Loans*** A significant portion of the Bank's lending consists of origination of residential loans secured by 1-4 family real estate located in Ashtabula, Cuyahoga, Delaware, Franklin, Geauga, Madison, Portage, Summit, and Trumbull counties. Residential real estate loans approximated $296.3 million or 21.9% of the Bank's total loan portfolio on December 31, 2022.

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

Approximately 61.2% of the residential mortgage loan portfolio due after a year has an adjustable rate and is secured by 1-4 family real estate on December 31, 2022. The Bank originates variable-rate and fixed-rate, single-family mortgage loans. Generally, fixed-rate mortgage loans are underwritten according to the Federal Home Loan Mortgage Corporation ("Freddie Mac") guidelines. In some instances, these loans are sold to the agency. Upon the sale to Freddie Mac, the servicing rights are retained and are done so in furtherance of the Bank's goal of better matching the maturities and interest rate sensitivity of its assets and liabilities. The Bank generally retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax payments on behalf of borrowers, and otherwise servicing the loans it sells, and receives a fee for performing these services. Sales of loans also provide funds for additional lending and other purposes.

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On December 31, 2022, residential real estate loans of approximately $1.4 million were non-accruing, representing 0.5% of the residential real estate loan portfolio. On December 31, 2021, residential real estate loans of approximately $1.6 million were non-accruing, representing 0.7% of the residential real estate loan portfolio.

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

On December 31, 2022, the Bank had approximately $128.1 million in its home equity lines of credit portfolio, representing 9.5% of total loans. On December 31, 2022, home equity lines of credit of approximately $191,000 were non-accruing and represented 0.1% of the home equity lines of credit portfolio. On December 31, 2021, the Bank had approximately $104.4 million in its home equity lines of credit portfolio, representing 10.6% of total loans. On December 31, 2021, home equity lines of credit of approximately $121,000 were non-accruing and represented 0.1% of the home equity lines of credit portfolio.

***Commercial and Commercial Real Estate Loans***

The Bank's commercial and commercial real estate loan services include:

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

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Commercial real estate loans include commercial properties occupied by the proprietor of the business conducted on the premises, non-owner occupied business properties, multifamily residential properties, income-producing properties, and agricultural properties and businesses that support these sectors. The primary risks of commercial real estate loans are loss of income of the owner or lessee of the property and the inability of the market to sustain rent levels. Although commercial loans generally bear more risk than single-family residential mortgage loans, they tend to be higher-yielding, have shorter terms and provide for interest-rate adjustments. Accordingly, commercial loans enhance a lender's interest rate risk management and, in management's opinion, promote more rapid asset and income growth than a loan portfolio composed strictly of residential real estate mortgage loans.

Although a risk of nonpayment exists for all loans, certain specific risks are associated with various kinds of loans. One of the primary risks associated with commercial loans is the possibility that the commercial borrower will not generate cash flow sufficient to repay the loan. The Bank's Credit Policy provides that commercial loan applications must be supported by documentation indicating cash flow sufficient for the borrower to service the proposed loan. Financial statements or tax returns for at least three years must be submitted, and annual reviews are required for business purpose relationships of $750,000 or more. Ongoing financial information is generally required for any commercial relationship where the exposure is $250,000 or more.

The fair value of commercial loan collateral must exceed the Bank's exposure. For this purpose, fair value is determined by independent appraisal or the loan officer's estimate, employing guidelines established by the Credit Policy. Loans not secured by real estate generally have terms of five years or fewer unless guaranteed by the U.S. Small Business Administration or other governmental agencies, and term loans secured by collateral having a useful life exceeding five years may have longer terms. The Bank's Credit Policy allows for terms of up to 20 years for loans secured by commercial real estate and one year for business lines of credit. The maximum LTV ratio for commercial real estate loans is 80% of the appraised value or cost, whichever is less.

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

On December 31, 2022, commercial and commercial real estate loans totaled $826.2 million, or 61.1% of the Bank's total loan portfolio, which include $229,000 in Paycheck Protection Program ("PPP") loans. On December 31, 2022, commercial and commercial real estate loans of approximately $255,000 were non-accruing and represented 0.03% of the commercial and commercial real estate loan portfolios. On December 31, 2021, commercial and commercial real estate loans totaled $575.1 million, or 58.6% of the Bank's total loan portfolio, which include $34.1 million in PPP loans. On December 31, 2021, commercial and commercial real estate loans of approximately $3.0 million were non-accruing and represented 0.5% of the commercial and commercial real estate loan portfolios.

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***Construction and Other***

The Bank originates several different types of loans that it categorizes as construction loans, including:

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

• residential construction loans to builders,

• commercial construction loans, and

• real estate acquisition and development loans.

Because of the complex nature of construction lending, these loans are generally recognized as having a higher degree of risk than other forms of real estate lending. The Bank's fixed-rate and adjustable-rate construction loans do not provide for the same interest rate terms on the construction loan and on the permanent mortgage loan that follows the completion of the construction phase of the loan. It is typical for the Bank to make residential construction loans without an existing written commitment for permanent financing. The Bank's Credit Policy provides that the Bank may make construction loans with terms for up to one year, with a maximum LTV ratio for residential construction of 80%. The Bank also offers residential construction-to-permanent loans with a twelve-month construction period followed by 30 years of permanent financing.

On December 31, 2022, real estate construction loans totaled $94.2 million, or 7.0% of the Bank's total loan portfolio. On December 31, 2022, real estate construction loans of approximately $68,000 were non-accruing and represented 0.1% of the real estate construction loan portfolios. On December 31, 2021, real estate construction and other loans totaled $54.1 million, or 5.5% of the Bank's total loan portfolio. There were no loans in the construction and other portfolio that were 90 days delinquent or non-accruing on that date.

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

According to the Bank's Credit Policy, consumer loans secured by collateral other than real estate generally may have terms of up to five years, and unsecured consumer loans may have terms up to three years. Real estate security is typically required for consumer loans having terms exceeding five years.

On December 31, 2022, the Bank had approximately $8.1 million in its consumer installment loan portfolio, representing 0.6% of total loans. On December 31, 2022, consumer installment loans of approximately $166,000 were non-accruing and represented 2.0% of the consumer installment loan portfolio. On December 31, 2021, the Bank had approximately $8.0 million in its consumer installment loan portfolio, representing 0.8% of total loans. On December 31, 2021, consumer installment loans of approximately $182,000 were non-accruing and represented 2.3% of the consumer installment loan portfolio.

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

When a loan request is made, the Bank reviews the application, credit bureau reports, property appraisals or evaluations, financial information, verifications of income, and other documentation concerning the borrower's creditworthiness, as applicable to each loan type. The Bank's underwriting guidelines are set by senior management and approved by the Board of Directors. The Credit Policy specifies each officer's loan approval authority. Loans exceeding an individual officer's approval authority are submitted to an Officer's Loan Committee, which can approve loans up to $6,000,000. The Board of Directors' Loan Committee acts as approval authority for exposures over $6,000,000 and up to $10,000,000. Loans exceeding $10,000,000 require approval from the entire Board of Directors.

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

***Mortgage Banking Activity*** The Bank originates residential loans secured by first-lien mortgages on one-to-four family residential properties located within its market area for either portfolio or sale into the secondary market. During the year ended December 31, 2022, the Bank recorded gains of $24,000 on the sale of $1.6 million in loans receivable originated for sale. During the year ended December 31, 2021, the Bank recorded gains of $1.2 million on the sale of $35.1 million in loans receivable originated for sale. These loans were sold on a servicing-retained basis to Freddie Mac.

In addition to interest earned on loans and income recognized on the sale of loans, the Bank receives fees for servicing loans that it has sold. Income from these activities will vary from period to period with the volume and type of loans originated and sold, which depends on prevailing mortgage interest rates and their effect on the demand for loans in the Bank's market area.

**Nonperforming Loans** Late charges on residential mortgages and consumer loans are assessed if a payment is not received by the due date plus a grace period. When an advanced stage of delinquency appears on a single-family loan and repayment cannot be expected within a reasonable time, or a repayment agreement is not entered into, required notice of foreclosure or repossession proceedings may be prepared by the Bank's attorney and delivered to the borrower so that foreclosure proceedings may be initiated promptly, if necessary. The Bank also collects late charges on commercial loans.

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When the Bank acquires real estate through foreclosure, voluntary deed, or similar means, it is classified as OREO until it is sold. When a property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal balance at the date of acquisition) or fair value, less anticipated cost to sell. If fair value, less cost to sell, is less than carrying value, then carrying value is reduced through the allowance for loan and lease losses ("ALLL") immediately before booking as OREO. Any subsequent write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed. OREO is appraised during the foreclosure process, before the acquisition, when possible. Subsequent to the initial appraisal, OREO is appraised at least annually. Losses are recognized for the amount by which the book value of the related mortgage loan exceeds the estimated net realizable value of the property.

The Bank undertakes a regular review of the loan portfolio to assess its risks, particularly the risks associated with the commercial loan portfolio.

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

When an FDIC-insured institution classifies assets as either "substandard" or "doubtful," it may establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies assets as "loss," it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off that amount. An Ohio nonmember bank's determination about the classification of its assets and the amount of its allowances is subject to review by the FDIC and the Ohio Division of Financial Institutions (the "ODFI"), which may order the establishment of additional loss allowances. Management also employs an independent third party to semi-annually review and validate the internal loan review process and loan classifications.

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

All securities-related activity is reported to the Bank's Board of Directors. General changes in investment strategy are required to be reviewed and approved by the board. Senior management can purchase and sell securities per the Bank's stated investment policy.

Management determines the appropriate classification of securities at the time of purchase. At this time, the Bank has no securities classified as held to maturity. Securities to be held for indefinite periods and not intended to be held to maturity or on a long-term basis are classified as available for sale. Available-for-sale securities are reflected on the balance sheet at their fair value.

The contractual maturity of investment debt securities is as follows:

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| | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
|  | One year or less | One year or less | More than one to five years | More than one to five years | More than five to ten years | More than five to ten years | More than ten years | More than ten years | Total investment securities | Total investment securities | Total investment securities |
|  | Amortized cost | Average yield | Amortized cost | Average yield | Amortized cost | Average yield | Amortized cost | Average yield | Amortized cost | Average yield | Fair value |
| (Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
| Subordinated debt | $- |  | $- |  | $32300 | 4.79% | $- |  | $32300 | 4.79% | $30164 |
| Obligations of states and political subdivisions: |  |  |  |  |  |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp; Taxable | 500 | 5.30% |  |  |  |  |  |  | 500 | 5.30% | 500 |
| &nbsp;&nbsp;&nbsp;&nbsp; Tax-exempt \*\* | 625 | 4.52% | 1533 | 4.99% | 11405 | 3.89% | 138333 | 3.08% | 151896 | 3.16% | 126834 |
| Mortgage-backed securities in government-sponsored entities |  |  | 1471 | 2.17% | 1658 | 2.04% | 5173 | 2.46% | 8302 | 2.33% | 7469 |
| Total | $1125 | 4.87% | $3004 | 3.61% | $45363 | 4.46% | $143506 | 3.05% | $192998 | 3.40% | $164967 |

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

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Expected maturities of investment securities could differ from contractual maturities because the borrower, or issuer, could have the right to call or prepay obligations with or without call or prepayment penalties.

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

As of December 31, 2022, the Bank held 57,772 shares of $100 par value Federal Home Loan Bank ("FHLB") of Cincinnati stock, which is a restricted security. FHLB stock represents an equity interest in the FHLB, but it does not have a readily determinable market value. The stock can be sold at its par value only to the FHLB or to another member institution. Member institutions must maintain a minimum stock investment in the FHLB based on total assets, total mortgages, and total mortgage-backed securities. The Bank's minimum investment in FHLB stock on December 31, 2022, was $5.8 million.

**Sources of Funds** —Deposit accounts are a significant source of funds for the Bank. The Bank offers many deposit products to attract commercial and regular consumer checking and savings customers, including standard and money market savings accounts, NOW accounts, a variety of fixed-maturity, fixed-rate certificates with maturities ranging from 3 to 60 months, and brokered deposits. These accounts earn interest at rates established by management based on liquidity, competitive market factors, and management's desire to increase certain types or maturities. The Bank also provides travelers' checks, official checks, money orders, ATM services, and IRA accounts.

The following table shows on a consolidated basis the amount of uninsured time deposits as of December 31, 2022, including certificates of deposit, by the time remaining until maturity.

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| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | Amount | Percent of Total |
| Within three months | $9807 | 19.26% |
| Beyond three but within six months | 5094 | 10.00% |
| Beyond six but within twelve months | 11166 | 21.93% |
| Beyond one year | 24850 | 48.81% |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total | $50917 | 100.00% |

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The following table shows on a consolidated basis the amount of uninsured deposits as of December 31, 2022 by category:

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| | | | | |
|:---|:---|:---|:---|:---|
|  | December 31, | December 31, | | |
|  | 2022 | 2021 | $ change | % change |
| Noninterest-bearing demand | $158334 | $118231 | $40103 | 33.9% |
| Interest-bearing demand | 65669 | 67541 | (1872) | -2.8% |
| Money market | 89832 | 108771 | (18939) | -17.4% |
| Savings | 7859 | 36150 | (28291) | -78.3% |
| Time | 50917 | 33419 | 17497 | 52.4% |
| Total deposits | $372611 | $364112 | $8498 | 2.3% |

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Borrowings, deposits, and repayment of loan principal are the Bank's primary sources of funds for lending activities and other general business purposes. However, when the supply of funds cannot satisfy the demand for loans or general business purposes, the Bank can obtain funds from the FHLB of Cincinnati. Interest and principal are payable monthly, and the line of credit is secured by a pledge collateral agreement on some investments and loan balances. On December 31, 2022, MBC had $65.0 million in FHLB borrowings outstanding. On December 31, 2021, MBC had no FHLB borrowings outstanding. The Bank also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.

**Competition**

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

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

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

**Personnel and Human Capital Resources**

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

The safety, health, and wellness of our employees are a top priority. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum, and sponsoring various wellness programs.

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

As of December 31, 2022, the Bank had 238 full-time equivalent employees. None of the employees are represented by a collective bargaining group.

**Supervision and Regulation**

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

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

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

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

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

• directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring company would own or control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of the shares),

• acquiring all or substantially all of the assets of another bank, or

• merging or consolidating with another bank holding company.

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

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

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

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

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

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

Activities that are financial include:

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

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

• providing financial and investment advice.

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

*Holding Company Capital and Source of Strength* The Federal Reserve considers the adequacy of a bank holding company's capital on essentially the same risk-adjusted basis as capital adequacy is determined by the FDIC at the bank subsidiary level.

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

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

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

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

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

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

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

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer: consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. At December 31, 2022, the Bank exceeded the regulatory requirement for the "capital conservation buffer."

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

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

*Prompt Corrective Action*. To resolve the problems of undercapitalized financial institutions and to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system known as "prompt corrective action." Under the prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories, depending on its total capital ratio, its Tier 1 capital ratio, its common equity Tier 1 risk-based capital ratio, its leverage ratio, and subjective factors. The categories are "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." To be considered well-capitalized for purposes of the prompt corrective action rules, a bank must maintain total risk-based capital of 10.0% or greater, Tier 1 risk-based capital of 8.0% or greater, common equity Tier 1 capital of 6.5% or greater, and leverage capital of 5.0% or greater. An institution with a capital level that might qualify for well-capitalized or adequately capitalized status may nevertheless be treated as though it were in the next lower capital category if its primary federal banking supervisory authority determines an unsafe or unsound condition or practice warrants that treatment.

A financial institution's capital classification can significantly affect its operations under the prompt corrective action rules. For example, an institution that is not well-capitalized generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval, which can harm the bank's liquidity. An insured depository institution is subject to additional restrictions at each successively lower capital category. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance fund. A bank holding company must guarantee that a subsidiary bank that adopts a capital restoration plan will satisfy its plan obligations. Any capital loans made by a bank holding company to a subsidiary bank are subordinated to the claims of depositors in the bank and certain other indebtedness of the subsidiary bank. If bankruptcy of a bank holding company occurs, any commitment by the bank holding company to a federal banking regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and would be entitled to priority of payment. Bank regulatory agencies generally must appoint a receiver or conservator shortly after an institution becomes critically undercapitalized. For a complete discussion of the Company and the Bank's actual capital amounts and ratios, refer to Note 17 of the "Notes to Consolidated Financial Statements" of this Annual Report.

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

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

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

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

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

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

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

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

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

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

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") became law, expanding the authority to make loans under the PPP through March 31, 2021, and revising specific PPP requirements. The Economic Aid Act expands PPP eligibility to include eligible 501(c)(6) organizations, housing cooperatives, and direct marketing organizations and provides greater flexibility for businesses with seasonal employees. The Economic Aid Act also permits a second round of funding for specific borrowers who have already received a PPP loan. As of December 31, 2022, the Company had $229,000 in PPP loan originations with the SBA's forgiveness of $212.4 million.

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

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

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

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**Deposit Insurance** The Deposit Insurance Fund of the FDIC insures deposits at insured depository institutions such as the Bank. Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 based upon the ownership rights and capacities in which deposit accounts are maintained at the Bank. Banks' premium for deposit insurance is based upon a risk classification system established by the FDIC.

Effective July 1, 2016, the FDIC changed the way banks are assessed for deposit insurance. The FDIC has eliminated the risk categories for "small banks", such as the Bank, that have been FDIC insured for at least five years and have less than $10 billion in total assets, and assessments are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) for established small banks with CAMELS 1 or 2 ratings has been reduced to 1.5 to 16 basis points and the maximum assessment rate for established small banks with CAMELS 3 through 4 ratings is 40 basis points.

The FDIC has the authority to increase insurance assessments. Effective January 1, 2023, FDIC deposit insurance assessment rates increased two basis points. The FDIC rule aims to return the deposit insurance fund to its statutory minimum of 1.35%. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.

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

**Transactions with Affiliates** Transactions between an insured bank, such as the Bank, and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and implementing regulations. These statutes are intended to protect banks from abuse in financial transactions with affiliates, preventing FDIC-insured deposits from being diverted to support the activities of unregulated entities engaged in nonbanking businesses. An affiliate of a bank includes any company or entity that controls or is under common control with the bank. Generally, section 23A and section 23B of the Federal Reserve Act:

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

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

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

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

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

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

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

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

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

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

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

Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions, and applications to open branches.

MBC's CRA performance evaluation dated December 12, 2022 states that MBC's CRA rating is "Satisfactory."

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

Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The criteria consider a member's performance under the CRA and its record of lending to first-time home buyers.

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

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

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

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

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

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

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

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

- financial institutions must follow Treasury Department regulations setting forth minimum standards regarding customer identification. These regulations require financial institutions to implement reasonable procedures for verifying the identity of any person seeking to open an account, maintain records of the information used to verify the person's identity, and consult lists of known or suspected terrorists and terrorist organizations provided to the financial institution by government agencies. Every financial institution must establish anti-money laundering programs, including the development of internal policies and procedures, designation of a compliance officer, employee training, and an independent audit function.

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

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

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

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

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

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

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

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

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

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

**Item 1A** — **Risk Factors**

**Risks Related to the Company**'**s Business**

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

***The Company does not have the financial and other resources that larger competitors have; this could affect its ability to compete for large commercial loan originations and its ability to offer products and services competitors provide to customers.*** The northeastern Ohio and central Ohio markets in which the Company operates have high concentrations of financial institutions. Many of the financial institutions operating in our markets are branches of significantly larger institutions headquartered in Cleveland or in Columbus, with significantly greater financial resources and higher lending limits. In addition, many of these institutions offer services that the Company does not or cannot provide. For example, the larger competitors' greater resources offer advantages such as the ability to price services at lower, more attractive levels, and the ability to provide larger credit facilities. The Company accommodates loan volumes in excess of its lending limits from time to time through the sale of loan participations to other banks.

***The business of banking is changing rapidly with changes in technology, which poses financial and technological challenges to small and mid-sized institutions.*** With frequent introductions of new technology-driven products and services, the banking industry is undergoing rapid technological changes. In addition to enhancing customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Financial institutions' success is increasingly dependent upon use of technology to provide products and services that satisfy customer demands and to create additional operating efficiencies. Many of the Company's competitors have substantially greater resources to invest in technological improvements, which could enable them to perform various banking functions at lower costs than the Company, or to provide products and services that the Company is not able to economically provide. The Company cannot assure you that we will be able to develop and implement new technology-driven products or services or that the Company will be successful in marketing these products or services to customers. Because of the demand for technology-driven products, banks increasingly rely on unaffiliated vendors to provide data processing services and other core banking functions. The use of technology-related products, services, delivery channels, and processes exposes banks to various risks, particularly transaction, strategic, reputation, and compliance risk. The Company cannot assure you that we will be able to successfully manage the risks associated with our dependence on technology.

***Success in the banking industry requires disciplined management of lending risks.*** There are many risks in the business of lending, including risks associated with the duration over which loans may be repaid, risks resulting from changes in economic conditions, risks inherent in dealing with individual borrowers, and risks resulting from changes in the value of loan collateral. We attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers. Nevertheless, there is risk that our credit evaluations will prove to be inaccurate due to changed circumstances or otherwise.

***Our allowance for loan losses may prove to be insufficient to absorb the probable, incurred losses in our loan portfolio.*** Lending money is a substantial part of our business. However, every loan we make carries a risk of nonpayment. This risk is affected by, among other things: the cash flow of the borrower and/or the project being financed; in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral, the credit history of a particular borrower, changes in economic and industry conditions, and the duration of the loan. The preparation of consolidated financial statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. In addition, bank regulatory agencies periodically review the allowance for loan and lease losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Any increases in the allowance for possible loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company's financial condition and results of operations.

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***The implementation of the Current Expected Credit Loss accounting standard could require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations*** Effective January 1, 2023, we are required to adopt the Financial Accounting Standards Board (the "FASB") Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, commonly referred to as "CECL". CECL changes the allowance for loan losses methodology from an incurred loss impairment methodology to an expected loss methodology, which is more dependent on future economic forecasts, assumptions and models than previous accounting standards and could result in increases in, and add volatility to, our allowance for loan losses and future provisions for loan losses. These forecasts, assumptions and models are inherently uncertain and are based upon management's reasonable judgment in light of information currently available.

***Our financial instruments expose us to certain market risks and may increase the volatility of earnings and AOCI.*** We hold certain financial instruments measured at fair value. For those financial instruments measured at fair value, we are required to recognize the changes in the fair value of such instruments in earnings or accumulated other comprehensive income ("AOCI") each quarter. Therefore, any increases or decreases in the fair value of these financial instruments have a corresponding impact on reported earnings or AOCI. Fair value can be affected by a variety of factors, many of which are beyond our control, including our credit position, interest rate volatility, capital markets volatility, and other economic factors. Accordingly, we are subject to mark-to-market risk and the application of fair value accounting may cause our earnings and AOCI to be more volatile than would be suggested by our underlying performance.

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

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

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

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

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

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Our most important source of funds is deposits. As of December 31, 2022, approximately $660.1 million, or 47.1%, of our total deposits were negotiable order of withdrawal, or NOW, savings and money market accounts. Historically our savings, money market deposit and NOW accounts have been stable sources of funds. However, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors that may be outside of our control, such as a loss of confidence by customers in us or the banking sector generally, customer perceptions of our financial health and general reputation, increasing competitive pressures from other financial services firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes, any of which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits, increasing our funding costs and reducing our net interest income and net income.

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

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

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

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

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

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

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

***The value of our goodwill and core deposit intangible assets may decline in the future.*** As of December 31, 2022, we had $39.4 million of goodwill and core deposit intangible assets. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of the Company's common stock may necessitate taking charges in the future related to the impairment of our goodwill and core deposit intangible assets. If we were to conclude that a future write-down of goodwill and core deposit intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.

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**Risks Relating to Economic and Market Conditions** 

**Our *business may be adversely affected by conditions in the financial markets and economic conditions generally.*** As economic conditions relating to the COVID-19 pandemic have improved, the Federal Reserve has shifted its focus to limiting inflationary and other potentially adverse effects of the extensive pandemic-related government stimulus, which signals the potential for a continued period of economic uncertainty even though the pandemic has subsided. In addition, there are continuing concerns related to, among other things, the level of U.S. government debt and fiscal actions that may be taken to address that debt, a potential resurgence of economic and political tensions with China and the Russian invasion of Ukraine, all of which may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes in consumer and business spending, borrowing and savings habits. These economic conditions or other negative developments in the domestic or international credit markets or economies may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability.

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

- declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio;

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

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

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

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

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

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

***The Company operates in a highly competitive industry and market area.*** The Company faces significant competition both in making loans and in attracting deposits. Competition is based on interest rates and other credit and service charges, the quality of services rendered, the convenience of banking facilities, the range and type of products offered and, in the case of loans to larger commercial borrowers, lending limits, among other factors. Competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, insurance companies, and other financial service companies. The Company's most direct competition for deposits has historically come from commercial banks, savings banks, and savings and loan associations. Technology has also lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. The wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. Our profitability depends upon our continued ability to successfully compete in our market areas. Larger competitors may be able to achieve economies of scale and, as a result, offer a broader range of products and services. The Company's ability to compete successfully depends on a number of factors, including, among other things:

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

- the ability to expand the Company's market position;

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

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

- customer satisfaction with the Company's level of service; and

- industry and general economic trends

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

***Changing interest rates have a direct and immediate impact on financial institutions.*** The interest rate risk that exists for most or all financial institutions arises out of interest rates that increase more than anticipated or that increase more quickly than expected. If interest rates change more abruptly than we have simulated or if the increase is greater than we have simulated, this could have an adverse effect on our net interest income and equity value. The risk of nonpayment of loans — or credit risk — is not the only lending risk. Lenders are subject also to interest rate risk. Fluctuating rates of interest prevailing in the market affect a bank's net interest income, which is the difference between interest earned from loans and investments, on one hand, and interest paid on deposits and borrowings, on the other. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted-average yield earned on our interest-earning assets and the weighted-average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect (i) our ability to originate loans, (ii) the value of our interest-earning assets, and our ability to realize gains from the sale of such assets, (iii) our ability to obtain and retain deposits in competition with other available investment alternatives, and (iv) the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. Although the Company believes that the estimated maturities of our interest-earning assets currently are well balanced in relation to the estimated maturities of our interest-bearing liabilities (which involves various estimates as to how changes in the general level of interest rates will impact these assets and liabilities), there can be no assurance that our profitability would not be adversely affected during any period of changes in interest rates.

**A prolonged economic downturn in our market area would adversely affect our loan portfolio and our growth prospects**. Our lending market area is concentrated in northeastern, central, and western Ohio, particularly Ashtabula, Cuyahoga, Delaware, Franklin, Geauga, Hardin, Logan, Madison, Portage, Summit, Trumbull, and Union Counties. A very significant percentage of our loan portfolio is secured by real estate collateral, primarily residential mortgage loans. Commercial and industrial loans to small and medium-sized businesses also represent a significant percentage of our loan portfolio. The asset quality of our loan portfolio is largely dependent upon the area's economy and real estate markets. A prolonged economic downturn would likely lead to deterioration of the credit quality of our loan portfolio and reduce our level of customer deposits, which in turn would hurt our business. Borrowers may be less likely to repay their loans as scheduled or at all. Moreover, the value of real estate or other collateral that may secure our loans could be adversely affected. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. A prolonged economic downturn could, therefore, result in losses that could materially and adversely affect our business.

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

**Risks Associated with the Company**'**s Common Stock**

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

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

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

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**Risks Related to the Legal and Regulatory Environment**

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

The burdens of federal and state banking regulation place banks in general at a competitive disadvantage compared to less regulated competitors. Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies have undergone significant changes, and could change significantly again. Federal and state banking agencies also require banks and bank holding companies to maintain adequate capital. Failure to maintain adequate capital or to comply with applicable laws, regulations, and supervisory agreements could subject a bank or bank holding company to federal or state enforcement actions, including termination of deposit insurance, imposition of fines and civil penalties, and, in the most severe cases, appointment of a conservator or receiver for a depositary institution. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or the Company in particular. The Company gives you no assurance that we will be able to adapt successfully to industry changes caused by governmental actions.

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

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

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

***Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.*** Rising commercial real estate lending concentrations may expose institutions like the Bank to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. In addition, institutions that are exposed to significant commercial real estate concentration risk may be subject to increased regulatory scrutiny. The federal banking agencies have issued guidance for institutions that are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions that have (i) total reported loans for construction, land development, and other land which represent 100% or more of an institution's total risk-based capital; or (ii) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the outstanding balance of the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are encouraged to identify and monitor credit concentrations and enhance risk management systems. At December 31, 2022, non-owner occupied commercial real estate loans (including construction, land, and land development loans) represent 266.5% of total risk-based capital. Construction, land, and land development loans represent 47.1% of total risk-based capital as of December 31, 2022. Management has extensive experience in commercial real estate lending. Management has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive capital planning policy, which includes pro forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well-capitalized ratios.

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

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

***Government regulation could restrict our ability to pay cash dividends.*** Dividends from the bank are the only significant source of cash for the Company. Statutory and regulatory limits could prevent the bank from paying dividends or transferring funds to the Company. The Company cannot assure you that subsidiary bank profitability will continue to allow dividends to the Company, and the Company therefore cannot assure you that the Company will be able to continue paying regular, quarterly cash dividends.

**General Risk Factors**

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

**<u>Item</u><u>1B</u>** <u>—</u> **<u>Unresolved Staff Comments</u>**

Not applicable.

**<u>Item</u><u>2</u>** <u>—</u> **<u>Properties</u>**

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

As of the date of this Annual Report on Form 10-K, MBC has 23 banking centers and one administrative office as listed below:

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

● an administrative office in Middlefield in Geauga County;

● branch offices in Garrettsville and Mantua in Portage County;

● a branch office in Orwell in Ashtabula County;

● a branch office in Cortland in Trumbull County;

● branch offices in Dublin and Westerville (two offices) in Franklin County;

● a loan production office in Mentor in Lake County;

● branch offices in Sunbury and Powell in Delaware County;

● branch offices in Beachwood and Solon in Cuyahoga County;

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● a branch office in Twinsburg in Summit County;

● a branch office in Plain City in Madison County;

● branch offices in Ada and Kenton in Hardin County;

● branch offices in Bellefontaine (two offices) in Logan County;

● a branch office in Marysville in Union County.

On December 31, 2022, the net book value of the Bank's investment in premises and equipment totaled $22.0 million.

**<u>Item</u><u>3</u>** <u>—</u> **<u>Legal Proceedings</u>**

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

**<u>Item</u><u>4</u>** <u>—</u> **<u>Mine Safety Disclosures</u>**

Not applicable.

**Part II**

**<u>Item</u><u>5</u>** <u>—</u> **<u>Market for Registrant</u>**<u>'</u>**<u>s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities</u>**

Details of repurchases of Company common stock during the fourth quarter of 2022 are included in the following table:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  |  | Total shares purchased as | Maximum number of shares |
| 2022 period | Total shares |  | part of a publicly announced | that may yet be purchased |
| In thousands, except per share data | purchased | Average price paid per share | program | under the program |
| October 1- October 31 |  | $- |  | 246549 |
| November 1- November 30 |  | $- |  | 246549 |
| December 1- December 31 | 88418 | $28.02 | 88418 | 158131 |
| Total | 88418 | $28.02 |  |  |

---

Our common stock is traded on the NASDAQ Capital Market under the symbol "MBCN." At the close of business on December 31, 2022, there were approximately 1,169 shareholders of record. Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. Our Board of Directors has consistently declared cash dividends on our common stock. Any dividends declared and paid in the future would depend upon several factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurance can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipts of dividends from the Bank, which are restricted by banking regulations.

Information relating to the market for Middlefield's common equity and related shareholder matters appears under "Return on Equity and Assets" and "Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters" in the Company's 2022 Annual Report to Shareholders and is incorporated herein by reference.

**<u>Item</u><u>6</u>** <u>—</u> **<u>[Reserved]</u>**

Not applicable.

**<u>Item</u><u>7</u>** <u>—</u> **<u>Management</u>**<u>'</u>**<u>s Discussion and Analysis of Financial Condition and Results of Operations</u>**

The above-captioned information appears under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report to Shareholders and is incorporated herein by reference.

**<u>Item</u><u>7A</u>** <u>—</u> **<u>Quantitative and Qualitative Disclosures about Market Risk</u>**

Not applicable.

**<u>Item</u><u>8</u>** <u>—</u> **<u>Financial Statements and Supplementary Data</u>**

The Consolidated Financial Statements of the Company and its subsidiaries, together with the report thereon by S.R. Snodgrass, P.C. (PCAOB: 00074) appear in the Company's 2022 Annual Report to Shareholders and are incorporated herein by reference.

**<u>Item</u><u>9</u>** <u>—</u> **<u>Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</u>**

None

------

**<u>Item 9A</u>** <u>–</u> **<u>Controls and Procedures</u>**

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

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

(c) Changes to Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting during the period ended December 31, 2022, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

**<u>Item</u><u>9B</u>** <u>—</u> **<u>Other Information</u>**

None

**<u>Item</u><u>9C</u>** <u>—</u> **<u>Disclosure Regarding Foreign Jurisdictions that Prevent Inspections</u>**

Not applicable

**Part III**

**<u>Item</u><u>10</u>** <u>—</u> **<u>Directors, Executive Officers, and Corporate Governance</u>**

Incorporated by reference to the definitive proxy statement for the 2023 annual meeting of shareholders, which will be filed with the SEC not later than 120 days after December 31, 2022.

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

**<u>Item</u><u>11</u>** <u>—</u> **<u>Executive Compensation</u>**

Incorporated by reference to the definitive proxy statement for the 2023 annual meeting of shareholders, which will be filed with the SEC not later than 120 days after December 31, 2022.

------

**<u>Item</u><u>12</u>** <u>—</u> **<u>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</u>**

Incorporated by reference to the definitive proxy statement for the 2023 annual meeting of shareholders, which will be filed with the SEC not later than 120 days after December 31, 2022.

Our 2017 Omnibus Equity Plan authorized the Company to issue up to 448,000 shares of the Company's common stock to our employees and non-employee directors in exchange for consideration in the form of goods or services. Information on awards outstanding under such plans as of December 31, 2022, is set forth below:

---

| | | | |
|:---|:---|:---|:---|
|  | **(a)** | **(b)** | **(c)** |
| **Plan Category** | **Number of Securities** | **Weighted-Average** | **Number of Securities** |
|  | **to be Issued upon** | **Exercise Price of** | **Remaining Available for** |
|  | **Exercise of** | **Outstanding** | **Future Issuance Under** |
|  | **Outstanding Options,** | **Options, Warrants** | **Equity Compensation** |
|  | **Warrants** | **and Rights** | **Plans (Excluding** |
|  | **and Rights** |  | **Securities Reflected in** |
|  |  |  | **Column (a))<sup>(1)</sup>** |
| Equity compensation plans appoved ' by security holders | Equity compensation plans appoved ' by security holders | Equity compensation plans appoved ' by security holders | 390839 |
| Equity compensation plans not appoved ' by security holders | Equity compensation plans not appoved ' by security holders | Equity compensation plans not appoved ' by security holders | N/A |
| Total | Total | Total | 390839 |

---

(1) Amount represents shares available for future issuance under the 2017 Omnibus Equity Plan.<br>

**<u>Item</u><u>13</u>** <u>—</u> **<u>Certain Relationships and Related Transactions, and Director Independence</u>**

Incorporated by reference to the definitive proxy statement for the 2023 annual meeting of shareholders, which will be filed with the SEC not later than 120 days after December 31, 2022.

**<u>Item</u><u>14</u>** <u>—</u> **<u>Principal Accountant Fees and Services</u>**

Incorporated by reference to the definitive proxy statement for the 2023 annual meeting of shareholders, which will be filed with the SEC not later than 120 days after December 31, 2022.

**Part IV**

**<u>Item</u><u>15</u>** <u>—</u> **<u>Exhibits, Financial Statement Schedules</u>**

(a)(1) <u>Financial Statements</u>

---

| |
|:---|
| **Index to Consolidated Financial Statements**: |
| Consolidated Financial Statements as of December 31, 2022 and 2021 and for each of the two years in the period ended December 31, 2022: |
| Report of Independent Registered Public Accounting firm |
| Consolidated Balance Sheet |
| Consolidated Statement of Income |
| &nbsp;&nbsp;&nbsp;Consolidated Statement of Comprehensive Income |
| &nbsp;&nbsp;&nbsp;Consolidated Statement of Changes in Stockholders' Equity |
| Consolidated Statement of Cash Flows |
| Notes to Consolidated Financial Statements |

---

(a)(2) <u>Financial Statement Schedules</u>

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

------

(a)(3) <u>Exhibits</u>

See the list of exhibits below

(b) <u>Exhibits Required by Item</u><u>601 of Regulation</u><u>S-K</u>

---

| | | |
|:---|:---|:---|
| **Exhibit** <br> **Number** | **Description** | **Location** |
| 2.1 | [Agreement and Plan of Merger dated as of May 26, 2022 by and among Middlefield Banc Corp., MBCN Merger Subsidiary, LLC, and Liberty Bancshares, Inc.](http://www.sec.gov/Archives/edgar/data/836147/000119312522247719/d365548ds4a.htm#tx365548_71) | Incorporated by reference to Exhibit 2.1 of Middlefield Banc Corp.'s Form 8-K Current Report and Form 425 filed on May 27, 2022 |
| 3.1 | [Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended](http://www.sec.gov/Archives/edgar/data/836147/000095015206002629/l17958aexv3w1.htm) | Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006 |
| 3.2 | [Regulations of Middlefield Banc Corp.](http://www.sec.gov/Archives/edgar/data/836147/000119312522296213/d351854dex32.htm) | Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.'s Form 8-K Current Report filed on December 1, 2022 |
| 4 | [Specimen stock certificate](http://www.sec.gov/Archives/edgar/data/836147/000095012801500009/j8774001ex4.txt) | Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.'s registration statement on Form 10 filed on April 17, 2001 |
| 4.1 | [Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees](http://www.sec.gov/Archives/edgar/data/836147/000095015206010417/l23862aexv4w1.htm) | Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.'s Form 8-K Current Report filed on December 27, 2006 |
| 4.2 | [Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company](http://www.sec.gov/Archives/edgar/data/836147/000095015206010417/l23862aexv4w2.htm) | Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.'s Form 8-K Current Report filed on December 27, 2006 |
| 4.3 | [Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company](http://www.sec.gov/Archives/edgar/data/836147/000095015206010417/l23862aexv4w3.htm) | Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.'s Form 8-K Current Report filed on December 27, 2006 |
| 10.1.0\* | [2017 Omnibus Equity Plan](http://www.sec.gov/Archives/edgar/data/836147/000119312517109293/d332199ddef14a.htm) | Incorporated by reference to Middlefield Banc Corp.'s definitive proxy statement for the 2017 Annual Meeting of Shareholders, Appendix A, filed on April 4, 2017 |
| 10.1.1\* | [reserved] |  |
| 10.2\* | [reserved] |  |
| 10.3\* | [Change in Control Agreement between Middlefield Banc Corp. and James R. Heslop, II](http://www.sec.gov/Archives/edgar/data/836147/000119312519071667/d697632dex103.htm) | Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.'s Form 8-K Current Report filed on March 12, 2019 |
| 10.4 | [Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000](http://www.sec.gov/Archives/edgar/data/836147/000095012801500009/j8774001ex10-4.txt) | Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.'s registration statement on Form 10 filed on April 17, 2001 |
| 10.4.1\* | [Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008](http://www.sec.gov/Archives/edgar/data/836147/000095015208000145/l29471aexv10w4w1.htm) | Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.'s Form 8-K Current Report filed on January 9, 2008 |

---

------

---

| | | |
|:---|:---|:---|
| 10.4.2\* | [reserved] |  |
| 10.4.3\* | [Change in Control Agreement between Middlefield Banc Corp. and Donald L. Stacy](http://www.sec.gov/Archives/edgar/data/836147/000119312519071667/d697632dex1043.htm) | Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.'s Form 8-K Current Report filed on March 12, 2019 |
| 10.4.4\* | [Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson, Jr., dated January 7, 2008](http://www.sec.gov/Archives/edgar/data/836147/000095015208000145/l29471aexv10w4w4.htm) | Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.'s Form 8-K Current Report filed on January 9, 2008 |
| 10.4.5\* | [Change in Control Agreement between Middlefield Banc Corp. and Michael L. Allen](http://www.sec.gov/Archives/edgar/data/836147/000143774919021571/ex_161993.htm) | Incorporated by reference to Exhibit 10.4.5 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on November 5, 2019 |
| 10.4.6\*\* | [Compensation Agreement between Middlefield Banc Corp. and Michael C. Ranttila](http://www.sec.gov/Archives/edgar/data/836147/000143774922006281/ex_342112.htm) | Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.'s Form 10-K Annual Report filed on March 15, 2022 |
| 10.4.7\* | [Change in Control Agreement between Middlefield Banc Corp. and Michael C. Ranttila](http://www.sec.gov/Archives/edgar/data/836147/000143774921005904/ex_231424.htm) | Incorporated by reference to Exhibit 10.4.7 of Middlefield Banc Corp.'s Form 10-K Annual Report filed on March 12, 2021 |
| 10.4.8\* | [Change in Control Agreement between Middlefield Banc Corp. and Courtney M. Erminio](ex_487333.htm) | filed herewith |
| 10.5\* | [Severance Agreement between Middlefield Banc Corp. and Ronald L. Zimmerly, Jr., dated December 1, 2022](ex_487334.htm) | filed herewith |
| 10.6\* | [Restricted Stock Award Agreement between Middlefield Banc Corp. and Ronald L. Zimmerly, Jr., dated December 1, 2022](ex_487335.htm) | filed herewith |
| 10.7\* | [Amended Director Retirement Agreement with Frances H. Frank](http://www.sec.gov/Archives/edgar/data/836147/000095015208000145/l29471aexv10w7.htm) | Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.'s Form 8-K Current Report filed on January 9, 2008 |
| 10.8 | [Executive Retention Agreement between The Middlefield Banking Company and Michael C. Ranttila](http://www.sec.gov/Archives/edgar/data/836147/000143774922011687/ex_369774.htm) | Incorporated by reference to Exhibit 10.8 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on May 10, 2022 |
| 10.9 | [Executive Retention Agreement between The Middlefield Banking Company and Michael L. Allen](http://www.sec.gov/Archives/edgar/data/836147/000143774922011687/ex_369775.htm) | Incorporated by reference to Exhibit 10.9 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on May 10, 2022 |
| 10.10 | [reserved]  |  |
| 10.11\* | [Director Retirement Agreement with Martin S. Paul](http://www.sec.gov/Archives/edgar/data/836147/000095013202000070/dex1011.txt) | Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002 |
| 10.12 | [Split-Dollar Agreement between The Middlefield Banking Company and Ronald L. Zimmerly, Jr.](ex_487337.htm) | filed herewith |

---

------

---

| | | |
|:---|:---|:---|
| 10.13 | [reserved] |  |
| 10.14\* | [Executive Survivor Income Agreement (aka DBO agreement \[death benefit only\]) with Donald L. Stacy](http://www.sec.gov/Archives/edgar/data/836147/000095015204002474/l06610aexv10w14.txt) | Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 |
| 10.15\* | [DBO Agreement with Jay P. Giles](http://www.sec.gov/Archives/edgar/data/836147/000095015204002474/l06610aexv10w15.txt) | Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 |
| 10.16\* | [DBO Agreement with Alfred F. Thompson, Jr.](http://www.sec.gov/Archives/edgar/data/836147/000095015204002474/l06610aexv10w16.txt) | Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 |
| 10.17\* | [DBO Agreement with Teresa M. Hetrick](http://www.sec.gov/Archives/edgar/data/836147/000095015204002474/l06610aexv10w18.txt) | Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 |
| 10.18 \* | [Executive Deferred Compensation Agreement with Jay P. Giles](http://www.sec.gov/Archives/edgar/data/836147/000119312512123667/d311317dex1018.htm) | Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012 |
| 10.19 | [reserved] |  |
| 10.20\* | [DBO Agreement with James R. Heslop, II](http://www.sec.gov/Archives/edgar/data/836147/000095015204002474/l06610aexv10w20.txt) | Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 |
| 10.21\* | [DBO Agreement with Thomas G. Caldwell](http://www.sec.gov/Archives/edgar/data/836147/000095015204002474/l06610aexv10w21.txt) | Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 |
| 10.22\* | [Annual Incentive Plan](http://www.sec.gov/Archives/edgar/data/836147/000119312519071667/d697632dex1022.htm) | Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.'s Form 8-K Current Report filed on March 12, 2019 |
| 10.22.1 | [reserved] |  |
| 10.23\*\* | [Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell](http://www.sec.gov/Archives/edgar/data/836147/000143774920004329/ex_174240.htm) | Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020 |
| 10.24\*\* | [Amended Executive Deferred Compensation Agreement with James R. Heslop, II](http://www.sec.gov/Archives/edgar/data/836147/000143774920004329/ex_174241.htm) | Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020 |

---

------

---

| | | |
|:---|:---|:---|
| 10.25\*\* | [Amended Executive Deferred Compensation Agreement with Donald L. Stacy](http://www.sec.gov/Archives/edgar/data/836147/000143774920004329/ex_174242.htm) | Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020 |
| 10.26\*\* | [Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II](http://www.sec.gov/Archives/edgar/data/836147/000143774920004329/ex_174243.htm) | Incorporated by reference to Exhibit 10.26 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020 |
| 10.27\*\* | [Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy](http://www.sec.gov/Archives/edgar/data/836147/000143774920004329/ex_174244.htm) | Incorporated by reference to Exhibit 10.27 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020 |
| 10.28\*\* | [Executive Deferred Compensation Agreement with Charles O. Moore](http://www.sec.gov/Archives/edgar/data/836147/000143774920004329/ex_174245.htm) | Incorporated by reference to Exhibit 10.28 of Middlefield Banc Corp.'s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020 |
| 10.29\* | [Executive Deferred Compensation Agreement with Ronald L. Zimmerly, Jr.](ex_487336.htm) | filed herewith |
| 10.29.1 | [Form of conditional stock award under the 2017 Omnibus Equity Plan](http://www.sec.gov/Archives/edgar/data/836147/000119312517233300/d427986dex1029.htm) | Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.'s Form 8-K Current Report filed on July 24, 2017 |
| 10.30\*\* | [Executive Deferred Compensation Agreement with Michael L. Allen](http://www.sec.gov/Archives/edgar/data/836147/000143774919008963/ex_142935.htm) | Incorporated by reference to Exhibit 10.30 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on May 7, 2019 |
| 10.31\*\* | [Executive Deferred Compensation Agreement with John D. Lane](http://www.sec.gov/Archives/edgar/data/836147/000143774919008963/ex_142936.htm) | Incorporated by reference to Exhibit 10.31 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on May 7, 2019 |
| 10.32\*\* | [Executive Deferred Compensation Agreement with Michael C. Ranttila](http://www.sec.gov/Archives/edgar/data/836147/000143774921005904/ex_231425.htm) | Incorporated by reference to Exhibit 10.32 of Middlefield Banc Corp.'s Form 10-K Annual Report filed on March 12, 2021 |
| 10.33\*\* | [Executive Deferred Compensation Agreement with Courtney M. Erminio](http://www.sec.gov/Archives/edgar/data/836147/000143774922019378/ex_404696.htm) | Incorporated by reference to Exhibit 10.33 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on August 8, 2022 |
| 10.34\*\* | [Executive Deferred Compensation Agreement with Alfred F. Thompson](http://www.sec.gov/Archives/edgar/data/836147/000143774922019378/ex_404697.htm) | Incorporated by reference to Exhibit 10.34 of Middlefield Banc Corp.'s Form 10-Q Quarterly Report filed on August 8, 2022 |
| 13 | [Portions of Annual Report to Shareholders for the year ended December 31, 2022 incorporated by reference into this Form 10-K](ex_487533.htm) | filed herewith |
| 21 | [Subsidiaries of Middlefield Banc Corp.](ex_487328.htm) | filed herewith |
| 23 | [Consent of S.R. Snodgrass, P.C., independent auditors of Middlefield Banc Corp.](ex_487329.htm) | filed herewith |

---

------

---

| | | |
|:---|:---|:---|
| 31.1 | [Rule 13a-14(a) certification of Chief Executive Officer](ex_487330.htm) | filed herewith |
| 31.2 | [Rule 13a-14(a) certification of Chief Financial Officer](ex_487331.htm) | filed herewith |
| 32 | [Rule 13a-14(b) certification](ex_487332.htm) | filed herewith |
| 99.1 | [Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company](http://www.sec.gov/Archives/edgar/data/836147/000095012801500200/j8887501ex99-1.txt) | Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.'s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001 |
| 101.INS\*\*\* | Inline XBRL Instance | furnished herewith |
| 101.SCH\*\*\* | Inline XBRL Taxonomy Extension Schema | furnished herewith |
| 101.CAL\*\*\* | Inline XBRL Taxonomy Extension Calculation | furnished herewith |
| 101.DEF\*\*\* | Inline XBRL Taxonomy Extension Definition | furnished herewith |
| 101.LAB\*\*\* | Inline XBRL Taxonomy Extension Labels | furnished herewith |
| 101.PRE\*\*\* | Inline XBRL Taxonomy Extension Presentation | furnished herewith |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |  |

---

\* management contract or compensatory plan or arrangement

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

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

**<u>Item 16</u>** <u>–</u> **<u>Form 10-K Summary</u>**

None.

------

Signatures

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

---

| | |
|:---|:---|
| **Middlefield Banc Corp.** | **Middlefield Banc Corp.** |
| By:  | /s/ James R. Heslop, II  |
|  | James R. Heslop, II  |
|  | Chief Executive Officer  |
|  | Date: March 15, 2023 |

---

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

---

| | |
|:---|:---|
| /s/ James R. Heslop, II | March 15, 2023 |
| James R. Heslop, II |  |
| Chief Executive Officer and Director |  |
| /s/ Ronald L. Zimmerly, Jr. | March 15, 2023 |
| Ronald L. Zimmerly, Jr. |  |
| President and Director |  |
| /s/ Donald L. Stacy | March 15, 2023 |
| Donald L. Stacy, Treasurer and Chief Financial Officer |  |
| (Principal accounting and financial officer) |  |
| /s/ Carolyn J. Turk | March 15, 2023 |
| Carolyn J. Turk, Director |  |
| /s/ Kenneth E. Jones | March 15, 2023 |
| Kenneth E. Jones, Director |  |
| /s/ James J. McCaskey | March 15, 2023 |
| James J. McCaskey, Director |  |
| /s/ William J. Skidmore | March 15, 2023 |
| William J. Skidmore, Chairman of the Board |  |
| /s/ Kevin A. DiGeronimo | March 15, 2023 |
| Kevin A. DiGeronimo, Director |  |

---

---

| | |
|:---|:---|
| /s/ Darryl E. Mast | March 15, 2023 |
| Darryl E. Mast, Director |  |
| /s/ Thomas W. Bevan | March 15, 2023 |
| Thomas W. Bevan, Director |  |
| /s/ Michael C. Voinovich | March 15, 2023 |
| Michael C. Voinovich, Director |  |
| /s/ Mark R. Watkins | March 15, 2023 |
| Mark R. Watkins, Director |  |
| /s/ Spencer T. Cohn | March 15, 2023 |
| Spencer T. Cohn, Director |  |

---

## Exhibit 10.48

**Exhibit 10.4.8**

**Change In Control Agreement**

This **Change in Control Agreement** (this "Agreement") is entered into effective as of this 1<sup>st</sup> day of April, 2022, by and between Middlefield Banc Corp., an Ohio corporation ("Middlefield"), and Courtney M. Erminio, Senior Vice President and Risk Officer of The Middlefield Banking Company, a subsidiary of Middlefield (the "Executive").

**Whereas**, recognizing the contributions made and expected to be made by the Executive to the profitability, growth, and financial strength of Middlefield and its subsidiaries, intending to assure itself of the current and future continuity of management, intending to establish minimum severance benefits for certain officers and other key employees, including the Executive, intending to ensure that officers and other key employees are not practically disabled from discharging their duties if a proposed or actual transaction involving a change in control arises, and finally desiring to provide additional inducement for the Executive to remain in the employment of The Middlefield Banking Company, and

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

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

**1**. **Termination after a Change in Control**. (a) *Cash benefit*. If the Executive's employment terminates involuntarily but without Cause or voluntarily but with Good Reason, in either case within 24 months after a Change in Control, Middlefield shall make a lump-sum payment to the Executive in an amount in cash equal to 2 times the Executive's compensation. For this purpose the Executive's compensation means (*x*) the sum of the Executive's base salary when the Change in Control occurs or when employment termination occurs, whichever amount is greater, plus (*y*) the average of the cash bonus and cash incentive compensation earned for the three calendar years immediately preceding the year in which the Change in Control occurs, regardless of when the bonus or incentive compensation is paid and regardless of whether the bonus or incentive compensation is subject to elective deferral or vesting. For purposes of the preceding clause (y), if the Executive has been employed by Middlefield for less than three full calendar years, the Executive's cash bonus and cash incentive compensation average will be determined using the average of the cash bonus and cash incentive compensation that the Executive has received for the calendar years during which the Executive has been employed by Middlefield, with any cash bonus and cash incentive compensation that the Executive receives for a partial calendar year's employment annualized to reflect a complete year of service. Middlefield recognizes that the bonus and incentive compensation earned by the Executive for a particular year's service might be paid in the year after the calendar year in which the bonus or incentive compensation is earned. Unless delay is required under section 1(b), the payment required under this section 1(a) shall be made the day the Executive's employment terminates. The amount payable to the Executive hereunder shall not be reduced to account for the time value of money or discounted to present value. If the Executive's employment terminates involuntarily but without Cause before the Change in Control occurs but after discussions regarding the Change in Control commence, then for purposes of this Agreement the Executive's employment shall be deemed to have terminated immediately after the Change in Control and the Executive shall be entitled to the cash benefit under this section 1(a) on the date of the Change in Control.

------

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Payment of the benefit*. If when employment termination occurs the Executive is a specified employee within the meaning of section 409A of the Internal Revenue Code of 1986, as amended, and applicable guidance thereunder ("Code Section 409A"), if the cash severance benefit under section 1(a) would be considered deferred compensation under Code Section 409A, and finally if an exemption from the six-month delay requirement of Code Section 409A(a)(2)(B)(i) is not available, payment of the benefit under section 1(a) shall be delayed and shall be made to the Executive in a single lump sum without interest on the first day of the seventh month after the month in which the Executive's employment terminates.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Change in Control defined*. For purposes of this Agreement the term Change in Control means a change in the ownership of Middlefield, a change in the effective control of Middlefield, or a change in the ownership of a substantial portion of the assets of Middlefield, in each case as provided under Code Section 409A and Treasury Rule 1.409A-3(i)(5), as the same may be amended from time to time. For purposes of clarification and without intending to affect the foregoing reference to Code Section 409A for the definition of Change in Control, as of the effective date of this Agreement a Change in Control event as defined in Treasury Rule 1.409A-3(i)(5) would include the following –

1) *Change in ownership*: a change in ownership of Middlefield occurs on the date any one person or group accumulates ownership of Middlefield stock constituting more than 50% of the total fair market value or total voting power of Middlefield stock, or

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

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

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Involuntary termination with Cause defined*. For purposes of this Agreement involuntary termination of the Executive's employment shall be considered involuntary termination with Cause if the Executive shall have committed any of the following acts –

1) an act of fraud, embezzlement, or theft while employed by Middlefield or a subsidiary, or conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more, or

2) gross negligence, insubordination, disloyalty, or dishonesty in the performance of the Executive's duties as an officer of Middlefield or a subsidiary; willful or reckless failure by the Executive to adhere to Middlefield's or subsidiary's written policies; intentional wrongful damage by the Executive to the business or property of Middlefield or subsidiary, including without limitation its reputation, which in Middlefield's sole judgment causes material harm to Middlefield or subsidiary; breach by the Executive of fiduciary duties to Middlefield and its stockholders, whether in the Executive's capacity as an officer or as a director of Middlefield or subsidiary, or

3) removal of the Executive from office or permanent prohibition of the Executive from participating in the affairs of Middlefield's subsidiary bank or banks by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

4) intentional wrongful disclosure of secret processes or confidential information of Middlefield or affiliates, which in Middlefield's sole judgment causes material harm to Middlefield or affiliates, or

5) any actions that have caused the Executive to be terminated with cause under any employment agreement existing on the date hereof or hereafter entered into between the Executive and Middlefield or a subsidiary, or

6) the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of Middlefield or affiliates, under a blanket bond or other fidelity or insurance policy covering directors, officers, or employees, or

7) intentional wrongful engagement in any competitive activity. For purposes of this Agreement competitive activity means the Executive's participation, without the consent of Middlefield's board of directors, in the management of any business enterprise if (*x*) the enterprise engages in substantial and direct competition with Middlefield, (*y*) the enterprise's revenues derived from any product or service competitive with any product or service of Middlefield or a subsidiary amounted to 10% or more of the enterprise's revenues for its most recently completed fiscal year, and (*z*) Middlefield's revenues from the product or service amounted to 10% of Middlefield's revenues for its most recently completed fiscal year. A competitive activity does not include mere ownership of securities in an enterprise and the exercise of rights appurtenant thereto, provided the Executive's share ownership does not represent practical or legal control of the enterprise. For this purpose, ownership of less than 5% of the enterprise's outstanding voting securities shall conclusively be presumed to be insufficient for practical or legal control, and ownership of more than 50% shall conclusively be presumed to constitute practical and legal control.

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For purposes of this Agreement no act or failure to act on the Executive's part shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive's part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in Middlefield's best interests. Any act or failure to act based upon authority granted by resolutions duly adopted by the board of directors or based upon the advice of counsel for Middlefield shall be conclusively presumed to be in good faith and in Middlefield's best interests. For purposes of this Agreement the term subsidiary means any entity in which Middlefield directly or indirectly beneficially owns 50% or more of the outstanding voting securities.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *Voluntary termination with Good Reason defined*. For purposes of this Agreement a voluntary termination by the Executive shall be considered a voluntary termination with Good Reason if the conditions stated in both clauses (*x*) and (*y*) are satisfied –

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (x) a voluntary termination by the Executive shall be considered a voluntary termination with Good Reason if any of the following occur without the Executive's advance written consent, and the term Good Reason shall mean the occurrence of any of the following without the Executive's advance written consent –

1) a material diminution of the Executive's base salary,

2) a material diminution of the Executive's authority, duties, or responsibilities,

3) a material diminution in the budget over which the Executive retains authority,

4) a material change in the geographic location at which the Executive must perform services, or

5) any other action or inaction that constitutes a material breach by Middlefield of this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (y) the Executive must give notice to Middlefield of the existence of one or more of the conditions described in clause (x) within 90 days after the initial existence of the condition, and Middlefield shall have 30 days thereafter to remedy the condition. In addition, the Executive's voluntary termination because of the existence of one or more of the conditions described in clause (x) must occur within 24 months after the initial existence of the condition.

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**2**. **Insurance and Miscellaneous Benefits**. (a) *Benefits*. Subject to section 2(b), if the Executive's employment terminates involuntarily but without Cause or voluntarily but for Good Reason within 24 months after a Change in Control, Middlefield shall also (*x*) cause the Executive to become fully vested in any non-qualified plans, programs, or arrangements in which the Executive participated if the plan, program, or arrangement does not address the effect of a change in control and (*y*) continue or cause to be continued life, health, and disability insurance coverage substantially identical to the coverage maintained for the Executive before termination and in accordance with the same schedule prevailing before employment termination. The insurance coverage may cease when the Executive becomes employed by another employer or 24 months after the Executive's termination, whichever occurs first.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Alternative lump-sum cash payment*. If (*x*) under the terms of the applicable policy or policies for the insurance benefits specified in section 2(a) it is not possible to continue the Executive's coverage, or (*y*) if when employment termination occurs the Executive is a specified employee within the meaning of Code Section 409A, if any of the continued insurance coverage benefits specified in section 2(a) would be considered deferred compensation under Code Section 409A, and finally if an exemption from the six-month delay requirement of Code Section 409A(a)(2)(B)(i) is not available for that insurance benefit, instead of continued insurance coverage under section 2(a) Middlefield shall pay or cause to be paid to the Executive in a single lump sum an amount in cash equal to the present value of Middlefield's projected cost to maintain that particular insurance benefit had the Executive's employment not terminated, assuming continued coverage for 24 months. The lump-sum payment shall be made 30 days after employment termination or, if a six-month delay is required by Code Section 409A, on the first day of the seventh month after the month in which the Executive's employment terminates.

**3**. **Termination for Which No Benefits Are Payable**. Despite anything in this Agreement to the contrary, the Executive shall be entitled to no benefits under this Agreement if the Executive's employment terminates with Cause, if the Executive dies while actively employed by Middlefield or a subsidiary, or if the Executive becomes totally disabled while actively employed by Middlefield or a subsidiary. For purposes of this Agreement, the term totally disabled means that because of injury or sickness the Executive is unable to perform the Executive's duties. The benefits, if any, payable to the Executive or the Executive's beneficiary or estate relating to the Executive's death or disability shall be determined solely by such benefit plans or arrangements as Middlefield or subsidiary may have with the Executive relating to death or disability, not by this Agreement.

**4**. **Term of Agreement**. The initial term of this Agreement shall be for a period of three years, commencing on the effective date. On the first anniversary of the effective date of this Agreement and on each anniversary thereafter, this Agreement shall be extended automatically for one additional year, unless Middlefield's board of directors gives notice to the Executive in writing at least 90 days before the anniversary that the term of this Agreement will not be extended. If the board of directors determines not to extend the term, it shall promptly notify the Executive. References herein to the term of this Agreement mean the initial term and extensions of the initial term. If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in force until its term expires.

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**5**. **This Agreement Is Not an Employment Contract**. The parties hereto acknowledge and agree that (*x*) this Agreement is not a management or employment agreement and (*y*) nothing in this Agreement shall give the Executive any rights or impose any obligations to continued employment by Middlefield or any subsidiary or successor of Middlefield.

**6**. **Payment of Legal Fees**. Middlefield is aware that after a Change in Control management could cause or attempt to cause Middlefield to refuse to comply with its obligations under this Agreement, or could institute or cause or attempt to cause Middlefield to institute litigation seeking to have this Agreement declared unenforceable, or could take or attempt to take other action to deny Executive the benefits intended under this Agreement. In these circumstances the purposes of this Agreement would be frustrated. Middlefield desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. Middlefield desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (*x*) Middlefield has failed to comply with any of its obligations under this Agreement, or (*y*) Middlefield or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, Middlefield irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at Middlefield's expense as provided in this section 6, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against Middlefield or any director, officer, stockholder, or other person affiliated with Middlefield, in any jurisdiction. Despite any existing or previous attorney-client relationship between Middlefield and any counsel chosen by the Executive under this section 6, Middlefield irrevocably consents to the Executive entering into an attorney-client relationship with that counsel and Middlefield and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by Middlefield on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel's customary practices, up to a maximum aggregate amount of $100,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. Middlefield's obligation to pay the Executive's legal fees under this section 6 operates separately from and in addition to any legal fee reimbursement obligation Middlefield may have with the Executive under any other agreement. Despite any contrary provision of this Agreement however, Middlefield shall not be required to pay or reimburse the Executive's legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

**7**. **Withholding of Taxes**. Middlefield may withhold from any benefits payable under this Agreement all Federal, state, local or other taxes as may be required by law, governmental regulation, or ruling.

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**8**. **Successors and Assigns**. (a) *This Agreement is binding on successors*. This Agreement shall be binding upon Middlefield and any successor to Middlefield, including any persons acquiring directly or indirectly all or substantially all of the business or assets of Middlefield by purchase, merger, consolidation, reorganization, or otherwise. But this Agreement and Middlefield's obligations under this Agreement are not otherwise assignable, transferable, or delegable by Middlefield. By agreement in form and substance satisfactory to the Executive, Middlefield shall require any successor to all or substantially all of the business or assets of Middlefield expressly to assume and agree to perform this Agreement in the same manner and to the same extent Middlefield would be required to perform had no succession occurred.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *This Agreement is enforceable by the Executive*'*s heirs*. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and legatees.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *This Agreement is personal and is not assignable*. This Agreement is personal in nature. Without written consent of the other party, neither party shall assign, transfer, or delegate this Agreement or any rights or obligations under this Agreement except as expressly provided in this section 8. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder is not assignable or transferable, whether by pledge, creation of a security interest, or otherwise, except for a transfer by Executive's will or by the laws of descent and distribution. If the Executive attempts an assignment or transfer that is contrary to this section 8, Middlefield shall have no liability to pay any amount to the assignee or transferee.

**9**. **Notices**. Any notice under this Agreement shall be deemed to have been effectively made or given if in writing and personally delivered, delivered by mail properly addressed in a sealed envelope, postage prepaid by certified mail restricted delivery or registered mail restricted delivery, return receipt requested, or if delivered by a nationally recognized overnight delivery service, specifying next day delivery, with written verification of receipt confirmed through a signature from someone at the delivery address. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of Middlefield at the time of the delivery of the notice, and properly addressed to Middlefield if addressed to the board of directors, Middlefield Banc Corp., 15985 East High Street, Middlefield, Ohio, 44062-0035 Attention: Corporate Secretary.

**10**. **Captions and Counterparts**. The headings and subheadings in this Agreement are included solely for convenience and shall not affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same agreement.

**11**. **Amendments and Waivers**. No provision of this Agreement may be modified, waived, or discharged unless the waiver, modification, or discharge is agreed to in a writing signed by the Executive and by Middlefield. No waiver by either party hereto at any time of any breach by the other party hereto or waiver of compliance with any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

**12**. **Severability**. The provisions of this Agreement are severable. The invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement. Any provision held to be invalid or unenforceable shall be reformed to the extent and solely to the extent necessary to make it valid and enforceable.

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**13**. **Governing Law**. The validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.

**14**. **Entire Agreement**. This Agreement constitutes the entire agreement between Middlefield and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. No agreements or representations, oral or otherwise, expressed or implied concerning the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.

**15**. **No Mitigation Required**. Middlefield hereby acknowledges that it will be difficult and could be impossible (*x*) for the Executive to find reasonably comparable employment after termination and (*y*) to measure the amount of damages the Executive suffers as a result of termination. Additionally, Middlefield acknowledges that its general severance pay plans do not provide for mitigation, offset, or reduction of any severance payment received thereunder. Middlefield further acknowledges that the payment of benefits by Middlefield under this Agreement is reasonable and shall be liquidated damages. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise.

**16**. **Compliance with Internal Revenue Code Section 409A**. (a) *Interpretation*. The intent of the parties is that payments and benefits under this Agreement comply with Code Section 409A or comply with an exemption of the application of Code Section 409A and, accordingly, all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Code Section 409A. References in this Agreement to Code Section 409A include rules, regulations, and guidance of general application issued by the Department of the Treasury under Code Section 409A.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Action*. Neither the Executive nor Middlefield shall take any action to accelerate or delay the payment of any monies or provision of any benefits in any matter which would not be in compliance with Code Section 409A.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Separation from Service*. A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement unless such termination is also a "separation from service" (within the meaning of Code Section 409A) and, for purposes of this Agreement, references to a "termination" or "termination of employment" or like references shall mean separation from service. If the Executive is deemed on the date of separation from service with Middlefield to be a "specified employee," within the meaning of that term under Code Section 409A(a)(2)(B) and using the identification methodology selected by Middlefield from time to time, or if none, the default methodology, then with regard to any payment or benefit that is required to be delayed in compliance with Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six-month period measured from the date of the Executive's separation from service or (ii) the date of the Executive's death. In the case of benefits required to be delayed under Code Section 409A, however, the Executive may, to the extent permissible under Code Section 409A, pay the cost of benefit coverage, and thereby obtain benefits, during such six-month delay period and then be reimbursed by Middlefield thereafter when delayed payments are made pursuant to the next sentence. On the first day of the seventh month following the date of the Executive's separation from service or, if earlier, on the date of the Executive's death, all payments delayed pursuant to this section 16(c) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. If any cash payment is delayed under this section 16(c), then interest shall be paid on the amount delayed, with such interest to be calculated at the prime rate reported in *The Wall Street Journal* for the date of the Executive's termination to the date of payment.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Treatment of Installment Payments*. If under this Agreement an amount is to be paid in two or more installments, for purposes of Code Section 409A, each installment shall be treated as a separate payment. In the event any payment payable upon termination of employment would be exempt from Code Section 409A under Treasury Rule 1.409A-1(b)(9)(iii) but for the amount of such payment, the determination of the payments to the Executive that are exempt under such provision shall be made by applying the exemption to payments based on chronological order beginning with the payments paid closest in time on or after such termination of employment.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *Payment Period*. When, if ever, a payment under this Agreement specifies a payment period with reference to a number of days (*e.g.*, "payment shall be made within ten (10) days following the date of termination"), the actual date of payment within the specified period shall be within the sole discretion of Middlefield.

**In Witness Whereof**, the parties have executed this Change in Control Agreement as of the date first written above.

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| | | |
|:---|:---|:---|
| **Executive** | **Middlefield Banc Corp**. | **Middlefield Banc Corp**. |
|  | By: |  |
| Courtney M. Erminio | James R. Heslop, II | James R. Heslop, II |
|  | Its: | President and Chief Executive Officer |

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## Exhibit 10.5

**Exhibit 10.5**

**Severance Agreement**

This **Severance Agreement** (this "Agreement") is entered into effective as of this 5<sup>th</sup> day of December, 2022, by and between Middlefield Banc Corp., an Ohio corporation ("Middlefield"), and Ronald L. Zimmerly, Jr., President of Middlefield and The Middlefield Banking Company (the "Bank"), a subsidiary of Middlefield (the "Executive").

**Whereas**, recognizing the contributions made and expected to be made by the Executive to the profitability, growth, and financial strength of Middlefield and its subsidiaries, intending to assure itself of the current and future continuity of management, intending to establish minimum severance benefits for certain officers and other key employees, including the Executive, intending to ensure that officers and other key employees are not practically disabled from discharging their duties if a proposed or actual transaction involving a change in control arises, and finally desiring to provide additional inducement for the Executive to remain in the employment of Middlefield, and

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

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

**1**. **Termination after a Change in Control**. (a) *Cash benefit*. If the Executive's employment terminates involuntarily but without Cause or voluntarily but with Good Reason, in either case within 24 months after a Change in Control, Middlefield shall make a lump-sum payment to the Executive in an amount in cash equal to 2 times the Executive's compensation. If the Executive is appointed Chief Executive Officer ("CEO") of Middlefield and the Bank by January 1, 2024, the change in control benefit will become 2.5 times the Executive's compensation. For this purpose the Executive's compensation means (*x*) the sum of the Executive's base salary when the Change in Control occurs or when employment termination occurs, whichever amount is greater, plus (*y*) the average of the cash bonus and cash incentive compensation earned for the two calendar years immediately preceding the year in which the Change in Control occurs, regardless of when the bonus or incentive compensation is paid and regardless of whether the bonus or incentive compensation is subject to elective deferral or vesting. For purposes of the preceding clause (y), if the Executive has been employed by Middlefield for less than two full calendar years, the Executive's cash bonus and cash incentive compensation average will be determined using the average of the cash bonus and cash incentive compensation that the Executive has received for the calendar years during which the Executive has been employed by Middlefield, with any cash bonus and cash incentive compensation that the Executive receives for a partial calendar year's employment annualized to reflect a complete year of service. Middlefield recognizes that the bonus and incentive compensation earned by the Executive for a particular year's service might be paid in the year after the calendar year in which the bonus or incentive compensation is earned. Unless delay is required under section 1(b), the payment required under this section 1(a) shall be made the day the Executive's employment terminates. The amount payable to the Executive hereunder shall not be reduced to account for the time value of money or discounted to present value. If the Executive's employment terminates involuntarily but without Cause before the Change in Control occurs but after discussions regarding the Change in Control commence, then for purposes of this Agreement the Executive's employment shall be deemed to have terminated immediately after the Change in Control and the Executive shall be entitled to the cash benefit under this section 1(a) on the date of the Change in Control.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Payment of the benefit*. If when employment termination occurs the Executive is a specified employee within the meaning of section 409A of the Internal Revenue Code of 1986, as amended, and applicable guidance thereunder ("Code Section 409A"), if the cash severance benefit under section 1(a) would be considered deferred compensation under Code Section 409A, and finally if an exemption from the six-month delay requirement of Code Section 409A(a)(2)(B)(i) is not available, payment of the benefit under section 1(a) shall be delayed and shall be made to the Executive in a single lump sum without interest on the first day of the seventh month after the month in which the Executive's employment terminates.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Change in Control defined*. For purposes of this Agreement the term Change in Control means a change in the ownership of Middlefield, a change in the effective control of Middlefield, or a change in the ownership of a substantial portion of the assets of Middlefield, in each case as provided under Code Section 409A and Treasury Rule 1.409A-3(i)(5), as the same may be amended from time to time. For purposes of clarification and without intending to affect the foregoing reference to Code Section 409A for the definition of Change in Control, as of the effective date of this Agreement a Change in Control event as defined in Treasury Rule 1.409A-3(i)(5) would include the following –

1) *Change in ownership*: a change in ownership of Middlefield occurs on the date any one person or group accumulates ownership of Middlefield stock constituting more than 50% of the total fair market value or total voting power of Middlefield stock, or

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

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

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Involuntary termination with Cause defined*. For purposes of this Agreement involuntary termination of the Executive's employment shall be considered involuntary termination with Cause if the Executive shall have committed any of the following acts –

1) an act of fraud, embezzlement, or theft while employed by Middlefield or a subsidiary, or conviction of the Executive for or plea of no contest to a felony or conviction of or plea of no contest to a misdemeanor involving moral turpitude, or the actual incarceration of the Executive for 45 consecutive days or more, or

2) gross negligence, insubordination, disloyalty, or dishonesty in the performance of the Executive's duties as an officer of Middlefield or a subsidiary; willful or reckless failure by the Executive to adhere to Middlefield's or subsidiary's written policies; intentional wrongful damage by the Executive to the business or property of Middlefield or subsidiary, including without limitation its reputation, which in Middlefield's sole judgment causes material harm to Middlefield or subsidiary; breach by the Executive of fiduciary duties to Middlefield and its stockholders, whether in the Executive's capacity as an officer or as a director of Middlefield or subsidiary, or

3) removal of the Executive from office or permanent prohibition of the Executive from participating in the affairs of Middlefield's subsidiary bank or banks by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1), or

4) intentional wrongful disclosure of secret processes or confidential information of Middlefield or affiliates, which in Middlefield's sole judgment causes material harm to Middlefield or affiliates, or

5) any actions that have caused the Executive to be terminated with cause under any employment agreement existing on the date hereof or hereafter entered into between the Executive and Middlefield or a subsidiary, or

6) the occurrence of any event that results in the Executive being excluded from coverage, or having coverage limited for the Executive as compared to other executives of Middlefield or affiliates, under a blanket bond or other fidelity or insurance policy covering directors, officers, or employees, or

7) intentional wrongful engagement in any competitive activity. For purposes of this Agreement competitive activity means the Executive's participation, without the consent of Middlefield's board of directors, in the management of any business enterprise if (*x*) the enterprise engages in substantial and direct competition with Middlefield, (*y*) the enterprise's revenues derived from any product or service competitive with any product or service of Middlefield or a subsidiary amounted to 10% or more of the enterprise's revenues for its most recently completed fiscal year, and (*z*) Middlefield's revenues from the product or service amounted to 10% of Middlefield's revenues for its most recently completed fiscal year. A competitive activity does not include mere ownership of securities in an enterprise and the exercise of rights appurtenant thereto, provided the Executive's share ownership does not represent practical or legal control of the enterprise. For this purpose, ownership of less than 5% of the enterprise's outstanding voting securities shall conclusively be presumed to be insufficient for practical or legal control, and ownership of more than 50% shall conclusively be presumed to constitute practical and legal control.

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For purposes of this Agreement no act or failure to act on the Executive's part shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive's part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in Middlefield's best interests. Any act or failure to act based upon authority granted by resolutions duly adopted by the board of directors or based upon the advice of counsel for Middlefield shall be conclusively presumed to be in good faith and in Middlefield's best interests. For purposes of this Agreement the term subsidiary means any entity in which Middlefield directly or indirectly beneficially owns 50% or more of the outstanding voting securities.

The Executive shall not be deemed under this Agreement to have been terminated with Cause unless and until there is delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of at least two-thirds (![ex_487334img001.jpg](ex_487334img001.jpg)) of the directors (excluding the Executive) of Middlefield then in office at a meeting of the board of directors called and held for such purpose, which resolution shall (x) contain findings that, in the good faith opinion of the board, the Executive has committed an act constituting Cause and (y) specify the particulars thereof. Notice of that meeting and the proposed determination of Cause shall be given to the Executive a reasonable time before the board's meeting. The Executive and the Executive's counsel (if the Executive chooses to have counsel present) shall have a reasonable opportunity to be heard by the board at the meeting. Nothing in this Agreement limits the Executive's right to contest the validity or propriety of the board's determination of Cause.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *Voluntary termination with Good Reason defined*. For purposes of this Agreement a voluntary termination by the Executive shall be considered a voluntary termination with Good Reason if the conditions stated in both clauses (*x*) and (*y*) are satisfied –

(*x*) a voluntary termination by the Executive shall be considered a voluntary termination with Good Reason if any of the following occur without the Executive's advance written consent, and the term Good Reason shall mean the occurrence of any of the following without the Executive's advance written consent –

1) a material diminution of the Executive's base salary,

2) a material diminution of the Executive's authority, duties, or responsibilities,

3) a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report,

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4) a material diminution in the budget over which the Executive retains authority,

5) a material change in the geographic location at which the Executive must perform services, or

6) any other action or inaction that constitutes a material breach by Middlefield of this Agreement.

After the Executive is appointed CEO of Middlefield, the preceding clause (x) (3) is revised to read as follows:

3) a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that the Executive report to a corporate officer or employee instead of reporting directly to the board of directors,

(*y*) the Executive must give notice to Middlefield of the existence of one or more of the conditions described in clause (*x*) within 90 days after the initial existence of the condition, and Middlefield shall have 30 days thereafter to remedy the condition. In addition, the Executive's voluntary termination because of the existence of one or more of the conditions described in clause (*x*) must occur within 24 months after the initial existence of the condition.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2. Severance Payment for Failure to be Appointed CEO by January 1, 2024.** Middlefield will pay the Executive severance compensation equal to 2 times the Executive's base salary if the Executive resigns because the Executive is not appointed CEO of Middlefield and the Bank by January 1, 2024, unless the Executive's termination before January 1, 2024 results from involuntary termination for cause, with "cause" being determined by the affirmative vote of at least two-thirds (2/3) of Middlefield's directors exclusive of the Executive's vote as a Middlefield director. "Cause" has the meaning of "involuntary termination with cause" in section 1(d) of this Agreement. The lump sum payment for the Executive's resignation if the Executive is not appointed as CEO by January 1, 2024 will be made within 30 days of the Executive's employment termination. To receive the severance compensation set forth in section 2 hereof, the Executive must resign within 30 days of the earlier to occur of (a) the date the Middlefield Board informs the Executive in writing that the Executive will not be appointed as CEO of Middlefield and the Bank, or (b) January 1, 2024, if Executive has not been appointed as CEO of Middlefield and the Bank by that date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3. Board Resignation.** If at employment termination the Executive is serving as a director of Middlefield or the Bank, the Executive shall be deemed to have resigned as a director of Middlefield and any affiliate where the Executive is a director effective immediately at employment termination, regardless of whether the Executive submits a formal, written resignation as director.

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**4**. **Insurance and Miscellaneous Benefits.** (a) *Benefits*. Subject to section 4(b), if the Executive's employment terminates involuntarily but without Cause, voluntarily because of failure to be appointed CEO by January 1, 2024 pursuant to section 2 hereof, or voluntarily but for Good Reason within 24 months after a Change in Control, Middlefield shall also (*x*) cause the Executive to become fully vested in any non-qualified plans, programs, or arrangements in which the Executive participated if the plan, program, or arrangement does not address the effect of a change in control or failure to be appointed CEO by January 1, 2024 pursuant to section 2 hereof and (*y*) continue or cause to be continued life, health, and disability insurance coverage substantially identical to the coverage maintained for the Executive before termination and in accordance with the same schedule prevailing before employment termination. The insurance coverage may cease when the Executive becomes employed by another employer or 24 months after the Executive's termination, whichever occurs first.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Alternative lump-sum cash payment*. If (*x*) under the terms of the applicable policy or policies for the insurance benefits specified in section 4(a) it is not possible to continue the Executive's coverage, or (*y*) if when employment termination occurs the Executive is a specified employee within the meaning of Code Section 409A, if any of the continued insurance coverage benefits specified in section 4(a) would be considered deferred compensation under Code Section 409A, and finally if an exemption from the six-month delay requirement of Code Section 409A(a)(2)(B)(i) is not available for that insurance benefit, instead of continued insurance coverage under section 4(a) Middlefield shall pay or cause to be paid to the Executive in a single lump sum an amount in cash equal to the present value of Middlefield's projected cost to maintain that particular insurance benefit had the Executive's employment not terminated, assuming continued coverage for 24 months. The lump-sum payment shall be made 30 days after employment termination or, if a six-month delay is required by Code Section 409A, on the first day of the seventh month after the month in which the Executive's employment terminates.

**5**. **Termination for Which No Benefits Are Payable**. Despite anything in this Agreement to the contrary, the Executive shall be entitled to no benefits under this Agreement if the Executive's employment terminates with Cause, if the Executive dies while actively employed by Middlefield or a subsidiary prior to the occurrence of an event which would require a payment under this Agreement, or if the Executive becomes totally disabled while actively employed by Middlefield or a subsidiary. For purposes of this Agreement, the term totally disabled means that because of injury or sickness the Executive is unable to perform the Executive's duties. The benefits, if any, payable to the Executive or the Executive's beneficiary or estate relating to the Executive's death or disability shall be determined solely by such benefit plans or arrangements as Middlefield or subsidiary may have with the Executive relating to death or disability, not by this Agreement.

**6**. **Term of Agreement**. The initial term of this Agreement shall be for a period of three years, commencing on the effective date. On the first anniversary of the effective date of this Agreement and on each anniversary thereafter, this Agreement shall be extended automatically for one additional year, unless Middlefield's board of directors gives notice to the Executive in writing at least 90 days before the anniversary that the term of this Agreement will not be extended. If the board of directors determines not to extend the term, it shall promptly notify the Executive. References herein to the term of this Agreement mean the initial term and extensions of the initial term. If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in force until its term expires.

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**7**. **This Agreement Is Not an Employment Contract**. The parties hereto acknowledge and agree that (*x*) this Agreement is not a management or employment agreement and (*y*) nothing in this Agreement shall give the Executive any rights or impose any obligations to continued employment by Middlefield or any subsidiary or successor of Middlefield.

**8**. **Payment of Legal Fees**. Middlefield is aware that after a Change in Control management could cause or attempt to cause Middlefield to refuse to comply with its obligations under this Agreement, or could institute or cause or attempt to cause Middlefield to institute litigation seeking to have this Agreement declared unenforceable, or could take or attempt to take other action to deny Executive the benefits intended under this Agreement. In these circumstances the purposes of this Agreement would be frustrated. Middlefield desires that the Executive not be required to incur the expenses associated with the enforcement of rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. Middlefield desires that the Executive not be forced to negotiate settlement of rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Executive that (*x*) Middlefield has failed to comply with any of its obligations under this Agreement, or (*y*) Middlefield or any other person has taken any action to declare this Agreement void or unenforceable, or instituted any litigation or other legal action designed to deny, diminish, or to recover from the Executive the benefits intended to be provided to the Executive hereunder, Middlefield irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at Middlefield's expense as provided in this section 8, to represent the Executive in the initiation or defense of any litigation or other legal action, whether by or against Middlefield or any director, officer, stockholder, or other person affiliated with Middlefield, in any jurisdiction. Despite any existing or previous attorney-client relationship between Middlefield and any counsel chosen by the Executive under this section 8, Middlefield irrevocably consents to the Executive entering into an attorney-client relationship with that counsel and Middlefield and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this section shall be paid or reimbursed to the Executive by Middlefield on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by counsel in accordance with counsel's customary practices, up to a maximum aggregate amount of $500,000, whether suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings. Middlefield's obligation to pay the Executive's legal fees under this section 8 operates separately from and in addition to any legal fee reimbursement obligation Middlefield may have with the Executive under any other agreement. Despite any contrary provision of this Agreement however, Middlefield shall not be required to pay or reimburse the Executive's legal expenses if doing so would violate section 18(k) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)] and Rule 359.3 of the Federal Deposit Insurance Corporation [12 CFR 359.3].

**9**. **Withholding of Taxes**. Middlefield may withhold from any benefits payable under this Agreement all Federal, state, local or other taxes as may be required by law, governmental regulation, or ruling.

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**10**. **Successors and Assigns**. (a) *This Agreement is binding on successors*. This Agreement shall be binding upon Middlefield and any successor to Middlefield, including any persons acquiring directly or indirectly all or substantially all of the business or assets of Middlefield by purchase, merger, consolidation, reorganization, or otherwise. But this Agreement and Middlefield's obligations under this Agreement are not otherwise assignable, transferable, or delegable by Middlefield. By agreement in form and substance satisfactory to the Executive, Middlefield shall require any successor to all or substantially all of the business or assets of Middlefield expressly to assume and agree to perform this Agreement in the same manner and to the same extent Middlefield would be required to perform had no succession occurred.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *This Agreement is enforceable by the Executive*'*s heirs*. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and legatees.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *This Agreement is personal and is not assignable*. This Agreement is personal in nature. Without written consent of the other party, neither party shall assign, transfer, or delegate this Agreement or any rights or obligations under this Agreement except as expressly provided in this section 10. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder is not assignable or transferable, whether by pledge, creation of a security interest, or otherwise, except for a transfer by Executive's will or by the laws of descent and distribution. If the Executive attempts an assignment or transfer that is contrary to this section 10, Middlefield shall have no liability to pay any amount to the assignee or transferee.

**11**. **Notices**. Any notice under this Agreement shall be deemed to have been effectively made or given if in writing and personally delivered, delivered by mail properly addressed in a sealed envelope, postage prepaid by certified mail restricted delivery or registered mail restricted delivery, return receipt requested, or if delivered by a nationally recognized overnight delivery service, specifying next day delivery, with written verification of receipt confirmed through a signature from someone at the delivery address. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of Middlefield at the time of the delivery of the notice, and properly addressed to Middlefield if addressed to the board of directors, Middlefield Banc Corp., 15985 East High Street, Middlefield, Ohio, 44062-0035 Attention: Corporate Secretary.

**12**. **Captions and Counterparts**. The headings and subheadings in this Agreement are included solely for convenience and shall not affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same agreement.

**13**. **Amendments and Waivers**. No provision of this Agreement may be modified, waived, or discharged unless the waiver, modification, or discharge is agreed to in a writing signed by the Executive and by Middlefield. No waiver by either party hereto at any time of any breach by the other party hereto or waiver of compliance with any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

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**14**. **Severability**. The provisions of this Agreement are severable. The invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement. Any provision held to be invalid or unenforceable shall be reformed to the extent and solely to the extent necessary to make it valid and enforceable.

**15**. **Governing Law**. The validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state.

**16**. **Entire Agreement**. This Agreement constitutes the entire agreement between Middlefield and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth. No agreements or representations, oral or otherwise, expressed or implied concerning the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.

**17**. **No Mitigation Required**. Middlefield hereby acknowledges that it will be difficult and could be impossible (*x*) for the Executive to find reasonably comparable employment after termination and (*y*) to measure the amount of damages the Executive suffers as a result of termination. Additionally, Middlefield acknowledges that its general severance pay plans do not provide for mitigation, offset, or reduction of any severance payment received thereunder. Middlefield further acknowledges that the payment of benefits by Middlefield under this Agreement is reasonable and shall be liquidated damages. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise.

**18**. **Compliance with Internal Revenue Code Section 409A**. (a) *Interpretation*. The intent of the parties is that payments and benefits under this Agreement comply with Code Section 409A or comply with an exemption of the application of Code Section 409A and, accordingly, all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Code Section 409A. References in this Agreement to Code Section 409A include rules, regulations, and guidance of general application issued by the Department of the Treasury under Code Section 409A.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) *Action*. Neither the Executive nor Middlefield shall take any action to accelerate or delay the payment of any monies or provision of any benefits in any matter which would not be in compliance with Code Section 409A.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) *Separation from Service*. A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement unless such termination is also a "separation from service" (within the meaning of Code Section 409A) and, for purposes of this Agreement, references to a "termination" or "termination of employment" or like references shall mean separation from service. If the Executive is deemed on the date of separation from service with Middlefield to be a "specified employee," within the meaning of that term under Code Section 409A(a)(2)(B) and using the identification methodology selected by Middlefield from time to time, or if none, the default methodology, then with regard to any payment or benefit that is required to be delayed in compliance with Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six-month period measured from the date of the Executive's separation from service or (ii) the date of the Executive's death. In the case of benefits required to be delayed under Code Section 409A, however, the Executive may, to the extent permissible under Code Section 409A, pay the cost of benefit coverage, and thereby obtain benefits, during such six-month delay period and then be reimbursed by Middlefield thereafter when delayed payments are made pursuant to the next sentence. On the first day of the seventh month following the date of the Executive's separation from service or, if earlier, on the date of the Executive's death, all payments delayed pursuant to this section 18(c) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. If any cash payment is delayed under this section 18(c), then interest shall be paid on the amount delayed, with such interest to be calculated at the prime rate reported in *The Wall Street Journal* for the date of the Executive's termination to the date of payment.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) *Treatment of Installment Payments*. If under this Agreement an amount is to be paid in two or more installments, for purposes of Code Section 409A, each installment shall be treated as a separate payment. In the event any payment payable upon termination of employment would be exempt from Code Section 409A under Treasury Rule 1.409A-1(b)(9)(iii) but for the amount of such payment, the determination of the payments to the Executive that are exempt under such provision shall be made by applying the exemption to payments based on chronological order beginning with the payments paid closest in time on or after such termination of employment.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) *Payment Period*. When, if ever, a payment under this Agreement specifies a payment period with reference to a number of days (*e.g.*, "payment shall be made within ten (10) days following the date of termination"), the actual date of payment within the specified period shall be within the sole discretion of Middlefield.

**19**. **Automobile Allowance**. Middlefield shall provide the Executive either [1] a monthly cash automobile allowance of $1,000 or [2] a leased or Middlefield-owned automobile for use by the Executive with the value of the leased or Middlefield-supplied car to be commensurate with a monthly lease expense of $1,000, in either case subject to annual increases as may be determined by the Compensation Committee. Middlefield will pay insurance, taxes, and maintenance expenses for the automobile incurred by the Executive in connection with the use of the Middlefield-owned car, subject to applicable W-2 income reporting for personal use.

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**In Witness Whereof**, the parties have executed this Severance Agreement as of the date first written above.

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| | | |
|:---|:---|:---|
| **Executive** | **Middlefield Banc Corp**. | **Middlefield Banc Corp**. |
|  | By: |  |
| Ronald L. Zimmerly, Jr. |  | &nbsp;&nbsp;&nbsp;James R. Heslop, II |
|  | Its: | Chief Executive Officer |

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## Exhibit 10.6

**Exhibit 10.6**

**MIDDLEFIELD BANC CORP.** 

**2017 OMNIBUS EQUITY PLAN** 

**STOCK AWARD AGREEMENT**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. **Number of Shares Awarded**. Middlefield Banc Corp. ("Middlefield"), an Ohio corporation, hereby awards to Ronald L. Zimmerly, Jr. (the "Participant") the right to become the owner of 11,364 shares of Middlefield common stock (the "Restricted Stock") if the terms and conditions of this Stock Award Agreement (the "Agreement") are satisfied. The Participant is not and will not be the owner of the shares and the shares are not and will not be outstanding until the date when the conditions to the Participant's entitlement to the shares are satisfied, as provided in Section 3. This award is subject to the terms and conditions of the 2017 Omnibus Equity Plan and this Agreement. Terms that are defined in the 2017 Omnibus Equity Plan are used in this Agreement as they are defined in the 2017 Omnibus Equity Plan.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. **Date of the Award**. The date of this Agreement is December 5, 2022 (the "Grant Date").

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. **Vesting and Forfeiture**. As of the Grant Date, all shares of Restricted Stock will be subject to the conditions and restrictions set forth in this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>Vesting Schedule</u>. The Participant shall become 100% vested in the Restricted Stock if the Participant maintains continuous employment with Middlefield or a Related Entity as an officer for three years after the Grant Date. Unless earlier vested or forfeited in accordance with this Agreement, the shares of Restricted Stock shall vest annually in three equal installments beginning on December 1, 2023, and ending on December 1, 2025, provided that on each vesting date the Participant has maintained continuous employment with Middlefield or a Related Entity through the vesting date. When applying the vesting schedule, any fractional shares shall be rounded up to the next whole share, but in the aggregate may not exceed the number of shares of Restricted Stock awarded pursuant to Section 1 of this Agreement. Upon vesting, all restrictions applicable to such shares of Restricted Stock shall lapse, and Participant shall hold the vested shares free of any restrictions.

(b) <u>Accelerated Vesting; Effect of Termination</u>. Unvested shares of Restricted Stock may fully vest or be forfeited if Participant's employment terminates prior to a Payment Date, depending on the reason for termination as provided below:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) <u>Death or Disability</u>. If Participant's employment terminates due to death or Disability, any unvested shares of Restricted Stock will fully vest and any amounts remaining to be paid to Participant under this Agreement will be paid within three (3) days of the date of employment termination.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) <u>Termination by Middlefield without Cause or by Participant for Good Reason</u>. If Middlefield terminates Participant's employment without "Cause," or Participant terminates Participant's employment with Middlefield for "Good Reason," Participant's unvested shares of Restricted Stock will fully vest on the date of employment termination.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) <u>Termination by Middlefield for Cause</u>. If Middlefield terminates Participant's employment for Cause, Participant will forfeit all unvested shares of Restricted Stock.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) <u>Termination by Participant for Failure to be Appointed Chief Executive Officer by January 1, 2024</u>. If Participant resigns because Participant is not appointed Chief Executive Officer of Middlefield and The Middlefield Banking Company by January 1, 2024, then Participant's unvested shares of Restricted Stock will fully vest on the date of employment termination.

(c) <u>Definitions</u>. For purposes of this Agreement:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) "Cause" will have the meaning of "involuntary termination with cause" set forth in Section 1(d) of the Severance Agreement between Middlefield and the Participant.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) "Good Reason" will have the meaning of "voluntary termination with good reason" in Section 1(e) of the Severance Agreement between Middlefield and the Participant.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) "Disability" means because of a medically determinable physical or mental impairment that can be expected to result in death or that can be expected to last for a continuous period of at least 12 months, (x) the Participant is unable to engage in any substantial gainful activity, or (y) the Participant is receiving income replacement benefits for a period of at least three months under an accident and health plan of the employer. Medical determination of Disability may be made either by the Social Security Administration or by the provider of an accident or health plan covering employees of Middlefield.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. **The Shares Are Not Transferable While Subject to Forfeiture**. Until shares of Restricted Stock become vested and non-forfeitable under Section 3, the Participant is not the owner of and is not permitted to sell, transfer, pledge, assign, or otherwise alienate or hypothecate any of the shares or any interest in such shares. Until that time, Middlefield is entitled to disregard any attempt by the Participant to sell, transfer, pledge, assign, or otherwise alienate or hypothecate any of unvested shares or any interest in unvested shares, and any such sale, transfer, pledge, assignment, or other alienation or hypothecation is void and of no force or effect.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5. **Rights as a Stockholder**. Until shares of Restricted Stock become vested and non-forfeitable under Section 3, the Participant will have none of the associated rights of a stockholder with respect to such unvested shares under Ohio law and Middlefield's Articles of Incorporation and Code of Regulations, and the Participant will not be entitled to exercise voting power with respect to such unvested shares or receive cash dividends declared by Middlefield's board of directors with respect to such unvested shares.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6. **The 2017 Omnibus Equity Plan Governs**. The award of shares of Restricted Stock and this Agreement are subject to the terms and conditions of the 2017 Omnibus Equity Plan, as well as any rules of the Plan Committee under the 2017 Omnibus Equity Plan. The Participant acknowledges having received a copy of the 2017 Omnibus Equity Plan. The Participant is familiar with the terms and provisions of the 2017 Omnibus Equity Plan and accepts this award subject to all the terms and provisions of the 2017 Omnibus Equity Plan. The Participant agrees to accept as binding, conclusive, and final all decisions or interpretations of Middlefield's board of directors or Plan Committee having to do with the 2017 Omnibus Equity Plan or this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7. **Certificates**. Middlefield may record the Participant's ownership of vested Restricted Stock using a book entry system rather than issuing certificates. If certificates are issued, they will bear any restrictive legends that Middlefield considers necessary or desirable.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8. **Entire Agreement**. This Agreement and the 2017 Omnibus Equity Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties concerning the subject matter of this Agreement and constitute the sole agreement between the parties relating to the subject matter. All prior negotiations and agreements between the parties concerning the subject matter of this Agreement are merged in this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements concerning the shares of Restricted Stock have been made by any party or by anyone acting on behalf of any party that are not contained in this Agreement or in the 2017 Omnibus Equity Plan. Each party acknowledges that any agreement, statement, or promise concerning the shares of Restricted Stock that is not contained in this Agreement or the 2017 Omnibus Equity Plan is not valid, is not binding, and is of no force or effect.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9. **Headings**. The headings in this Agreement are solely for convenience of reference and do not affect the interpretation of this Agreement.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10. **Notices**. All written notices, requests, and other communications hereunder will be duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other address as either party may designate by like notice. If to Middlefield, notice must be given to Middlefield Banc Corp., 15985 East High Street, P.O. Box 35, Middlefield, Ohio 44062, Attention: Chief Financial Officer, or to such other address as Middlefield designates to the Participant in writing. If to the Participant, notice must be given to the Participant at the Participant's address appearing on the signature page of this Agreement, or to such other address as the Participant designates to Middlefield.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11. **Taxes**. The Participant is hereby advised to consult immediately with his or her own tax advisor about the tax consequences of this Agreement, the method and timing for filing an election to include this award in income under Section 83(b) of the Internal Revenue Code of 1986, and the tax consequences of that election. By executing this Agreement, the Participant agrees that if the Participant makes an election to include the award in income under Section 83(b) of the Internal Revenue Code of 1986, the Participant will provide Middlefield with written notice of the election in accordance with the regulations under Section 83(b) of the Internal Revenue Code of 1986.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12. **No Registration Rights**. The Participant acknowledges and agrees that Middlefield and its Related Entities have no obligation to register the Participant's offer and sale of the shares awarded under this Agreement under the Securities Act of 1933 or the securities laws of any state.

IN WITNESS WHEREOF, Middlefield has caused this Stock Award Agreement to be executed by its duly authorized officer as of the date specified in Section 2, and the Participant has duly executed this Stock Award Agreement as of the date specified in Section 2 and consents to and approves all of its terms.

---

| | |
|:---|:---|
| **PARTICIPANT** | **MIDDLEFIELD BANC CORP.**<br> an Ohio corporation |
|  | By: |
|  | Name: |
|  | Its: |
| Residence Address: |  |

---

## Exhibit 10.12

**Exhibit 10.12**

**SPLIT-DOLLAR AGREEMENT**

This SPLIT-DOLLAR AGREEMENT (this "Agreement made and entered into effective as of the 1'<sup>1</sup> day of October 2010, by and between Liberty National Bank, a federal bank headquartered in the state of Ohio (the "Bank") and Ronald Zimmerly, (the "Insured").

<u>RECITALS:</u>

A. Insured is currently an employee and officer of the Bank and Bank desires to retain the services of the Insured for a considerable period.

B. Bank desires 10 provide Insured with certain death benefits under a life insurance policy that the Bank has purchased on the life of Insured.

NOW, THEREFORE, the parries hereto, for and in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending 10 be legally bound hereby, do hereby agree as follows:

I. This Agreement pertains to the life insurance policies (the "Policy") listed on **Exhibit C**, attached and made a part hereof.

2. <u>Ownership of Policy</u>. The Bank shall own all of the right, title and interest in the Policy and shall control an rights of ownership with respect thereto. The Bank, in its sole discretion, may exercise its right to borrow against or withdraw the cash value of the Policy. In the event coverage under the Policy is increased, such increased coverage shall be subject to all of the rights, duties and obligations set forth in this Agreement.

3. <u>Designation of Beneficiary.</u> Insured may designate one or more beneficiaries (on the Beneficiary Designation Form attached hereto as **Exhibit A**) to receive a portion of the death proceeds of the Policy payable pursuant hereto upon the death of the Insured subject to any right, title or interest the Bank may have in such proceeds as provided herein. In the event Insured fails to designate a beneficiary, any benefits payable pursuant hereto shall be paid to the estate of Insured.

4. <u>Maintenance of Policy</u>. The Bank intends to maintain a policy for purposes of this agreement. The Bank shall make any required premium payments and take all other actions within the Bank's reasonable control in order to keep the Policy in full force and effect; provided, however, that the Bank may replace the Policy with a comparable policy or policies so long as Insured's beneficiaries will be entitled to receive an amount of death proceeds under Section 6 substantially equal to those that the beneficiaries would be entitled to if the original Policy were to remain in effect. If any such replacement is made, all references herein to the "Policy"shall thereafter be references to such replacement policy or policies. If the Policy contains any premium waiver provision, any such waived premiums shall be considered for the purposes of this Agreement as having been paid by the Bank. The Bank shall be under no obligation to set aside, earmark. or otherwise segregate any funds with which to pay its obligations under this Agreement, including. but not limited to, payment of Policy premiums.

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5*.* <u>Reporting Requirements.</u> The Bank will report on an annual basis to Insured the economic benefit attributable to this Agreement on IRS Form W-2 or its equivalent so that Insured can properly include said amount in his or her taxable income. Insured agrees to accurately report and pay all applicable taxes on such amounts of income reportable hereunder to Insured. Insured acknowledges and understands that no "group term life" or similar income tax exclusion applies to benefits provided hereunder.

6. <u>Policy Proceeds.</u> Subject to Section 8, upon the death of Insured, the death proceeds of the Policy shall be divided in the following manner:

(a) The Insured,s beneficiary(ies) designated in accordance with Section 3 shall be entitled to an amount equal to the Death Benefit (as defined in **Exhibit B** hereto).

(b) The Bank shall be entitled to any death proceeds payable under the Policy remaining after payment to the Insured"s beneficiary(ies) under Section 6(a) above.

(c) The Bank and Insured shall share in any interest due on the death proceeds of the Policy on a pro rata basis based upon the amount of proceeds due each patty divided by the total amount of proceeds,excluding any such interest.

7. <u>Cash Surrender Value of the Policy.</u> The "Cash Surrender Value of the Policy" shall be equal to the cash value of the Policy at the time of the Insured's death or upon surrender of the Policy, as applicable, less (i) any policy or premium loans or withdrawals or any other indebtedness by the Policy, and any unpaid interest thereon, previously incurred or made by the Bank, and (ii) any applicable surrender charges, as determined by the Insurer or agent servicing the Policy.

8. <u>Termination of Agreement.</u>

(a) This Agreement shall terminate upon the first to occur of the <sub>following:</sub>

&nbsp;&nbsp;&nbsp;&nbsp;(i) the distribution of the death benefit proceeds in accordance with Section 6 above; or

&nbsp;&nbsp;&nbsp;&nbsp;(ii) the termination of the Insured's employment for any reason (other than on account of the Insured's death).

(b) Insured acknowledges and agrees that the termination of this Agreement pursuant to subsection (a)(ii) above prior to the death of Insured shall terminate any right of Insured to receive any death proceeds of the Policy under this Agreement, and such termination shall be without any liability of any nature to Bank.

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9. <u>Assignment.</u> Insured shall not make any assignment of Insured's rights title or interest in or to the death proceeds of the Policy whatsoever without the prior written consent of the Bank (which may be withheld for any reason or no reason in its sole and absolute discretion) and acknowledgment by the Insurer.

10. <u>Administration.</u>

(a) This Agreement shall be administered by the Board of Directors of the Bank (the "Board").

(b) As the administrator, the Board shall have the powers, duties and discretion to:

(i) Construe and interpret the provisions of this Agreement;

(ii) Adopt. amend or revoke rules and regulations for the administration of this Agreement, provided they are not inconsistent with the provisions of this Agreement;

(iii) Provide appropriate parties with such returns, reports, descriptions and statements as may be required by law, within the times prescribed by law and to make them available to the Insured (or the Insured's beneficiary) when required by law;

(iv) Take such other action as may be reasonably required to administer this Agreement in accordance with its terms or as may be required by law;

(v) Withhold applicable taxes and file with the Internal Revenue Service appropriate information returns with respect to any payments and/or benefits provided hereunder;

(vi) Appoint and retain such persons as may be necessary to carry out jts duties as administrator.

(c) The Bank shall serve as the Named Fiduciary with respect to this Agreement. The Named Fiduciary shall be responsible for the management, control and administration of the Policy's death proceeds. The Named Fiduciary may, in its reasonable discretion, delegate certain aspects of its management and administrative responsibilities. If the Named Fiduciary has a claim which it believes may be covered under the Policy, it will contact the Insurer in order to complete a claim form and determine what other steps need to be taken. The Insurer will evaluate and make a decision as to payment. If the claim is eligible for payment under the Policy, a check will be issued to the Named Fiduciary. If the Insurer determines that a claim is not eligible for payment under the Policy, the Named Fiduciary may, in its sole discretion, contest such claim denial by contacting the Insurer in writing.

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11. <u>Claims Procedures.</u>

(a) For purposes of these claims procedures, the Board shall serve as the "Claims Administrator."

(b) If the Executive or any beneficiary of the executive should have a claim for benefits hereunder, he or she shall file such claim by notifying the Claims Administrator in writing. The Claims Administrator sha11 make all determinations as to the right of any person or persons to a benefit hereunder. Benefit claims shall be made by the Executive, his beneficiary or beneficiaries or a duly authorized representative thereof (the '"claimant").

If the claim is wholly or partially denied, the Claims Administrator shall provide written or electronic notice thereof to the claimant within a reasonable period of time, but not later than ninety (90) days after receipt of the claim. An extension of time for processing the claim for benefits is allowable if special circumstances require an extension, but such an extension shall not extend beyond one hundred eighty (180) days from the date the claim for benefits is received by the Claims Administrator. Written notice of any extension of time shall be delivered or mailed within ninety (90) days after receipt of the claim and shall include an explanation of the special circumstances requiring the extension and the date by which the Claims Administrator expects to render the final decision.

The notice of adverse benefit determination shall (i) specify the reason fur the denial(ii) reference the provisions of this Agreement on which the denial is based;(iii) describe the additional material or information, if any, necessary for the claimant to receive benefits and explain why such information is necessary(iv) indicate the steps to be taken by the claimant if a review of the denial is desired, including the time limits applicable thereto; and (v) contain a statement of the claimant's right to bring a civil action under ERISA in the event of an adverse determination on review.

If notice of the adverse benefit determination is not furnished in accordance with the preceding provisions of this Section, the claim shall be deemed denied and the claimant shall be permitted to exercise his right to review as set forth below.

(c) If a claim is denied and a review is desired, the claimant shall notify the Claims Administrator in writing within sixty (60) days after receipt of written notice of a denial of a claim. In requesting a review, the claimant may submit any written comments, documents, records, and other information relating to the claim, the claimant feels arc appropriate. The claimant shall, upon request and free of charge, be provided reasonable access to, and copies of, all documents, records and other information "relevant" to the claimant's claim for benefits. The Claims Administrator shall review the claim taking into account all comments, documents, records and other information submitted by the claimant, without regard to whether such information was submitted or considered in the initial benefit determination.

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The Claims Administrator shall provide the claimant with written or electronic notification of the benefit determination upon review. In the event of an adverse benefit determination on review, the notice thereof shall (i) specify the reason or reasons for the adverse determination; (ii) reference the specific provisions of this Agreement on which the benefit determination is based; (iii) contain a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of all do records and other information "relevant" to the claimant's claim for benefits; and (iv) inform the claimant of the right to bring a civil action under the provisions of ERISA.

For purposes hereof, documents, records and information shall be considered "relevant" to the claimant's claim if it (i) was relied upon in making the benefit determination, (ii) was submitted, considered, or generated in the course of making the benefit determination, whether or not actually relied upon in making the determination; or (iii) demonstrates compliance with the administrative processes and safeguards of this claims procedure.

(d) After exhaustion of the claims procedure as provided herein, nothing shall prevent the claimant from pursuing any other legal or equitable remedy otherwise available, including the right to bring a civil action under Section 502(a) of ERISA, if applicable. Notwithstanding the foregoing, no legal action may be commenced or maintained against the Bank, the Board, any member of the Board or the Claims Administrator more than ninety (90) days after the claimant has exhausted the administrative remedies set forth in this Section 11.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12. <u>Confidentiality.</u> Insured agrees that the terns and conditions of this Agreement, except as such may be disclosed in financial statements and tax returns, or in connection with estate planning, are and shall forever remain confidential, and Insured agrees that he shall not reveal the terms and conditions contained in this Agreement at any time to any person or entity, other than his financial and professional advisors unless required to do so by a court of competent jurisdiction.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13. <u>Other Agreements.</u> The benefits provided for herein for Insured are supplemental life insurance benefits and shall not be deemed to modify, affect or limit any salary or salary increases, bonuses, profit sharing or any other type of compensation of Insured in any manner whatsoever. No provision contained in this Agreement shall in any way affect, restrict or limit any existing employment agreement between the Bank and Insured, nor shall any provision or condition contained in this Agreement create specific rights of Insured or limit the right of the Bank to discharge Insured with or without cause. Except as otherwise provided therein, nothing contained in this Agreement shall affect the right of Insured to participate in or be covered by or under any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation, retirement or fringe benefit plan constituting any part of the Bank's compensation structure whether now or hereinafter existing.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14. <u>Withholding.</u> Notwithstanding any of the provisions hereof, the Bank may withhold from any payment \0 be made hereunder such amount as it may be required to withhold under any applicable federal, state or other law, and transmit such withheld amounts to the applicable taxing authority.

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15*.* <u>Miscellaneous Provisions.</u>

(a) <u>Counterparts.</u> This Agreement may be executed simultaneously in any number of counterparts. F..ach counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. This Agreement may be executed and delivered by facsimile transmission of an executed counterpart.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>Survival.</u> The provisions of Sections 12 and 1*S* of this Agreement shall survive the termination of this Agreement indefinitely, regardless of the cause of, or reason for, such termination.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) <u>Construction.</u> As used in this Agreement, the neuter gender shall include the masculine and the feminine, the masculine and feminine genders shall be interchangeable among themselves and each with the neuter, the singular numbers shall include the plural, and the plural the singular. The term "person.. shall include all persons and entities of every nature whatsoever, including, but not limited to, individuals, corporations, partnerships, governmental entities and associations. The terms "including," "included," "such as" and terms of similar import shall not imply the exclusion of other items not specifically enumerated.

(d) <u>Severability.</u> If any provision of this Agreement or the application thereof to any person or circumstance shall be held to be invalid, illegal, unenforceable or inconsistent with any present or future law, ruling.rule or regulation of any court, governmental or regulatory authority having jurisdiction over the subject matter of this Agreement, such provision shall be rescinded or modified in accordance with such law, ruling, rule or regulation and the remainder of this Agreement or the application of such provision to the person or circumstances other than those as to which it is held inconsistent shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

(e) <u>Governing Law.</u> This Agreement shall be governed in all respects and construed in accordance with the laws of the State of Ohio, without regard to its conflicts of law principles, except to the extent superseded by the Federal laws of the United States of America.

(f) <u>Binding Effect.</u> This Agreement is binding upon the parties, their respective successors, permitted assigns, heirs and legal representatives. Without limiting the foregoing, the terms of this Agreement shall be binding upon Insured's estate, administrators, personal representatives and heirs. This Agreement may be assigned by Bank to any party to which Bank assigns or transfers the Policy. This Agreement has been approved by the Bank's Board of Directors and the Bank agrees to maintain an executed counterpart of this Agreement in a safe place as an official record of the Bank.

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(g) <u>No Trust.</u> Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Bank and the Insured, Insured's designated beneficiary or any other person.

(h) <u>Assignment of Rights.</u> None of the payments provided for by this Agreement shall be subject to seizure for payment of any debts or judgments against the Insured or any beneficiary; nor shall the Insured or any beneficiary have any right to transfer, modify, anticipate or encumber any rights or benefits hereunder; provided, however, that the undistributed portion of any benefit payable hereunder shall at all times be subject to set--off for debts owed by Insured to Bank.

(i) <u>Entire Agreement.</u> This Agreement (together with its Exhibits, which are incorporated herein by reference) constitutes the entire agreement of the parties with respect to the subject matter hereof and supercedes all prior or contemporaneous negotiations, agreements and understandings, whether oral or written, relating to the subject matter hereof.

(j) <u>Notice</u>. Any notice to be delivered to the Bank under this Agreement shall be sufficient if in writing and delivered by hand, or by first class, certified or registered mail at the address below:

Director of Human Resources

Liberty National Bank

118 South Main Street

Ada, OH 45810

&nbsp;&nbsp;&nbsp;&nbsp;Any notice to be delivered to the Insured under this Agreement shall be sufficient if in writing and delivered by hand, or by first class, certified or registered mail at the last known address of the Insu d.

(k) <u>Non-waiver.</u> No delay or failure by either party to exercise any right under this Agreement, and no partial or single exercise of that right, shall constitute a waiver of that or any other right.

(l) <u>Headings.</u> Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions.

(m) <u>Amendment.</u> No amendments or additions to this Agreement shall be binding Wlless in writing and signed by all parties. No waiver of any provision contained in this Agreement shall be effective unless it is in writing and signed by the party against whom such waiver is asserted. Notwithstanding the foregoing. the Bank may amend, modify or terminate this Agreement (and may do so retroactively) without the consent and or approval of the Insured or any beneficiary of the Insured if such amendment, modification or termination is necessary to ensure compliance with Code Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") or in order to avoid the application of any penalties that may be imposed upon the Insured and any beneficiary of the Insured pursuant to the provisions of Code Section 409A.

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(n) <u>Seal.</u> The parties hereto intend this Agreement to have the effect of an agreement executed under the seal of each.

(o) <u>Purpose.</u> The primary purpose of this Agreement is to provide certain death benefits to the Insured as a member of a select group of management or highly compensated employees of the Bank.

(p) <u>Compliance with the AJCA.</u> Code Section 409A, as added by the American Jobs Creation Act of 2004 (AJCA), substantially revised the requirements applicable to certain deferred compensation arrangements. If Code Section 409A is found to be applicable, this Agreement is intended to comply, and to be operated and administered in all respects in compliance, with the requirements of Code Section 409A and all Internal Revenue Service rulings, treasury regulations or other pronouncements or guidance implementing or interpreting its provisions.

**(Signature Page Follows)**

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year set forth above.

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| |
|:---|
| **BANK:** |
| ![pic3.jpg](pic3.jpg) |
| ![pic4.jpg](pic4.jpg) |

---

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**EXHIBIT A**

**BENEFICIARY DESIGNATION FORM**

**SPLIT-DOLLAR AGREEMENT**

Pursuant to Section 3 of the Split-Dollar Agreement (the "Agreement"), I, Ronald Zimmerly, hereby designate the beneficiary(ies) listed below to receive any benefits under the Agreement that may be due upon my death. This designation shall replace and revoke any prior designation of beneficiary(ies) made by me under the Agreement.

Full Name(s), Address(es) and Social Security Number(s) of Primary Beneficiary(ies)\*:

![pic5.jpg](pic5.jpg)<br>

\*If more than one beneficiary is named above, the beneficiaries will share equally in any benefits, unless you have otherwise provided above. Further, if you have named more than one beneficiary and one or more of the beneficiaries is deceased at the time of your death, any remaining beneficiary(ies) will share equally, unless you have provided otherwise above. If no primary beneficiary survives you, then the contingent beneficiary designated below will receive any benefits due upon your death. In the event you have no designated beneficiary upon your death, any benefits due will be paid to your estate. In the event that you are naming a beneficiary that is not a person, please provide pertinent infonna1ion regarding the designation.

Full Name, Address and Social Security Number of Contingent Beneficiary:

 <br>  <br> 

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| | |
|:---|:---|
| ![pic6.jpg](pic6.jpg) | ![pic7.jpg](pic7.jpg) |
| Date | Ronald Zimmerly |

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<sub>ACCEPTED:</sub>

Liberty National Bank

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| | |
|:---|:---|
| By | ![pic9.jpg](pic9.jpg) |
| Its | ![pic10.jpg](pic10.jpg) |
| Date | ![pic11.jpg](pic11.jpg) |

---

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**EXHIBIT B**

**DEATH BENEFIT**

Ronald Zimmerly

**Death Benefit** - lf Insured's death occurs while Insured is in the full-time employment of the Bank or during the continuation of the Agreement, subject to Section 8 of the Agreement. then the "Death Benefit" shall equal the lesser of (a) one hundred thousand dollars ($100,000.00) or (b) one hundred percent (100%) of the difference between the total death proceeds payable under the Policy and the 11Cash Surrender Value of the Policy,. (as defined in Section 7 of the Agreement); such difference in the total death proceeds and the Cash Surrender Value of the Policy is defined as the "Net at Risk Amount." Notwithstanding any other provision in this paragraph or this agreement or elsewhere, in no event shall the amount payable to the Insured exceed the Net at Risk Amount in the Policy(s) as of the date of the Insured's death.

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**EXHIBIT C**

**ENDORSED POLICIES**

Ronald Zimmerly

This Agreement pertains to the life insurance policies (the "Policy") listed on this **Exhibit C**, attached and made a part of this Split-Dollar Agreement dated October 1, 2010.

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| |
|:---|
| Insurer: **Northwestern Mutual Life Insurance Company** |
| Insurer: **Guardian Life Insurance Company** |

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## Exhibit 10.29

**Exhibit 10.29**

**The Middlefield Banking Company**

**Executive Deferred Compensation Agreement**

This **Executive Deferred Compensation Agreement** (this "Agreement") is entered into as of this 5<sup>th</sup> day of December, 2022, by and between The Middlefield Banking Company, an Ohio-chartered bank (the "Bank"), and Ronald L. Zimmerly, Jr. President of the Bank (the "Executive").

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

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

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

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

**Article 1**

**Definitions**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.1** "**Account Balance**" means the Bank's accounting of Annual Contributions made by the Bank, plus accrued interest.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.2** "**Annual Contribution**" means the amount credited to the Account Balance after the end of each Plan Year. The Annual Contribution amount in any Plan Year shall not be less than 5% or more than 15% of the Executive's Base Annual Salary. The Annual Contribution, if any, in excess of 5% will be conditional on achievement of the Performance Goals. The Annual Contribution amount shall be changed no more frequently than annually.

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.4** "**Beneficiary**" means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 5.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.5** "**Beneficiary Designation Form**" means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

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

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

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

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.7** "**Code**" means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.8** "**Effective Date**" means January 1, 2023.

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.10** "**Normal Retirement Age**" means age 65.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.11** "**Performance Goals**" means the performance criteria set forth in Schedule A attached to this Agreement and incorporated herein by this reference, which criteria have been established by the Bank's board of directors. The Performance Goals may be changed by the board of directors no more frequently than annually. If the performance criteria are changed, a new Schedule A shall be substituted for and shall supersede the old Schedule A, and the new Schedule A shall be deemed to be incorporated by reference herein and to be a part of this Agreement. A change in Performance Goals shall not become effective for the Plan Year in which the change is made unless the change is made on or before March 31 of the Plan Year. The Plan Administrator shall have sole authority to determine whether the Performance Goals have been achieved for any Plan Year. The Plan Administrator's determination that the Performance Goals for a Plan Year have or have not been achieved shall be conclusive and binding.

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.12** "**Plan Administrator**" or "**Administrator**" means the plan administrator described in Article 8.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.13** "**Plan Year**" means the calendar year. The first Plan Year shall begin on the Effective Date and end on December 31, 2023.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.14** "**Separation from Service**" means separation from service as defined in Treasury Regulation 1.409A-1(h), other than because of the Executive's death.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**1.15** "**Termination with Cause**" and "**Cause**" shall have the same definition specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and Banc Corp. If the Executive is not a party to a severance or employment agreement containing a definition, Termination with Cause means the Bank terminates the Executive's employment because of –

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

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

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

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

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

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

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

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**Article 2**

**Deferral Account**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**2.1 Annual Contribution**. The Bank shall establish an Account Balance on its books. Within three months after the end of each Plan Year the Bank shall credit the Annual Contribution to the Account Balance. Contributions to the Account Balance by the Executive are prohibited. Discretionary contributions by the Bank are likewise prohibited. The Annual Contribution will not be made by the Bank for the Plan Year in which the Executive attains Normal Retirement Age or for any year thereafter. However, if the Performance Goals are achieved for the Plan Year in which the Executive attains Normal Retirement Age (and if Separation from Service does not occur before Normal Retirement Age), the Bank will make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage is equal to the number of days in the Plan Year before the Executive attained Normal Retirement Age, divided by 365. If the Performance Goals are achieved for a Plan Year in which the Executive dies before Separation from Service and before attaining Normal Retirement Age, the Bank shall make a final contribution in an amount equal to the Annual Contribution multiplied by a percentage. The percentage shall equal the number of days in the Plan Year before the Executive's death divided by 365.

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

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

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

**Article 3**

**Benefits During Lifetime**

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

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

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

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

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;**3.6 Savings Clause Relating to Compliance with Code Section 409A**. Despite any contrary provision of this Agreement, if when the Executive's employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 3 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive shall not be entitled to the payments under Article 3 until the earliest of (*x*) the date that is at least six months after termination of the Executive's employment for reasons other than the Executive's death, (*y*) the date of the Executive's death, or (*z*) any earlier date that does not result in additional tax or interest to the Executive under section 409A.

**Article 4**

**Death Benefits**

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

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**Article 5**

**Beneficiaries**

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

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

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

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

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

**Article 6**

**General Limitations**

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

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

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

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**Article 7**

**Claims and Review Procedures**

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

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

**Article 8**

**Administration of Agreement**

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

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

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

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

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

**Article 9**

**Miscellaneous**

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

---

| | |
|:---|:---|
| **Executive:** | **Bank:**<br> **The Middlefield Banking Company** |
| Ronald L. Zimmerly, Jr. | By: |
|  | Its: |

---

------

**The Middlefield Banking Company**

**Executive Deferred Compensation Agreement**

**Beneficiary Designation**

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

Primary:   <br>

Contingent:   <br>

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

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

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| | | |
|:---|:---|:---|
| Signature: |  |  |
|  | Ronald L. Zimmerly, Jr. |  |
| Date: |  | <u>,</u> 2022 |

---

Received by the Bank this<u> </u> day__________ of ________________________<u> </u>, 2022

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| |
|:---|
| By: |
| Title: |

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## Ex-13

ex_487533.htm

*Exhibit 13*

![image01.jpg](image01.jpg)

<u>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</u>

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

**Opinion on the Financial Statements**

We have audited the accompanying consolidated balance sheets of Middlefield Banc Corp. and subsidiaries (the "Company") as of December 31, 2022 and 2021; the related consolidated statements of income, comprehensive (loss) income, changes in stockholders' equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

**Basis for Opinion**

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

**Critical Audit Matters**

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1

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![image02.jpg](image02.jpg)

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

*Description of the Matter*

The Company's loan portfolio totaled $1.35 billion as of December 31, 2022, and the associated ALL was $14.4 million. As discussed in Notes 1 and 5 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.

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

*How We Addressed the Matter in Our Audit*

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

To test the qualitative adjustments, we evaluated the appropriateness of management's methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments.

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

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2

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![image02.jpg](image02.jpg)

**Accounting for Acquisitions** 

*Description of the Matter*

During 2022, the Company completed the acquisition of Liberty Bancshares, Inc. for net consideration of $73.3 million, as disclosed in Note 21 to the consolidated financial statements. The transaction was accounted for by applying the acquisition method.

Auditing the Company's accounting for the acquisition of Liberty Bancshares, Inc. was complex due to the significant estimation required by management to determine the fair value of the loans acquired and core deposit intangibles of $312.6 million and $6.7 million, respectively. The Company determined the fair value of the acquired loans by estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considered a number of factors in evaluating the acquisition-date fair value, including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral, and interest rate environment. The Company determined the fair value of the core deposit intangibles by using a discounted cash flow model based on various factors, including discount rate, attrition rate, interest rate, cost of alternative funds, and net maintenance costs. The significant estimation was primarily due to the judgment involved in determining the discount rate used to discount the expected cash flows for acquired loans and core deposit intangibles, along with other factors described above, to establish the acquisition-date fair value of the loans and core deposit intangibles. These factors are forward-looking and could be affected by future economic and market conditions.

*How We Addressed the Matter in Our Audit*

We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's accounting for the acquisition. Our tests included testing controls over the completeness and accuracy of the data and the estimation process supporting the fair value of loans acquired and core deposit intangibles. We also tested management's review of factors used in the valuation models.

To test the estimated fair value of the loans acquired and core deposit intangibles, we performed audit procedures that included, among others, evaluating the Company's valuation methodology, evaluating the factors used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the factors and estimates. For example, when evaluating the discount rate and other factors noted above, we compared the factors to current industry, market, and economic information in addition to factors used in historical acquisitions.

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

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

Cranberry Township, Pennsylvania

March 15, 2023

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3

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MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands)

---

| | | |
|:---|:---|:---|
|  | December 31, | December 31, |
|  | 2022 | 2021 |
| ASSETS |  |  |
| Cash and due from banks | $51404 | $97172 |
| Federal funds sold | 2405 | 22322 |
| Cash and cash equivalents | 53809 | 119494 |
| Equity securities, at fair value | 915 | 818 |
| Investment securities available for sale, at fair value | 164967 | 170199 |
| Loans held for sale |  | 1051 |
| Loans: |  |  |
| Commercial real estate: |  |  |
| Owner occupied | 191748 | 111470 |
| Non-owner occupied | 380580 | 283618 |
| Multifamily | 58251 | 31189 |
| Residential real estate | 296308 | 240089 |
| Commercial and industrial | 195602 | 148812 |
| Home equity lines of credit | 128065 | 104355 |
| Construction and other | 94199 | 54148 |
| Consumer installment | 8119 | 8010 |
| Total loans | 1352872 | 981691 |
| Less: allowance for loan and lease losses | 14438 | 14342 |
| Net loans | 1338434 | 967349 |
| Premises and equipment, net | 21961 | 17272 |
| Goodwill | 31735 | 15071 |
| Core deposit intangibles | 7701 | 1403 |
| Bank-owned life insurance | 33811 | 17060 |
| Other real estate owned | 5821 | 6992 |
| Accrued interest receivable and other assets | 28528 | 14297 |
| TOTAL ASSETS | $1687682 | $1331006 |
| LIABILITIES |  |  |
| Deposits: |  |  |
| Noninterest-bearing demand | $503907 | $334171 |
| Interest-bearing demand | 164677 | 196308 |
| Money market | 187498 | 177281 |
| Savings | 307917 | 260125 |
| Time | 238020 | 198725 |
| Total deposits | 1402019 | 1166610 |
| Short-term borrowings: |  |  |
| Federal Home Loan Bank advances | 65000 |  |
| Other borrowings | 12059 | 12901 |
| Accrued interest payable and other liabilities | 10913 | 6160 |
| TOTAL LIABILITIES | 1489991 | 1185671 |
| STOCKHOLDERS' EQUITY |  |  |
| Common stock, no par value; 10,000,000 shares authorized, 9,916,466 and 7,330,548 shares issued; 8,245,235 and 5,888,737 shares outstanding | 161029 | 87131 |
| Retained earnings | 94154 | 83971 |
| Accumulated other comprehensive (loss) income | (22144) | 3462 |
| Treasury stock, at cost; 1,671,231 and 1,441,811 shares | (35348) | (29229) |
| TOTAL STOCKHOLDERS' EQUITY | 197691 | 145335 |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $1687682 | $1331006 |

---

See accompanying notes to the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4

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MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
|  | 2022 | 2021 |
| INTEREST AND DIVIDEND INCOME |  |  |
| Interest and fees on loans | $48513 | $47896 |
| Interest-earning deposits in other institutions | 472 | 90 |
| Federal funds sold | 219 | 3 |
| Investment securities: |  |  |
| Taxable interest | 1811 | 1679 |
| Tax-exempt interest | 3707 | 2565 |
| Dividends on stock | 184 | 102 |
| Total interest and dividend income | 54906 | 52335 |
| INTEREST EXPENSE |  |  |
| Deposits | 4018 | 3913 |
| Short-term borrowings | 307 |  |
| Other borrowings | 404 | 282 |
| Total interest expense | 4729 | 4195 |
| NET INTEREST INCOME | 50177 | 48140 |
| Provision for loan losses |  | 700 |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 50177 | 47440 |
| NONINTEREST INCOME |  |  |
| Service charges on deposit accounts | 3850 | 3425 |
| (Losses) gains on equity securities | (173) | 209 |
| Gain on other real estate owned |  | 43 |
| Earnings on bank-owned life insurance | 459 | 546 |
| Gain on sale of loans | 24 | 1240 |
| Revenue from investment services | 674 | 727 |
| Gross rental income | 951 | 180 |
| Other income | 961 | 879 |
| Total noninterest income | 6746 | 7249 |
| NONINTEREST EXPENSE |  |  |
| Salaries and employee benefits | 17548 | 17151 |
| Occupancy expense | 2033 | 2048 |
| Equipment expense | 1074 | 1361 |
| Data processing costs | 3701 | 3298 |
| Ohio state franchise tax | 1157 | 1144 |
| Federal deposit insurance expense | 329 | 494 |
| Professional fees | 1500 | 1313 |
| Other real estate owned writedowns | 1200 |  |
| Advertising expense | 1033 | 885 |
| Software amortization expense | 143 | 361 |
| Core deposit intangible amortization | 372 | 321 |
| Gross other real estate owned expenses | 707 | 54 |
| Merger-related costs | 2382 |  |
| Other expense | 4851 | 3561 |
| Total noninterest expense | 38030 | 31991 |
| Income before income taxes | 18893 | 22698 |
| Income taxes | 3220 | 4065 |
| NET INCOME | $15673 | $18633 |
| EARNINGS PER SHARE |  |  |
| Basic | $2.60 | $3.01 |
| Diluted | 2.59 | 3.00 |

---

See accompanying notes to the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 5

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MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Dollar amounts in thousands)

---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
|  | 2022 | 2021 |
| Net income | $15673 | $18633 |
| Other comprehensive loss: |  |  |
| Net unrealized holding loss on available- for-sale investment securities | (32413) | (1041) |
| Tax effect | 6807 | 219 |
| Total other comprehensive loss | (25606) | (822) |
| Comprehensive (loss) income | $(9933) | $17811 |

---

See accompanying notes to the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 6

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MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

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

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  | Accumulated |  |  |
|  |  |  |  | Other |  | Total |
|  | Common Stock | Common Stock | Retained | Comprehensive | Treasury | Stockholders' |
|  | Shares | Amount | Earnings | (Loss) Income | Stock | Equity |
| Balance, December 31, 2020 | 7308685 | $86886 | $69578 | $4284 | $(16938) | $143810 |
| Net income |  |  | 18633 |  |  | 18633 |
| Other comprehensive loss |  |  |  | (822) |  | (822) |
| Stock options exercised | 10650 | 94 |  |  |  | 94 |
| Stock-based compensation, net | 11213 | 151 |  |  |  | 151 |
| Treasury shares acquired (512,449 shares) |  |  |  |  | (12291) | (12291) |
| Cash dividends ($0.69 per share) |  |  | (4240) |  |  | (4240) |
| Balance, December 31, 2021 | 7330548 | $87131 | $83971 | $3462 | $(29229) | $145335 |
| Net income |  |  | 15673 |  |  | 15673 |
| Other comprehensive loss |  |  |  | (25606) |  | (25606) |
| Common stock issued in business combination | 2561513 | 73265 |  |  |  | 73265 |
| Stock-based compensation, net | 24405 | 633 |  |  |  | 633 |
| Treasury shares acquired (229,420 shares) |  |  |  |  | (6119) | (6119) |
| Cash dividends ($0.81 per share) |  |  | (5490) |  |  | (5490) |
| Balance, December 31, 2022 | 9916466 | $161029 | $94154 | $(22144) | $(35348) | $197691 |

---

See accompanying notes to the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 7

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MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
|  | 2022 | 2021 |
| OPERATING ACTIVITIES |  |  |
| Net income | $15673 | $18633 |
| Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
| Provision for loan losses |  | 700 |
| Loss (gain) on equity securities | 173 | (209) |
| Depreciation and amortization of premises and equipment, net | 1330 | 1420 |
| Software amortization expense | 143 | 361 |
| Financing lease amortization expense | 176 | 313 |
| Amortization of premium and discount on investment securities, net | 624 | 506 |
| Accretion of deferred loan fees, net | (1804) | (4780) |
| Amortization of core deposit intangibles | 372 | 321 |
| Stock-based compensation expense, net | 307 | 478 |
| Origination of loans held for sale | (1350) | (34081) |
| Proceeds from sale of loans | 1641 | 35148 |
| Gain on sale of loans | (24) | (1240) |
| Earnings on bank-owned life insurance | (459) | (546) |
| Deferred income tax | (324) | (401) |
| Gain on other real estate owned |  | (43) |
| Other real estate owned writedowns | 1200 |  |
| (Increase) decrease in accrued interest receivable | (209) | 1078 |
| Increase (decrease) in accrued interest payable | 395 | (343) |
| Other, net | 498 | (1893) |
| Net cash provided by operating activities | 18362 | 15422 |
| INVESTING ACTIVITIES |  |  |
| Investment securities available for sale: |  |  |
| Proceeds from repayments and maturities | 4235 | 11521 |
| Proceeds from sale of securities | 57887 |  |
| Purchases | (32290) | (68907) |
| (Increase) decrease in loans, net | (55908) | 127294 |
| Proceeds from the sale of other real estate owned |  | 501 |
| Purchase of premises and equipment | (884) | (605) |
| Proceeds from the disposal of premises and equipment | 165 |  |
| Purchase of restricted stock | (1448) |  |
| Redemption of restricted stock | 1183 | 658 |
| Proceeds from bank-owned life insurance |  | 424 |
| Acquisition, net of cash paid | 18406 |  |
| Net cash (used in) provided by investing activities | (8654) | 70886 |
| FINANCING ACTIVITIES |  |  |
| Net decrease in deposits | (128553) | (58590) |
| Increase in short-term borrowings, net | 65000 |  |
| Repayment of other borrowings | (231) | (4204) |
| Stock options exercised |  | 94 |
| Repurchase of treasury shares | (6119) | (12291) |
| Cash dividends | (5490) | (4240) |
| Net cash used in financing activities | (75393) | (79231) |
| (Decrease) increase in cash and cash equivalents | (65685) | 7077 |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 119494 | 112417 |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $53809 | $119494 |

---

See accompanying notes to the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 8

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---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
|  | 2022 | 2021 |
| SUPPLEMENTAL INFORMATION |  |  |
| Cash paid during the year for: |  |  |
| Interest on deposits and borrowings | $4334 | $4408 |
| Income taxes | 3579 | 5526 |
| Noncash investing transactions: |  |  |
| Common stock issued in business acquisition | $73265 | $- |
| Transfers from loans held for sale to loans held for investment | (784) | 63 |
| Decrease (increase) in finance lease assets included in premises and equipment | 611 | (67) |
| Transfers from loans to other real estate owned | 29 |  |
| Noncash financing transactions: |  |  |
| (Decrease) increase in finance lease liabilities included in other borrowings | $(611) | $67 |

---

See accompanying notes to the consolidated financial statements.

---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
| Acquisition of Liberty | 2022 | 2021 |
| Noncash assets acquired |  |  |
| Investments | $57907 | $- |
| Loans | 312618 |  |
| Premises and equipment, net | 6087 |  |
| Accrued interest receivable | 1563 |  |
| Bank-owned life insurance | 16290 |  |
| Core deposit intangible | 6670 |  |
| Mortgage servicing rights | 1680 |  |
| Other assets | 3111 |  |
| Goodwill | 16664 |  |
| Total noncash assets acquired | 422590 |  |
| Liabilities assumed |  |  |
| Time deposits | (69278) |  |
| Deposits other than time deposits | (294684) |  |
| Accrued interest payable | (246) |  |
| Other liabilities | (3523) |  |
| Total liabilities assumed | (367731) |  |
| Liberty stock acquired in business combination | (73265) |  |
| Cash and cash equivalents acquired, net | $18406 | $- |

---

See accompanying notes to the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 9

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**MIDDLEFIELD BANC CORP.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

***1.*** **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** 

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

**<u>Nature of Operations and Basis of Presentation</u>**

Middlefield Banc Corp. (the "Company") is an Ohio corporation organized to become the holding company of The Middlefield Banking Company ("MBC"). MBC is a state-chartered bank located in Ohio, whose consolidated financial statements also include the accounts of MBC's subsidiaries, Middlefield Investments, Inc. (MI) and Middlefield Insurance Services (MIS). MI was established in the *first* quarter of *2019.* In the *first* quarter of *2022,* MBC established a wholly-owned subsidiary named MIS, headquartered in Middlefield, Ohio. This operating subsidiary exists to offer retail and business customers a variety of insurance services, including home, renters, automobile, pet, identity theft, travel, and professional liability insurance. As a result of the bank merger, Middlefield Banc Corp. acquired a 100% ownership interest in LBSI Insurance, LLC ("LBSI"), a wholly owned financial subsidiary of Liberty National Bank. LBSI is *no* longer in operation following the merger, and it is the Bank's intention to merge it with and into its own insurance subsidiary. Significant intercompany items have been eliminated in preparing MBC's consolidated financial statements. On *October 23, 2009,* the Company established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services, including interest earnings on residential real estate, commercial mortgage, commercial and consumer financings, and interest earnings on investment securities and deposit services to its customers through 22 full-service locations. The Company is supervised by the Board of Governors of the Federal Reserve System. At the same time, MBC is subject to regulation and supervision by the FDIC and the Ohio Division of Financial Institutions.

The consolidated financial statements of the Company include its wholly owned subsidiaries, MBC and EMORECO, Inc. Significant intercompany items have been eliminated in preparing the consolidated financial statements.

On *December 1, 2022,* the Company completed its merger with Liberty Bancshares, Inc. ("Liberty'), pursuant to a previously announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company's common stock in exchange for each share of Liberty common stock they owned immediately before the merger. The Company issued 2.6 million shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million. Upon closing, Liberty National Bank was merged into MBC, and its six full-service bank offices, in Ada and Kenton in Hardin County, in Bellefontaine and Bellefontaine South in Logan County, in Marysville in Union County, and in Westerville in Franklin County, became offices of MBC.

The financial statements have been prepared according to U.S. Generally Accepted Accounting Principles. In preparing the financial statements, management must make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from those estimates.

**<u>Investment and Equity Securities</u>**

Investment securities are classified at the time of purchase, based on management's intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, computed using a level yield method, and recognized as interest income adjustments. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders' equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned. For *2022* and *2021,* this category includes common stocks of public companies that the Company has the positive intent and ability to hold for an indeterminate amount of time. Such securities are reported at fair value, with unrealized holding gains and losses included in earnings.

Securities are evaluated quarterly and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other-than-temporary. For debt securities, management considers whether the present value of cash flows expected to be collected is less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Bank's intent to sell the security or whether it is more likely than *not* that the Bank would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other-than-temporary. Once a decline in value is determined to be other-than-temporary, if the Bank does *not* intend to sell the security, and it is more likely than *not* that it will *not* be required to sell the security, before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the difference between fair value and the amortized cost is charged to earnings.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *10*

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**<u>Restricted Stock</u>**

Common stock of the FHLB represents ownership in an institution that is wholly owned by other financial institutions. This equity security is accounted for at cost and classified with other assets. The FHLB of Cincinnati has reported profits for *2022* and *2021,* remains in compliance with regulatory capital and liquidity requirements and continues to pay dividends on the stock and make redemptions at the par value. Considering these factors, management concluded that the stock was *not* impaired on *December 31, 2022,* or *2021.*

**<u>Mortgage Banking Activities</u>**

The Bank sells mortgage loans on a servicing retained basis. Servicing rights are initially recorded at fair value, with the income statement effect recorded in gains on sales of loans. The Bank measures servicing assets using the amortization method. Loan servicing rights are amortized in proportion to and throughout estimated net future servicing revenue. The expected period of the estimated net servicing income is partly based on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights is included in accrued interest and other assets on the Consolidated Balance Sheet.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are *not* material. The Bank is servicing loans for others in the amount of $94.8 million and $105.9 million on *December 31, 2022,* and *2021,* respectively.

**<u>Loans</u>**

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized, when earned, on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower's financial condition is such that the collection of interest is doubtful. Interest received on nonaccrual loans is recorded as income or applied against principal according to management's judgment as to the collectability of such principal.

Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan's yield. These amounts are amortized over the contractual life of the associated loans.

**<u>Allowance for Loan and Lease Losses</u>**

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

A loan is considered impaired when it is probable the borrower will *not* repay the loan according to the original contractual terms of the loan agreement. Loans that experience insignificant payment delays, which are defined as *89* days or less, generally are *not* classified as impaired. A loan is *not* impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when a realized loss has occurred. An allowance for loan and lease losses is maintained for estimated losses until such time. Cash receipts on impaired loans are applied *first* to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the payment related to interest is used to reduce principal.

Mortgage loans secured by *one*-to-*four* family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Management determines the significance of payment delays on a case-by-case basis, considering all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall concerning the principal and interest owed.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *11*

------

**<u>Loans Acquired</u>**

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

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

**<u>Premises and Equipment</u>**

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

**<u>Leases</u>**

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

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

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

**<u>Goodwill</u>**

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

**<u>Intangible Assets</u>**

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *12*

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**<u>Bank-Owned Life Insurance (</u>**<u>"</u>**<u>BOLI</u>**<u>"</u>**<u>)</u>**

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

**<u>Other Real Estate Owned (</u>**<u>"</u>**<u>OREO</u>**<u>"</u>**<u>)</u>**

Real estate properties acquired through foreclosure are initially recorded at fair value at the foreclosure date, establishing a new cost basis. After foreclosure, management periodically performs valuations, and the real estate is carried at the lower of cost or fair value less estimated cost to sell. Revenue and expenses from operations of the properties, gains or losses on sales, and additions to the valuation allowance are included in operating results. The Company is required to disclose the carrying amount of residential real estate loans in the process of foreclosure. At *December 31, 2022* and *2021,* the Company reported $68,000 and $1.0 million, respectively, in residential real estate loans in the process of foreclosure. As of *December 31, 2022,* the Company held *one* commercial property with a carrying amount of $5.8 million and *one* residential mortgage with a carrying amount of $28,000 in OREO. As of *December 31, 2021,* the Company held *one* commercial property with a carrying amount of $7.0 million in OREO. OREO decreased from *December 31, 2021* due to $1.2 million in write-downs for the *twelve* months ended *December 31, 2022.*

**<u>Income Taxes</u>**

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.

**<u>Treasury Stock</u>**

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company's treasury shares comprises the cost of the Company's shares held by the Company. As of *December 31, 2022,* the Company had 1,671,231 of the Company's shares, which is an increase of 229,420 shares from the 1,441,811 shares held as of *December 31, 2021.*

**<u>Earnings Per Share</u>**

The Company provides a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

**<u>Stock-Based Compensation</u>**

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

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

**<u>Cash Flow Information</u>**

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

**<u>Advertising Costs</u>**

Advertising costs are expensed as incurred.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *13*

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**<u>Reclassification of Comparative Amounts</u>**

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.

**<u>Recently Issued Accounting Pronouncements</u>**

In *June 2016,* the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") *2016*-*13, Financial Instruments* – *Credit Losses: Measurement of Credit Losses on Financial Instruments*, which changes the impairment model for most financial assets. This standard, along with several other subsequent codification updates, replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses that are expected to occur over the remaining life of a financial asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model ("CECL") will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures.

Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan included drafting of additional controls and policies to govern data uploads to its *third*-party vendor, balancing and reconciling, testing and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative factor adjustments, and reasonable and supportable forecasts and reversion techniques. Parallel runs were processed during *2022* and the results were consistent with management's expectations. The implementation plan is currently going through the Company's control structure and internal control testing is being performed.

As a result of adopting this standard, the Company expects to increase its reserve through a *one*-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the *first* reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of *2016.* These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU *2016*-*13* is *not* expected to have a significant impact on our regulatory capital ratios.

At adoption, the Company did *not* have any securities classified as HTM debt securities.

In *January 2017,* the FASB issued ASU *2017*-*04, Simplifying the Test for Goodwill Impairment*. To simplify the subsequent measurement of goodwill, the FASB eliminated Step *2* from the goodwill impairment test. In computing the implied fair value of goodwill under Step *2,* an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should *not* exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after *December 15, 2022,* and interim periods within those fiscal years. This Update is *not* expected to have a significant impact on the Company's financial statements.

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *14*

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***2.*** **REVENUE RECOGNITION**

Following ASC Topic *606, Revenue from Contracts with Customers (Topic *606*)*, management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains (losses), gains on the sale of loans, and BOLI income, are *not* within the scope of ASC *606.* These revenue sources cumulatively comprise 89.6% of the total revenue of the Company.

The main types of noninterest income within the scope of the standard are as follows:

<u>Service charges on deposit accounts</u> – The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be canceled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized monthly as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific customer requests or activities that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, which is the completion of the requested service/transaction.

<u>Gains (losses) on sale of other real estate owned (</u><u>"</u><u>OREO</u><u>"</u><u>)</u> – Gains and losses are recognized after the property sale when the buyer obtains control of the real estate, and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset includes the transfer of the property title, physical possession of the asset, and the buyer securing control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, the payment terms, that the contract has an actual commercial substance, and that amounts due from the buyer are reasonable. In situations where financing terms are *not* reflective of current market terms, the transaction price is discounted, impacting the gain/loss and the carrying value of the asset. Gains and losses on the sale of OREO are reported in the Consolidated Statement of Income.

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

<u>Miscellaneous Fee income</u> – Fees earned on other services, such as ATM surcharge fees, money order fees, and check fees, are recognized at the time of the event or the applicable billing cycle.

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

---

| | | |
|:---|:---|:---|
| Noninterest Income | 2022 | 2021 |
| (Dollar amounts in thousands) |  |  |
| Service charges on deposit accounts: |  |  |
| Overdraft fees | $905 | $727 |
| ATM banking fees | 1489 | 1377 |
| Service charges and other fees | 1456 | 1321 |
| (Loss) gain on equity securities <sup>(a)</sup> | (173) | 209 |
| Gain on other real estate owned |  | 43 |
| Earnings on bank-owned life insurance <sup>(a)</sup> | 459 | 546 |
| Gain on sale of loans <sup>(a)</sup> | 24 | 1240 |
| Revenue from investment services <sup>(b)</sup> | 674 | 727 |
| Miscellaneous Fee income | 299 | 276 |
| Gross rental income | 951 | 180 |
| Other income | 662 | 603 |
| Total noninterest income | $6746 | 7249 |

---

---

| |
|:---|
| (a) *Not* within scope of ASC *606* |
| (b) From services offered by the Company through it's servicing partnership with LPL Financial |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *15*

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***3.*** **EARNINGS PER SHARE**

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

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the year ended *December 31:*

---

| | | |
|:---|:---|:---|
|  | 2022 | 2021 |
| Weighted-average common shares issued | 7551769 | 7325449 |
| Average treasury stock shares | (1524678) | (1138783) |
| Weighted-average common shares and common stock equivalents used to calculate basic earnings per share | 6027091 | 6186666 |
| Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share | 17291 | 24410 |
| Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share | 6044382 | 6211076 |

---

There were no options to purchase shares of common stock outstanding on *December 31, 2022.* Also outstanding were 63,646 shares of restricted stock, 46,355 shares of which were anti-dilutive.

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

***4.*** **INVESTMENT AND EQUITY SECURITIES** 

The amortized cost, gross gains and losses and fair values of securities available for sale are as follows:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
|  |  | Gross | Gross |  |
|  | *Amortized* | *Unrealized* | *Unrealized* | *Fair* |
| (Dollar amounts in thousands) | *Cost* | *Gains* | *Losses* | *Value* |
| Subordinated debt | $32300 | $3 | $(2139) | $30164 |
| Obligations of states and political subdivisions: |  |  |  |  |
| Taxable | 500 |  |  | 500 |
| Tax-exempt | 151896 | 49 | (25111) | 126834 |
| Mortgage-backed securities in government-sponsored entities | 8302 |  | (833) | 7469 |
| Total | $192998 | $52 | $(28083) | $164967 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *16*

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---

| | | | | |
|:---|:---|:---|:---|:---|
|  | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 |
|  |  | Gross | Gross |  |
|  | *Amortized* | *Unrealized* | *Unrealized* | *Fair* |
| (Dollar amounts in thousands) | *Cost* | *Gains* | *Losses* | *Value* |
| Subordinated debt | $32300 | $356 | $(119) | $32537 |
| Obligations of states and political subdivisions: |  |  |  |  |
| Taxable | 500 | 2 |  | 502 |
| Tax-exempt | 122877 | 4307 | (341) | 126843 |
| Mortgage-backed securities in government-sponsored entities | 10140 | 257 | (80) | 10317 |
| Total | $165817 | $4922 | $(540) | $170199 |

---

Equity securities totaled $915,000 and $818,000 on *December 31, 2022,* and *2021,* respectively, which incorporates a recognized net (loss) gain on equity investments of $(173,000) and $209,000 for the years ended *December 31, 2022,* and *2021,* respectively. No net gains were realized from sales of equity securities during these periods.

The amortized cost and fair value of debt securities on *December 31, 2022,* by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers *may* have the right to call or prepay obligations with or without call or prepayment penalties.

---

| | | |
|:---|:---|:---|
|  | Amortized | Fair |
| (Dollar amounts in thousands) | Cost | Value |
| Due in one year or less | $1125 | $1126 |
| Due after one year through five years | 3004 | 2904 |
| Due after five years through ten years | 45363 | 42881 |
| Due after ten years | 143506 | 118056 |
| Total | $192998 | $164967 |

---

Investment securities with an approximate carrying value of $89.9 million and $77.1 million on *December 31, 2022,* and *2021,* respectively, were pledged to secure deposits and other purposes as required by law.

The Company sold the entire $57.9 million investment portfolio acquired in the Liberty Bancshares merger. These securities were acquired at fair value and then sold. Therefore, there were no realized gains or losses recognized during the year ended *December 31, 2022.* There were no securities sold during the year ended *December 31, 2021.*

The following tables show the Company's gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

---

| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
|  | Less than Twelve Months | Less than Twelve Months | Twelve Months or Greater | Twelve Months or Greater | Total | Total |
|  |  | Gross |  | Gross |  | Gross |
|  | *Fair* | *Unrealized* | *Fair* | *Unrealized* | *Fair* | *Unrealized* |
| (Dollar amounts in thousands) | *Value* | *Losses* | *Value* | *Losses* | *Value* | *Losses* |
| Subordinated debt | $12638 | $(1129) | $8790 | $(1010) | $21428 | $(2139) |
| Obligations of states and political subdivisions |  |  |  |  |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Tax-exempt | 75343 | (10488) | 41138 | (14623) | 116481 | (25111) |
| Mortgage-backed securities in government-sponsored entities | 6153 | (480) | 1316 | (353) | 7469 | (833) |
| Total | $94134 | $(12097) | $51244 | $(15986) | $145378 | $(28083) |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *17*

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 |
|  | Less than Twelve Months | Less than Twelve Months | Twelve Months or Greater | Twelve Months or Greater | Total | Total |
|  |  | Gross |  | Gross |  | Gross |
|  | *Fair* | *Unrealized* | *Fair* | *Unrealized* | *Fair* | *Unrealized* |
| (Dollar amounts in thousands) | *Value* | *Losses* | *Value* | *Losses* | *Value* | *Losses* |
| Subordinated debt | $9150 | $(100) | $731 | $(19) | $9881 | $(119) |
| Obligations of states and political subdivisions |  |  |  |  |  |  |
| Tax-exempt | 24273 | (341) |  |  | 24273 | (341) |
| Mortgage-backed securities in government-sponsored entities |  |  | 1980 | (80) | 1980 | (80) |
| Total | $33423 | $(441) | $2711 | $(99) | $36134 | $(540) |

---

There were 141 securities in an unrealized loss position for less than *twelve* months and 60 securities in an unrealized loss position for *twelve* months or greater on *December 31, 2022.*

Every quarter, the Company assesses whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment ("OTTI"). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other-than-temporary. For equity securities where the fair value has been significantly below cost for *one* year, the Company's policy recognizes an impairment loss unless sufficient evidence is available that the decline is *not* other-than-temporary and a recovery period can be predicted.

The Company has asserted that on *December 31, 2022,* and *2021,* the declines outlined in the above table represent temporary declines and the Company does *not* intend to sell and does *not* believe it will be required to sell these securities before recovery of their cost basis, which *may* be at maturity. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is *not* other-than-temporary and results from interest rate changes, sector credit rating changes, or company-specific rating changes that are *not* expected to result in the non-collection of principal and interest during the period.

Debt securities issued by state and political subdivisions and mortgage-backed securities in government-sponsored entities accounted for 81.7% of the total available-for-sale portfolio as of *December 31, 2022.* No credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company evaluates credit losses quarterly. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

● The length of time and the extent to which the fair value has been less than the amortized cost basis.

● Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions.

● The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities.

● Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation, and government actions affecting the issuer's industry and actions taken by the issuer to deal with the present economic climate.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *18*

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***5.*** **LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES**

The Company's primary business activity is with loan customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with offices in Dublin, Sunbury, Powell, Plain City, Marysville, and Westerville, Ohio. The Company services loan customers in western Ohio through our offices located in Hardin and Logan counties. The Northeastern Ohio trade area includes Cuyahoga and Summit County, locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, and consumer loans are granted. Although the Company has a diversified loan portfolio on *December 31, 2022,* and *2021,* loans outstanding to individuals and businesses depend on the local economic conditions in the Company's immediate trade area.

The following tables summarize the primary segments of the loan portfolio and the allowance for loan and lease losses (in thousands):

---

| | | | | |
|:---|:---|:---|:---|:---|
| December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
| Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation |
|  | Individually | Loans acquired<br> with deteriorated<br> credit quality | Collectively | Total Loans |
| Loans: |  |  |  |  |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $5650 | $- | $186098 | $191748 |
| Non-owner occupied | 13570 | 2992 | 364018 | 380580 |
| Multifamily |  |  | 58251 | 58251 |
| Residential real estate | 1023 | 24 | 295261 | 296308 |
| Commercial and industrial | 1828 |  | 193774 | 195602 |
| Home equity lines of credit | 244 |  | 127821 | 128065 |
| Construction and other |  | 3052 | 91147 | 94199 |
| Consumer installment |  |  | 8119 | 8119 |
| Total | $22315 | $6068 | $1324489 | $1352872 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
| December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 |
| Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation | Ending Loan Balance by Impairment Evaluation |
|  | Individually | Loans acquired<br> with deteriorated<br> credit quality | Collectively | Total Loans |
| Loans: |  |  |  |  |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $731 | $- | $110739 | $111470 |
| Non-owner occupied | 5297 |  | 278321 | 283618 |
| Multifamily |  |  | 31189 | 31189 |
| Residential real estate | 1104 |  | 238985 | 240089 |
| Commercial and industrial | 587 |  | 148225 | 148812 |
| Home equity lines of credit | 250 |  | 104105 | 104355 |
| Construction and other |  |  | 54148 | 54148 |
| Consumer installment |  |  | 8010 | 8010 |
| Total | $7969 | $- | $973722 | $981691 |

---

The amounts above include net deferred loan origination fees of $2.0 million and $3.6 million on *December 31, 2022,* and *December 31, 2021,* respectively. The net deferred loan origination fees include $1,000 and $1.3 million of unearned deferred fees from PPP loans at *December 31, 2022* and *2021,* respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *19*

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| | | | | |
|:---|:---|:---|:---|:---|
| December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
| Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation |
|  | Individually<br> Evaluated for<br> Impairment | Loans acquired<br> with deteriorated<br> credit quality | Collectively<br> Evaluated for<br> Impairment | Total Allocation |
| Loans: |  |  |  |  |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $407 | $- | $1796 | $2203 |
| Non-owner occupied | 167 |  | 5430 | 5597 |
| Multifamily |  |  | 662 | 662 |
| Residential real estate | 28 |  | 2019 | 2047 |
| Commercial and industrial | 39 |  | 1444 | 1483 |
| Home equity lines of credit | 48 |  | 1705 | 1753 |
| Construction and other |  |  | 609 | 609 |
| Consumer installment |  |  | 84 | 84 |
| Total | $689 | $- | $13749 | $14438 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
| December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 |
| Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation | Ending Allowance Balance by Impairment Evaluation |
|  | Individually<br> Evaluated for<br> Impairment | Loans acquired<br> with deteriorated<br> credit quality | Collectively<br> Evaluated for<br> Impairment | Total Allocation |
| Loans: |  |  |  |  |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $10 | $- | $1826 | $1836 |
| Non-owner occupied | 655 |  | 6776 | 7431 |
| Multifamily |  |  | 454 | 454 |
| Residential real estate | 17 |  | 1723 | 1740 |
| Commercial and industrial | 42 |  | 840 | 882 |
| Home equity lines of credit | 16 |  | 1436 | 1452 |
| Construction and other |  |  | 533 | 533 |
| Consumer installment |  |  | 14 | 14 |
| Total | $740 | $- | $13602 | $14342 |

---

As a result of the Liberty merger, the Company acquired loans with deteriorated credit quality with an unpaid principal balance of $8.0 million and an estimated fair value of $6.1 million. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will *not* impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

The Company's loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate ("CRE") which is further segmented into Owner Occupied ("CRE OO"), Non-owner Occupied ("CRE NOO"), and Multifamily, Residential Real Estate ("RRE"), Commercial and Industrial ("C&I"), Home Equity Lines of Credit ("HELOC"), Construction and Other ("Construction"), and Consumer Installment Loans. The commercial real estate loan segments consist of loans made to finance the activities of commercial real estate owners and operators and certain agricultural loans. The residential real estate and HELOC loan segments consist of loans made to finance the activities of residential homeowners. The C&I loan segment consists of loans made to finance the activities of commercial customers and certain agricultural loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates individual loans in all commercial segments for possible impairment based on guidelines established by the Board of Directors. Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall concerning the principal and interest owed. The Company does *not* separately evaluate individual consumer and residential mortgage loans for impairment unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *20*

------

Once the determination has been made that a loan is impaired, the decision of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using *one* of *three* methods: (a) the present value of expected future cash flows discounted at the loan's effective interest rate; (b) the loan's observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis. The evaluation of the need and amount of a specific allowance allocation and whether a loan can be removed from impairment status is made quarterly. The Company's policy for recognizing interest income on impaired loans does *not* differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was *not* necessary (in thousands):

---

| | | | |
|:---|:---|:---|:---|
| December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
| Impaired Loans | Impaired Loans | Impaired Loans | Impaired Loans |
|  |  | Unpaid |  |
|  | *Recorded* | *Principal* | *Related* |
|  | *Investment* | *Balance* | *Allowance* |
| With no related allowance recorded: |  |  |  |
| Commercial real estate: |  |  |  |
| Owner occupied | $4141 | $4141 | $*-* |
| Non-owner occupied | 1042 | 1042 | *-* |
| Residential real estate | 706 | 770 | *-* |
| Commercial and industrial | 450 | 547 | *-* |
| Home equity lines of credit | 112 | 112 | *-* |
| Total | $6451 | $6612 | $*-* |
| With an allowance recorded: |  |  |  |
| Commercial real estate: |  |  |  |
| Owner occupied | $1509 | $1509 | $407 |
| Non-owner occupied | 12528 | 12528 | 167 |
| Residential real estate | 317 | 317 | 28 |
| Commercial and industrial | 1378 | 1378 | 39 |
| Home equity lines of credit | 132 | 132 | 48 |
| Total | $15864 | $15864 | $689 |
| Total: |  |  |  |
| Commercial real estate: |  |  |  |
| Owner occupied | $5650 | $5650 | $407 |
| Non-owner occupied | 13570 | 13570 | 167 |
| Residential real estate | 1023 | 1087 | 28 |
| Commercial and industrial | 1828 | 1925 | 39 |
| Home equity lines of credit | 244 | 244 | 48 |
| Total | $22315 | $22476 | $689 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *21*

------

---

| | | | |
|:---|:---|:---|:---|
| December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 |
| Impaired Loans | Impaired Loans | Impaired Loans | Impaired Loans |
|  |  | Unpaid |  |
|  | *Recorded* | *Principal* | *Related* |
|  | *Investment* | *Balance* | *Allowance* |
| With no related allowance recorded: |  |  |  |
| Commercial real estate: |  |  |  |
| Non-owner occupied | $1547 | $1802 | $*-* |
| Residential real estate | 820 | 874 | *-* |
| Commercial and industrial | 370 | 538 | *-* |
| Home equity lines of credit | 7 | 7 | *-* |
| Total | $2744 | $3221 | $*-* |
| With an allowance recorded: |  |  |  |
| Commercial real estate: |  |  |  |
| Owner occupied | $731 | $731 | $*10* |
| Non-owner occupied | 3750 | 4277 | 655 |
| Residential real estate | 284 | 284 | 17 |
| Commercial and industrial | 217 | 230 | 42 |
| Home equity lines of credit | 243 | 243 | 16 |
| Total | $5225 | $5765 | $740 |
| Total: |  |  |  |
| Commercial real estate: |  |  |  |
| Owner occupied | $731 | $731 | $10 |
| Non-owner occupied | 5297 | 6079 | 655 |
| Residential real estate | 1104 | 1158 | 17 |
| Commercial and industrial | 587 | 768 | 42 |
| Home equity lines of credit | 250 | 250 | 16 |
| Total | $7969 | $8986 | $740 |

---

The tables above include troubled debt restructurings totaling $3.3 million and $2.6 million as of *December 31, 2022,* and *2021,* respectively. The amounts allocated within the allowance for losses for troubled debt restructurings were $72,000 and $150,000 on *December 31 2022* and *2021,* respectively.

The carrying value of the loans acquired and accounted for in accordance with ASC *310*-*30,* was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Liberty merger as of *December 1, 2022:*

---

| | |
|:---|:---|
| *(In Thousands)* | December 1, 2022 |
| Unpaid principal balance | $7919 |
| Interest | 2978 |
| Contractual cash flows | 10897 |
| Non-accretable premium | 117 |
| Expected cash flows | 11014 |
| Accretable discount | (4995) |
| Estimated fair value | 6019 |

---

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC *310*-*30:*

---

| | | |
|:---|:---|:---|
| *(In Thousands)* | December 1, 2022 | December 31, 2022 |
| Outstanding balance | $7919 | $7998 |
| Carrying amount | 6019 | 6068 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *22*

------

Changes in the amortizable yield for purchased credit-impaired loans were as follows for the year ended *December 31, 2022:*

---

| | |
|:---|:---|
| *(In Thousands)* | December 31, 2022 |
| Balance at beginning of period | $- |
| Additions | 1900 |
| Accretion | 30 |
| Balance at end of period | 1930 |

---

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

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | As of December 31, 2022 | As of December 31, 2022 | As of December 31, 2021 | As of December 31, 2021 |
|  | Average<br> Recorded<br> Investment | Interest<br> Income<br> Recognized | Average<br> Recorded<br> Investment | Interest<br> Income<br> Recognized |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $2637 | $231 | $1334 | $53 |
| Non-owner occupied | 8671 | 646 | 5023 | 262 |
| Residential real estate | 998 | 46 | 1208 | 56 |
| Commercial and industrial | 1331 | 145 | 763 | 62 |
| Home equity lines of credit | 247 | 12 | 245 | 12 |
| Total | $13884 | $1080 | $8573 | $445 |

---

Troubled Debt Restructuring ("TDR") describes loans on which the bank has granted concessions for reasons related to the customer's financial difficulties. Such concessions *may* include *one* or more of the following:

● reduction in the interest rate to below-market rates

● extension of repayment requirements beyond standard terms

● reduction of the principal amount owed

● reduction of accrued interest due

● acceptance of other assets in full or partial payment of a debt

In each case, the concession is made due to deterioration in the borrower's financial condition, and the new terms are less stringent than those required on a new loan with similar risk.

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

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
|  | Number of Contracts | Number of Contracts | Number of Contracts | Pre-Modification | Post-Modification |
|  | Term |  |  | &nbsp;&nbsp;&nbsp;&nbsp;Outstanding Recorded | &nbsp;&nbsp;&nbsp;&nbsp;Outstanding Recorded |
| Troubled Debt Restructurings | &nbsp;&nbsp;&nbsp;&nbsp;Modification | Other | Total | &nbsp;&nbsp;&nbsp;&nbsp;Investment | &nbsp;&nbsp;&nbsp;&nbsp;Investment |
| Commercial and industrial | 3 |  | 3 | $1252 | $1252 |
|  |  |  |  | $1252 | $1252 |

---

---

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

---

There were *no* subsequent defaults of troubled debt restructurings for the years ended *December 31, 2022,* or *2021.*

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *23*

------

Management uses a *nine*-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The *first five* categories are considered *not* criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in undue and unwarranted credit risk, but *not* to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are *not* corrected. All loans greater than *90* days past due are considered Substandard or Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect borrowers' present and future capacity to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event. The Company's Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $750,000 or greater. Confirmation of the appropriate risk grade is included in the ongoing review. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Detailed reviews, including resolutions plans, are performed on loans classified as Substandard every quarter. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in determining the allowance.

The following tables present the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized categories of Special Mention, Substandard, and Doubtful within the internal risk rating system (in thousands):

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  |  | Special |  |  | Total |
| December 31, 2022 | Pass | Mention | Substandard | Doubtful | Loans |
| Commercial real estate: |  |  |  |  |  |
| Owner occupied | $176400 | $6873 | $8475 | $- | $191748 |
| Non-owner occupied | 331584 | 6387 | 42609 |  | 380580 |
| Multifamily | 58251 |  |  |  | 58251 |
| Residential real estate | 294254 |  | 2054 |  | 296308 |
| Commercial and industrial | 185674 | 7936 | 1992 |  | 195602 |
| Home equity lines of credit | 127080 |  | 985 |  | 128065 |
| Construction and other | 90728 | 308 | 3163 |  | 94199 |
| Consumer installment | 8117 |  | 2 |  | 8119 |
| Total | $1272088 | $21504 | $59280 | $- | $1352872 |

---

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  |  | Special |  |  | Total |
| December 31, 2021 | Pass | Mention | Substandard | Doubtful | Loans |
| Commercial real estate: |  |  |  |  |  |
| Owner occupied | $104217 | $2400 | $4853 | $- | $111470 |
| Non-owner occupied | 230672 | 3038 | 49908 |  | 283618 |
| Multifamily | 31189 |  |  |  | 31189 |
| Residential real estate | 237132 |  | 2957 |  | 240089 |
| Commercial and industrial | 143911 | 2748 | 2153 |  | 148812 |
| Home equity lines of credit | 103296 |  | 1059 |  | 104355 |
| Construction and other | 53807 | 341 |  |  | 54148 |
| Consumer installment | 8005 |  | 5 |  | 8010 |
| Total | $912229 | $8527 | $60935 | $- | $981691 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *24*

------

Management further monitors the loan portfolio's performance and credit quality by analyzing the portfolio's age as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of loans (in thousands):

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  | Purchase |  |
|  |  | *30-59 Days* | *60-89 Days* | *90 Days+* | *Total* | *Credit* | *Total* |
| December 31, 2022 | *Current* | *Past Due* | *Past Due* | *Past Due* | *Past Due* | *Impaired Loans* | *Loans* |
| Commercial real estate: |  |  |  |  |  |  |  |
| Owner occupied | $191748 | $- | $- | $- | $- | $- | 191748 |
| Non-owner occupied | 380467 | 113 |  |  | 113 | 2992 | 380580 |
| Multifamily | 58251 |  |  |  |  |  | 58251 |
| Residential real estate | 293698 | 2093 | 111 | 406 | 2610 | 24 | 296308 |
| Commercial and industrial | 195532 | 62 | 4 | 4 | 70 |  | 195602 |
| Home equity lines of credit | 127494 | 415 | 145 | 11 | 571 |  | 128065 |
| Construction and other | 93997 | 202 |  |  | 202 | 3052 | 94199 |
| Consumer installment | 8096 | 23 |  |  | 23 |  | 8119 |
| Total | $1349283 | $2908 | $260 | $421 | $3589 | $6068 | 1352872 |

---

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  |  |  |  | Purchase |  |
|  |  | *30-59 Days* | *60-89 Days* | *90 Days+* | *Total* | *Credit* | *Total* |
| December 31, 2021 | *Current* | *Past Due* | *Past Due* | *Past Due* | *Past Due* | *Impaired Loans* | *Loans* |
| Commercial real estate: |  |  |  |  |  |  |  |
| Owner occupied | $111257 | $81 | $132 | $- | $213 | $- | 111470 |
| Non-owner occupied | 282365 | 880 |  | 373 | 1253 |  | 283618 |
| Multifamily | 31189 |  |  |  |  |  | 31189 |
| Residential real estate | 238483 | 1187 |  | 419 | 1606 |  | 240089 |
| Commercial and industrial | 148437 | 112 |  | 263 | 375 |  | 148812 |
| Home equity lines of credit | 104316 |  | 39 |  | 39 |  | 104355 |
| Construction and other | 54148 |  |  |  |  |  | 54148 |
| Consumer installment | 7799 | 16 | 19 | 176 | 211 |  | 8010 |
| Total | $977994 | $2276 | $190 | $1231 | $3697 | $- | 981691 |

---

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

---

| | | |
|:---|:---|:---|
|  |  | 90+ Days Past |
| December 31, 2022 | Nonaccrual | Due and Accruing |
| Commercial real estate: |  |  |
| Owner occupied | $69 | $- |
| Residential real estate | 1431 |  |
| Commercial and industrial | 186 |  |
| Home equity lines of credit | 191 |  |
| Construction and other | 68 |  |
| Consumer installment | 166 |  |
| Total | $2111 | $- |

---

---

| | | |
|:---|:---|:---|
|  |  | 90+ Days Past |
| December 31, 2021 | Nonaccrual | Due and Accruing |
| Commercial real estate: |  |  |
| Owner occupied | $81 | $- |
| Non-owner occupied | 2442 |  |
| Residential real estate | 1577 |  |
| Commercial and industrial | 456 |  |
| Home equity lines of credit | 121 |  |
| Consumer installment | 182 |  |
| Total | $4859 | $- |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *25*

------

There were no loans past due *90* days or more and still accruing interest on *December 31, 2022* or *2021.* Interest income that would have been recorded had these loans *not* been placed on nonaccrual status was $125,000 in *2022* and $204,000 in *2021.*

An allowance for loan and lease losses ("ALLL") is maintained to absorb losses from the loan portfolio. The ALLL is based on management's continuing evaluation of the loan portfolio's risk characteristics and credit quality, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company's methodology for determining the ALLL is based on the requirements of ASC Section *310*-*10*-*35* for loans individually evaluated for impairment (discussed above) and ASC Subtopic *450*-*20* for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the *two* components represents the Company's ALLL. Management also performs impairment analysis on TDRs, resulting in specific reserves. Loans that are collectively evaluated for impairment are analyzed, with general allowances being made as appropriate. For general allowances, historical loss trends are used to estimate losses in the current portfolio. Other qualitative factors modify these historical loss amounts.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the purpose code level. Then, a historical charge-off factor is calculated utilizing the last *twelve* consecutive historical quarters.

Management has identified several additional qualitative factors to supplement the historical charge-off factor. These factors likely cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are:

● national and local economic trends and conditions;

● levels of and trends in delinquency rates and nonaccrual loans;

● trends in volumes and terms of loans;

● effects of changes in lending policies;

● experience, ability, and depth of lending staff;

● value of underlying collateral;

● and concentrations of credit from a loan type, industry, and/or geographic standpoint.

Management reviews the loan portfolio every quarter using a defined, consistently applied process to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following tables summarize the ALLL within the primary segments of the loan portfolio and the activity within those segments (in thousands):

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses |
|  | Balance |  |  |  | Balance |
|  | December 31, 2021 | Charge-offs | Recoveries | Provision | December 31, 2022 |
| Loans: |  |  |  |  |  |
| Commercial real estate: |  |  |  |  |  |
| Owner occupied | $1836 | $- | $5 | $362 | $2203 |
| Non-owner occupied | 7431 | (150) | 23 | (1707) | 5597 |
| Multifamily | 454 |  |  | 208 | 662 |
| Residential real estate | 1740 |  | 61 | 246 | 2047 |
| Commercial and industrial | 882 | (40) | 312 | 329 | 1483 |
| Home equity lines of credit | 1452 | (25) |  | 326 | 1753 |
| Construction and other | 533 |  |  | 76 | 609 |
| Consumer installment | 14 | (231) | 141 | 160 | 84 |
| Total | $14342 | $(446) | $542 | $- | $14438 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *26*

------

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses |
|  | Balance |  |  |  | Balance |
|  | December 31, 2020 | Charge-offs | Recoveries | Provision | December 31, 2021 |
| Loans: |  |  |  |  |  |
| Commercial real estate: |  |  |  |  |  |
| Owner occupied | $1342 | $- | $45 | $449 | $1836 |
| Non-owner occupied | 6817 | (313) | 138 | 789 | 7431 |
| Multifamily | 461 |  |  | (7) | 454 |
| Residential real estate | 1683 | (27) | 27 | 57 | 1740 |
| Commercial and industrial | 1353 | (1) | 194 | (664) | 882 |
| Home equity lines of credit | 1405 |  | 56 | (9) | 1452 |
| Construction and other | 378 |  | 46 | 109 | 533 |
| Consumer installment | 20 | (124) | 142 | (24) | 14 |
| Total | $13459 | $(465) | $648 | $700 | $14342 |

---

The provision fluctuations during the year ended *December 31, 2022,* allocated to:

● non-owner occupied commercial loans due to a decrease in substandard credits.

● owner occupied commercial loans due to an increase in loans, coupled with an increase in the specific reserve on impaired loans.

● commercial and industrial loans, residential real estate loans, and multifamily loans are due to an increase in loans

● home equity lines of credit and residential loans are due to an increase in loans, coupled with an increase in the specific reserve on impaired loans.

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

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

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

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

***6.*** **PREMISES AND EQUIPMENT** 

Major classifications of premises and equipment at *December 31:*

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Land and land improvements | $4896 | $2963 |
| Building and leasehold improvements | 20537 | 16531 |
| Furniture, fixtures, and equipment | 9485 | 9596 |
| Financing right-of-use assets | 3703 | 4491 |
| Total premises and equipment | 38621 | 33581 |
| Less accumulated depreciation and amortization | 16660 | 16309 |
| Total premises and equipment, net | $21961 | $17272 |

---

Depreciation expense charged to operations was $1.3 million in *2022* and $1.4 million in *2021.*

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *27*

------

***7.*** **GOODWILL AND INTANGIBLE ASSETS**

Goodwill totaled $31.7 million and $15.1 million for the years ended *December 31, 2022* and *2021,* respectively. Core deposit intangible carrying amount was $7.7 million and $1.4 million for the years ended *December 31, 2022,* and *2021,* respectively. Core deposit accumulated amortization was $2.1 million and $1.7 million for the years ended *December 31, 2022,* and *2021.* Amortization expense totaled $372,000 and $321,000 in *2022* and *2021,* respectively.

Core deposit intangible assets are amortized to their estimated residual values over their expected useful lives, commonly ten years. The estimated aggregate future amortization expense for core deposit intangible assets as of *December 31, 2022,* is as follows:

---

| | |
|:---|:---|
| (Dollar amounts in thousands) | (Dollar amounts in thousands) |
| Remaining 2023 | $1059 |
| 2024 | 1031 |
| 2025 | 998 |
| 2026 | 968 |
| 2027 | 691 |
| Thereafter | 2954 |
| Total | $7701 |

---

Activity for mortgage servicing rights ("MSR"s) follows:

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Beginning of year | $542 | $476 |
| Purchases <sup>(1)</sup> | 1680 |  |
| Additions | 19 | 257 |
| Amortized to expense | (169) | (191) |
| End of year | $2072 | $542 |

---

<sup>(*1*)</sup> This reflects the fair value of the mortgage servicing rights acquired in the merger.

***8.*** **ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS** 

The components of accrued interest receivable and other assets at the years ended *December 31:*

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Restricted stock | $5777 | $4399 |
| Accrued interest receivable on investment securities | 1571 | 1312 |
| Accrued interest receivable on loans | 4333 | 2820 |
| Deferred tax asset, net | 9454 | 1693 |
| Operating right-of-use assets | 717 | 872 |
| Other | 6676 | 3201 |
| Total | $28528 | $14297 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *28*

------

***9.*** **DEPOSITS** 

Time deposits that meet or exceed the FDIC Insurance limit of *$250,000* as of *December 31, 2022,* and *2021* were $50.9 million and $33.4 million, respectively.

Scheduled maturities of all time deposits as of *December 31, 2022,* are as follows:

---

| | |
|:---|:---|
| (Dollar amounts in thousands) |  |
| 2023 | $136767.0 |
| 2024 | 85780.0 |
| 2025 | 6665.0 |
| 2026 | 5331.0 |
| 2027 | 3477.0 |
| Total | $238020.0 |

---

Scheduled maturities of time deposits that meet or exceed the FDIC Insurance limit of *$250,000* as of *December 31, 2022,* are as follows:

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | Amount | Percent of Total |
| Within three months | $9807 | 19.26% |
| Beyond three but within six months | 5094 | 10.00% |
| Beyond six but within twelve months | 11166 | 21.93% |
| Beyond one year | 24850 | 48.81% |
| Total | $50917 | 100.00% |

---

Deposits of related parties amounted to $24.1 million and $29.2 million as of *December 31, 2022* and *2021,* respectively.

***10.*** **SHORT-TERM BORROWINGS**

For the year ended *December 31,* outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase and short-term borrowings from other banks, are summarized as follows:

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Balance at year-end | $65000 | $- |
| Average balance outstanding | 8576 | 85 |
| Maximum month-end balance | 80000 |  |
| Weighted-average rate at year-end | 4.38% | *N/A* |
| Weighted-average rate during the year | 3.58% | 0.40% |

---

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

The Company maintains a $6.0 million line of credit and a $10.0 million line of credit. Both lines of credit have adjustable rates based on the time of borrowing. On *December 31, 2022,* and *2021,* there were no outstanding borrowings under these lines of credit. The additional borrowing capacity on FHLB advances was $380.8 million and $417.4 million on *December 31, 2022,* and *2021,* respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *29*

------

***11.*** **OTHER BORROWINGS**

Other borrowings consist of advances from the FHLB and subordinated debt as follows:

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  |  |  | Weighted- | Stated interest | Stated interest |  |  |
| (Dollar amounts in thousands) | *Maturity range* | *Maturity range* | *average* | *rate range* | *rate range* |  |  |
| Description | *from* | *to* | *interest rate* | *from* | *to* | *2022* | *2021* |
| Finance lease liabilities | 10/30/34 | 11/30/41 | 3.01% | 2.50% | 3.51% | $3811 | $4653 |
| Junior subordinated debt | 12/21/37 | 12/21/37 | 3.25% | 4.45% | 4.45% | 8248 | 8248 |
| Total |  |  |  |  |  | $12059 | $12901 |

---

The scheduled maturities of other borrowings are as follows:

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) |  |  |
|  |  | Weighted- |
| Year Ending December 31, | Amount | Average Rate |
| 2023 | $196 | 3.01% |
| 2024 | 202 | 3.01% |
| 2025 | 214 | 3.01% |
| 2026 | 227 | 3.01% |
| 2027 | 234 | 3.01% |
| Beyond 2025 | 10986 | 4.79% |
| Total | $12059 | 4.74% |

---

Under the terms of a blanket agreement, FHLB borrowings are secured by certain qualifying assets of the Company, which consist principally of *first* mortgage loans or mortgage-backed securities. Under this credit arrangement, the Company had an available borrowing capacity of approximately $380.8 million on *December 31, 2022.*

The Bank has a $64.0 million irrevocable Standby Letter of Credit Agreement with the FHLB outstanding at *December 31, 2022.* This letter of credit is issued to secure municipal deposit accounts as required by law. The amount of funds available from the FHLB to the Bank is reduced by any letters of credit outstanding.

The Company formed a special purpose entity ("Entity") to issue $8.0 million of floating rate, obligated mandatorily redeemable securities, and $248,000 in common securities as part of a pooled offering. The rate adjusts quarterly, equal to LIBOR plus 1.67%. The Entity *may* redeem them at face value in whole or in part. The Company borrowed the issuance proceeds from the Entity in *December 2006* in the form of an $8.3 million note payable, which matures in *December 2037,* and is included in the other borrowings on the Company's Consolidated Balance Sheet.

As of *December 31, 2022,* the Company had finance lease liabilities of $3.8 million on the Consolidated Balance Sheet. See Note *15* of the financial statements for more information.

***12.*** **ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES** 

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

---

| | | |
|:---|:---|:---|
|  | 2022 | 2021 |
| (Dollar amounts in thousands) |  |  |
| Accrued interest payable | $878 | $237 |
| Accrued directors' benefits | 4440 | 2247 |
| Accrued salary and benefits expense | 1942 | 1631 |
| Operating lease liabilities | 723 | 878 |
| Other | 2930 | 1167 |
| Total | $10913 | $6160 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *30*

------

***13.*** **INCOME TAXES** 

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

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Current payable | $3544 | $4466 |
| Deferred | (324) | (401) |
| Total provision | $3220 | $4065 |

---

The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows at *December 31:*

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Deferred tax assets: |  |  |
| Allowance for loan and lease losses | $2921 | $3012 |
| Supplemental retirement plan | 932 | 608 |
| Investment security basis adjustment | 18 | 18 |
| Nonaccrual interest income | 319 | 350 |
| Accrued compensation | 328 | 293 |
| Deferred origination fees, net | 26 |  |
| Net unrealized loss on AFS securities | 5886 |  |
| Lease liability | 952 | 1161 |
| Acquisition fair value adjustments | 728 |  |
| Net operating losses | 366 |  |
| Other | 252 |  |
| Gross deferred tax assets | 12728 | 5442 |
| Deferred tax liabilities: |  |  |
| Premises and equipment | 1123 | 632 |
| Net unrealized gain on AFS securities |  | 920 |
| Net unrealized gain on equity securities | 48 | 85 |
| FHLB stock dividends | 242 | 139 |
| Intangibles | 474 | 450 |
| Mortgage servicing rights | 435 | 114 |
| Deferred origination fees, net |  | 34 |
| Acquisition fair value adjustments |  | 249 |
| Right of use assets | 928 | 1126 |
| Other | 24 |  |
| Gross deferred tax liabilities | 3274 | 3749 |
| Net deferred tax assets | $9454 | $1693 |

---

No valuation allowance was established on *December 31, 2022,* and *2021,* in view of the Company's tax strategies, coupled with the anticipated future taxable income as evidenced by the Company's earnings potential.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *31*

------

The reconciliation between the federal statutory rate and the Company's effective consolidated income tax rate for the years ended *December 31,* is as follows:

---

| | | | | |
|:---|:---|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2022 | 2021 | 2021 |
|  |  | % of |  | % of |
|  |  | Pretax |  | Pretax |
|  | Amount | Income | Amount | Income |
| Provision at statutory rate | $3967 | 21.0% | $4766 | 21.0% |
| Tax-exempt income | (893) | (4.7)% | (703) | (3.1)% |
| Nondeductible interest expense | 5 | -% |  | -% |
| Nondeductible acquisition expense | 175 | 0.9% |  | -% |
| Other | (34) | (0.2)% | 2 | -% |
| Actual tax expense and effective rate | $3220 | 17.0% | $4065 | 17.9% |

---

ASC *740*-*10* prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than *not* that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-*not* recognition threshold is measured at the largest amount of benefit that is greater than *50* percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-*not* recognition threshold should be recognized in the *first* subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that *no* longer meet the more-likely-than-*not* recognition threshold should be derecognized in the *first* subsequent financial reporting period in which that threshold is *no* longer met.

At *December 31, 2022* and *2021,* the Company had no ASC *740*-*10* unrecognized tax benefits. The Company does *not* expect the total amount of unrecognized tax benefits to significantly increase within the next *12* months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.

The Company and the Bank are subject to U.S. federal income tax as well as an income tax in the states of Ohio and Florida, and the Bank is subject to a capital-based franchise tax in the state of Ohio. The Company and the Bank are *no* longer subject to examination by taxing authorities for years before *2019.*

***14.*** **EMPLOYEE BENEFITS**

**<u>Employee Retirement Plan</u>**

The Bank maintains section *401*(k) employee savings and investment plans for all full-time employees and officers of the Bank who are at least *21* years of age. The Bank's contributions to the plans are discretionary and were based on 66% matching of voluntary contributions up to 6% of compensation for the years ended *December 31, 2022.* The Bank's contributions to the plans are discretionary and were based on 50% matching of voluntary contributions up to 6% of compensation for the years ended *December 31, 2021.* Employee contributions are vested at all times, and MBC contributions are fully vested after six years beginning at the *second* year in 20% increments. Prior service by Liberty employees who become Middlefield employees is reviewed for purposes of eligibility, vesting and, contribution allocations. Contributions for *2022* and *2021* to these plans amounted to $427,000 and $347,000, respectively.

**<u>Executive Deferred Compensation Plans</u>**

The Company maintains executive deferred compensation plans to provide post-retirement payments to members of senior management. The plan agreements are noncontributory, defined contribution arrangements that provide supplemental retirement income benefits to several officers, with contributions made solely by the Bank. Accrued executive deferred compensation amounted to $3.7 million and $1.9 million as of *December 31, 2022,* and *2021,* respectively. In addition, during *2022* and *2021,* the Company recognized nonqualified deferred compensation expense of $164,000 and $264,000, respectively, to the plans.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *32*

------

**<u>Stock Option and Restricted Stock Plan</u>**

In *2007,* the Company adopted the *2007* Omnibus Equity Plan (the *"2007* Plan") for granting incentive stock options, nonqualified stock options, and restricted stock to key officers and employees and nonemployee directors. Three hundred twenty thousand shares of common stock were reserved for issuance under the *2007* Plan, which expired ten years from the date of board approval of the plan. No remaining shares are outstanding in incentive stock options awards granted under the *2007* Plan. The per-share exercise price of an option granted is *not* less than the fair value of a share of common stock on the date the option was granted.

In *2017,* the Company adopted the *2017* Omnibus Equity Plan (the *"2017* Plan") for granting incentive stock options, nonqualified stock options, restricted stock, and other equity awards to key officers and employees and nonemployee directors of the Company. The Company's stockholders approved the *2017* Plan at the annual meeting of the stockholders held on *May 10, 2017.* A total of 448,000 shares of authorized and unissued or issued common stock are reserved for issuance under the *2017* Plan, which expires ten years from the date of board approval of the plan. The per-share exercise price of an option granted will *not* be less than the fair value of a share of common stock on the date the option is granted. The remaining available shares that can be issued under the *2017* Plan were 390,839 on *December 31, 2022.*

There was no stock option activity during the *twelve* months ended *December 31, 2022.*

The following table presents share data related to stock option activity during *2021:*

---

| | | |
|:---|:---|:---|
|  | Shares | Weighted-<br> average Exercise<br> Price Per Share |
| Outstanding, January 1, 2021 | 12150 | $8.78 |
| Exercised | (12150) | 8.78 |
| Outstanding, December 31, 2021 |  | $- |
| Exercisable, December 31, 2021 |  | $- |

---

For the year ended *December 31, 2021,* 12,150 options were exercised, resulting in net proceeds to the participant of $21,000.

During *2022* and *2021,* the Compensation Committee of the Company's Board of Directors granted awards of restricted stock for an aggregate amount of 25,414 and 29,193 shares, respectively, to certain employees of the Bank. The expense recognized for all outstanding awards was $307,000 and $478,000 for the years ended *2022* and *2021,* respectively. The number of restricted stock shares earned or settled will depend on specific conditions and are also subject to service period-based vesting. The award recipient must maintain service with Middlefield Banc Corp. and its affiliates until the *third* anniversary of the award to satisfy the service condition. In addition, the market condition will be met if the average total shareholder annual return ("TSR") on Middlefield Banc Corp. stock for the *three* subsequent years meets target for *2021* and *2022.* The target TSR is 10%, capped at 125% of target, and reduced proportionally between 0% and 10%.

The liability for these accrued officer benefits was $693,000 and $979,000 for the years ended *December 31, 2022,* and *December 31, 2021,* respectively.

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

The following table presents the activity during *2022* related to awards of restricted stock:

---

| | | |
|:---|:---|:---|
|  | Units | Weighted-<br> average Grant<br> Date Fair Value<br> Per Unit |
| Nonvested at January 1, 2022 | 76933 | $23.01 |
| Granted | 25414 | 24.80 |
| Vested | (25263) | 20.95 |
| Forfeited | (13438) |  |
| Nonvested at December 31, 2022 | 63646 | $24.34 |
| Expected to vest at December 31, 2022 | 47236 | $23.97 |

---

As of *December 31, 2022,* there was $533,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the *2017* Plan. The cost is expected to be recognized over a weighted-average period of 1.92 years. The total fair value of shares vested during the years ended *December 31, 2022,* and *2021* was $529,000 and $447,000, respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *33*

------

***15.*** **COMMITMENTS** 

In the ordinary course of business, various outstanding commitments and certain contingent liabilities are *not* reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments reflect the extent of involvement in particular types of financial instruments, which were composed of the following on *December 31:*

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | 2022 | 2021 |
| Commitments to extend credit | $443364 | $280379 |
| Standby letters of credit | 869 | 586 |
| Total | $444233 | $280965 |

---

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

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

**<u>Leasing Commitments</u>**

The Company leases six of its branch locations and one loan production office. As of *December 31, 2022,* net assets recorded under leases amounted to $4.4 million and have remaining lease terms of 4 years to 19 years. As of *December 31, 2022,* finance lease assets included in premises and equipment, net, totaled $3.7 million, and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled $717,000. As of *December 31, 2022,* finance lease obligations included in other borrowings totaled $3.8 million, and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled $723,000.

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

---

| | | |
|:---|:---|:---|
|  | 2022 | 2021 |
| Lease Costs: |  |  |
| Finance lease cost: |  |  |
| Amortization of right-of-use asset | $176 | $313 |
| Interest Expense | 116 | 130 |
| Other | 30 | 63 |
| Operating lease cost | 206 | 225 |
| Total lease cost | $528 | $731 |

---

The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of *December 31, 2022:*

---

| | | |
|:---|:---|:---|
|  | Operating | Finance |
| Weighted-average term (years) | 5.0 | 15.6 |
| Weighted-average discount rate | 1.9% | 3.0% |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *34*

------

The following table displays the undiscounted cash flows due related to operating and finance leases as of *December 31, 2022,* along with a reconciliation to the discounted amount recorded on the *December 31, 2022* balance sheet:

---

| | | |
|:---|:---|:---|
|  | Operating | Finance |
| Undiscounted cash flows due within: |  |  |
| 2023 | $169 | $308 |
| 2024 | 169 | 308 |
| 2025 | 169 | 314 |
| 2026 | 134 | 320 |
| 2027 | 27 | 320 |
| 2028 and thereafter | 95 | 3207 |
| Total undiscounted cash flows | 763 | 4777 |
| Impact of present value discount | (40) | (966) |
| Amount reported on balance sheet | $723 | $3811 |

---

***16.*** **REGULATORY RESTRICTIONS** 

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank is subject to regulations of the FDIC and the State of Ohio, Division of Financial Institutions.

**<u>Cash Requirements</u>**

The Federal Reserve Bank of Cleveland requires the Company to maintain certain average reserve balances. The reserves requirement was reduced to zero as of *December 31, 2022,* and *2021.*

**<u>Loans</u>**

Federal law prevents the Company from borrowing from the Bank unless specific obligations secure the loans. Further, such a secured loan is limited to 10% of the Bank's common stock and capital surplus.

**<u>Dividends</u>**

MBC is subject to dividend restrictions that generally limit the amount of dividends that an Ohio state-chartered bank can pay. Under the Ohio Banking Code, cash dividends *may not* exceed net profits as defined for that year combined with retained net profits for the *two* preceding years less any required transfers to surplus. Under this formula, the amount available for payment of dividends for *2023* approximates $7.0 million, plus *2023* profits retained up to the dividend declaration date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *35*

------

***17.*** **REGULATORY CAPITAL** 

The Bank and Company are subject to regulatory capital requirements administered by banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and regulators can lower classifications in some instances. As a result, failure to meet various capital requirements can initiate regulatory action that could directly affect the financial statements. As of *December 31, 2022,* the Bank and Company have met all capital adequacy requirements to which they are subject.

The prompt corrective action regulations provide *five* classifications: well-capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized. However, these terms are *not* used to represent the overall financial condition. If an institution is adequately capitalized, regulatory approval is required before the institution *may* accept brokered deposits. If an institution is under capitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier *1* capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following tables present actual and required capital ratios as of *December 31, 2022,* and *2021* under the Basel III Capital Rules. Capital levels required to be considered well-capitalized are based upon prompt corrective action regulations, as amended to reflect the Basel III Capital Rules changes.

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | As of December 31, 2022 | As of December 31, 2022 | As of December 31, 2022 | As of December 31, 2022 |
|  | Leverage | Tier 1 Risk<br> Based | Common<br> Equity Tier 1 | Total Risk<br> Based |
| The Middlefield Banking Company | 11.16% | 12.63% | 12.63% | 13.61% |
| Middlefield Banc Corp. | 11.30% | 12.80% | 12.25% | 13.78% |
| Adequately capitalized ratio | 4.00% | 6.00% | 4.50% | 8.00% |
| Adequately capitalized ratio plus fully phased-in capital conservation buffer | 4.00% | 8.50% | 7.00% | 10.50% |
| Well-capitalized ratio (Bank only) | 5.00% | 8.00% | 6.50% | 10.00% |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 |
|  | Leverage | Tier 1 Risk<br> Based | Common<br> Equity Tier 1 | Total Risk<br> Based |
| The Middlefield Banking Company | 9.80% | 12.72% | 12.72% | 13.97% |
| Middlefield Banc Corp. | 10.02% | 12.96% | 12.18% | 14.21% |
| Adequately capitalized ratio | 4.00% | 6.00% | 4.50% | 8.00% |
| Adequately capitalized ratio plus fully phased-in capital conservation buffer | 4.00% | 8.50% | 7.00% | 10.50% |
| Well-capitalized ratio (Bank only) | 5.00% | 8.00% | 6.50% | 10.00% |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *36*

------

***18.*** **FAIR VALUE DISCLOSURE MEASUREMENTS** 

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The *three* broad levels defined by U.S. generally accepted accounting principles are as follows:

---

| | |
|:---|:---|
| Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |

---

---

| | |
|:---|:---|
| Level II: | Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed. |

---

---

| | |
|:---|:---|
| Level III: | Assets and liabilities that have little to *no* pricing observability as of the reported date. These items do *not* have *two*-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. |

---

This hierarchy requires the use of observable market data when available.

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  | December 31, 2022 | December 31, 2022 |  |
| (Dollar amounts in thousands) | Level I | Level II | Level III | Total |
| Assets measured on a recurring basis: |  |  |  |  |
| Subordinated debt | $- | $21427 | $8737 | $30164 |
| Obligations of states and political subdivisions |  | 127334 |  | 127334 |
| Mortgage-backed securities in government-sponsored entities |  | 7469 |  | 7469 |
| Total debt securities |  | 156230 | 8737 | 164967 |
| Equity securities in financial institutions | 915 |  |  | 915 |
| Total | $915 | $156230 | $8737 | $165882 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  | December 31, 2021 | December 31, 2021 |  |
| (Dollar amounts in thousands) | Level I | Level II | Level III | Total |
| Assets measured on a recurring basis: |  |  |  |  |
| Subordinated debt | $- | $20337 | $12200 | $32537 |
| Obligations of states and political subdivisions |  | 127345 |  | 127345 |
| Mortgage-backed securities in government-sponsored entities |  | 10317 |  | 10317 |
| Total debt securities |  | 157999 | 12200 | 170199 |
| Equity securities in financial institutions | 818 |  |  | 818 |
| Total | $818 | $157999 | $12200 | $171017 |

---

<u>Investment Securities Available for Sale</u> – An independent pricing service provides the Company fair values, which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II). Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments that are valued based on the discounted cash flow approach assuming a yield curve of similarly structured instruments.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *37*

------

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of specific financial instruments could result in a different estimate of fair value at the reporting date. Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are *not* necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have *not* been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments following the respective reporting dates *may* be different from the amounts reported at each period-end.

<u>Equity Securities</u> - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter ("OTC") markets, and listed securities for which *no* sale was reported on that date are generally valued at their last reported "bid" price if held long, and last reported "ask" price if sold short. To the extent equity securities are actively traded and valuation adjustments are *not* applied, they are categorized in Level I of the fair value hierarchy.

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

---

| | |
|:---|:---|
| *(Dollar amounts in thousands)* | |
|  | Subordinated debt |
| Balance as of January 1, 2022 | $12200 |
| Transfers into Level III <sup>(1)</sup> | 500 |
| Transfers out of Level III <sup>(1)</sup> | (3750) |
| Net unrealized holding gain on available-for-sale investment securities | (213) |
| Balance as of December 31, 2022 | $8737 |

---

<sup>(*1*)</sup> Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level III criteria. The level designation of each financial instrument is reassessed at the end of each period.

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established when a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property's value after the initial measurement. *No* such devaluation occurred during the year ended *December 31, 2021.*

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  | December 31, 2022 | December 31, 2022 |  |
|  | Level I | Level II | Level III | Total |
| (Dollar amounts in thousands) |  |  |  |  |
| Assets measured on a non-recurring basis: |  |  |  |  |
| Impaired loans | $- | $- | $1143 | $1143 |
| Other real estate owned |  |  | 5792 | 5792 |

---

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |  | December 31, 2021 | December 31, 2021 |  |
|  | Level I | Level II | Level III | Total |
| (Dollar amounts in thousands) |  |  |  |  |
| Assets measured on a non-recurring basis: |  |  |  |  |
| Impaired loans | $- | $- | $4162 | $4162 |

---

<u>Impaired Loans</u> – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan's collateral. Fair value is usually determined based on independent *third*-party appraisals of the properties. In some cases, management *may* adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management estimates expected costs to sell the property, which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses, or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is *not* included in the above table as it is *not* currently being carried at its fair value. The fair values in the preceding tables include estimated selling costs of $688,000 and $901,000 on *December 31, 2022,* and *2021,* respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *38*

------

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

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements |
| *(Dollar amounts in thousands)* | |  |  | |
|  | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) |
| December 31, 2022 |  |  |  |  |
| Impaired loans | $1143 | Appraisal of collateral <sup>(1)</sup> | Appraisal adjustments <sup>(2)</sup> | 12.0% |
| Other real estate owned | $5792 | Appraisal of collateral <sup>(1)</sup> | Appraisal adjustments <sup>(2)</sup> | 8.4% |

---

------

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements | Quantitative Information about Level III Fair Value Measurements |  |
| *(Dollar amounts in thousands)* |  |  |  |  |  |  |  |
|  | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) | Range (Weighted Average) | Range (Weighted Average) | Range (Weighted Average) |
| December 31, 2021 |  |  |  |  |  |  |  |
| Impaired loans | $4162 | *Appraisal of collateral (1)* | *Appraisal adjustments (2)* | 25.0% | *to* | 72.2% | (36.6%) |

---

------

<sup>(*1*)</sup> Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs, which are *not* identifiable, less any associated allowance.

<sup>(*2*)</sup> Appraisals *may* be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The estimated fair value of the Company's financial instruments *not* recorded at fair value on a recurring basis is as follows:

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 | December 31, 2022 |
|  | Carrying |  |  |  | Total |
|  | Value | Level I | Level II | Level III | Fair Value |
|  | (in thousands) | (in thousands) | (in thousands) | (in thousands) | (in thousands) |
| Financial assets: |  |  |  |  |  |
| Net loans | $1338434 | $- | $- | $1298814 | $1298814 |
| Financial liabilities: |  |  |  |  |  |
| Deposits | $1402019 | $1163999 | $- | $231218 | $1395217 |
| Other borrowings | 12059 |  |  | 12059 | 12059 |

---

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 | December 31, 2021 |
|  | Carrying |  |  |  | Total |
|  | Value | Level I | Level II | Level III | Fair Value |
|  | (in thousands) | (in thousands) | (in thousands) | (in thousands) | (in thousands) |
| Financial assets: |  |  |  |  |  |
| Loans held for sale | $1051 | $- | $1051 | $- | $1051 |
| Net loans | 967349 |  |  | 961645 | 961645 |
| Financial liabilities: |  |  |  |  |  |
| Deposits | $1166610 | $967885 | $- | $199503 | $1167388 |
| Other borrowings | 12901 |  |  | 12901 | 12901 |

---

Included within other borrowings is an $8.2 million note payable, which matures in *December 2037.* These borrowings were used to form a special purpose entity ("Entity") to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to LIBOR plus 1.67%. The borrowing is a floating rate instrument and any difference between the cost and fair value are insignificant.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *39*

------

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

***19.*** **ACCUMULATED OTHER COMPREHENSIVE LOSS**

The following table presents the changes in accumulated other comprehensive loss by component net of tax:

---

| | |
|:---|:---|
|  | Unrealized gains/(losses) on |
|  | available-for-sale |
| (Dollars in thousands) | securities (a) |
| Balance as of December 31, 2020 | $4284 |
| Other comprehensive loss | (822) |
| Balance at December 31, 2021 | $3462 |
| Balance as of December 31, 2021 | $3462 |
| Other comprehensive loss | (25606) |
| Balance at December 31, 2022 | $(22144) |

---

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

No unrealized gains or losses on available-for-sale securities were reclassified out of accumulated other comprehensive income for the years ended *December 31, 2022,* or *2021.*

***20.*** **PARENT COMPANY** 

Following are condensed financial statements for the Company.

CONDENSED BALANCE SHEET<br>

---

| | | |
|:---|:---|:---|
| (Dollar amounts in thousands) | December 31, | December 31, |
|  | 2022 | 2021 |
| ASSETS |  |  |
| Cash and due from banks | $201 | $805 |
| Equity securities, at fair value | 645 | 818 |
| Investment in nonbank subsidiary | 1 | 1 |
| Investment in subsidiary bank | 202887 | 150588 |
| Other assets | 2984 | 1371 |
| TOTAL ASSETS | $206718 | $153583 |
| LIABILITIES |  |  |
| Trust preferred debt | $8248 | $8248 |
| Other liabilities | 779 |  |
| TOTAL LIABILITIES | 9027 | 8248 |
| STOCKHOLDERS' EQUITY | 197691 | 145335 |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $206718 | $153583 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *40*

------

CONDENSED STATEMENT OF COMPREHENSIVE (LOSS) INCOME<br>

---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
| (Dollar amounts in thousands) | 2022 | 2021 |
| INCOME |  |  |
| Dividends from subsidiary bank | $15500 | $18600 |
| (Loss) gain on equity securities | (173) | 209 |
| Other | 7 | 5 |
| Total income | 15334 | 18814 |
| EXPENSES |  |  |
| Interest expense | 288 | 151 |
| Salaries and employee benefits | 667 | 842 |
| Ohio state franchise tax | 1157 | 1144 |
| Other | 3434 | 742 |
| Total expenses | 5546 | 2879 |
| Income before income tax benefit | 9788 | 15935 |
| Income tax benefit | (1024) | (560) |
| Income before equity in undistributed net income of subsidiaries | 10812 | 16495 |
| Equity in undistributed net income of subsidiaries | 4861 | 2138 |
| NET INCOME | $15673 | $18633 |
| Comprehensive (loss) income | $(9933) | $17811 |

---

CONDENSED STATEMENT OF CASH FLOWS<br>

---

| | | |
|:---|:---|:---|
|  | Year Ended December 31, | Year Ended December 31, |
| (Dollar amounts in thousands) | 2022 | 2021 |
| OPERATING ACTIVITIES |  |  |
| Net income | $15673 | $18633 |
| Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
| Equity in undistributed net income of Subsidiaries | (4861) | (2138) |
| Stock-based compensation | 307 | 398 |
| Loss (gain) on equity securities | 173 | (209) |
| Other, net | (297) | (664) |
| Net cash provided by operating activities | 10995 | 16020 |
| INVESTING ACTIVITIES |  |  |
| Acquisition, net of cash paid | 10 |  |
| FINANCING ACTIVITIES |  |  |
| Stock options exercised |  | 94 |
| Repurchase of treasury shares | (6119) | (12291) |
| Cash dividends | (5490) | (4240) |
| Net cash used in financing activities | (11609) | (16437) |
| Decrease in cash | (604) | (417) |
| CASH AT BEGINNING OF YEAR | 805 | 1222 |
| CASH AT END OF YEAR | $201 | $805 |
| SUPPLEMENTAL INFORMATION |  |  |
| Common stock issued in business acquisition | $73265 | $- |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *41*

------

***21.*** **BUSINESS ACQUISITION**

In the *second* quarter of *2022,* the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of Liberty for stock. Liberty was an Ohio bank holding company whose national bank subsidiary, Liberty National Bank, operated *six* offices in Central and Northwest Ohio.

The transaction closed on *December 1, 2022,* with Liberty National Bank merging into Middlefield Bank, with Middlefield Bank as the surviving entity. The acquisition established the Company's presence in Hardin, Logan, Franklin, and Union Counties.

Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company's common stock in exchange for each share of Liberty common stock they owned immediately before the merger. The Company issued 2.6 million shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million. Upon closing, Liberty National Bank was merged into MBC, and its *six* full-service bank offices, in Ada and Kenton in Hardin County, in Bellefontaine and Bellefontaine South in Logan County, in Marysville in Union County, and in Westerville in Franklin County, became offices of MBC.

The Company accounted for the Liberty acquisition using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with purchase accounting. The Company relied on the income approach to estimate the value of the loans. The loans' underlying characteristics (account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures and remaining balance) were considered. Various assumptions were applied regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. Due to the timing of the merger, the estimated fair value measurements remain preliminary. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction within *one* year of the merger. As the Company finalizes its analysis of these assets, there *may* be adjustments to the recorded carrying values. Any adjustments to carrying values will be recorded in goodwill. The calculation of goodwill is subject to change for up to *one* year after closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available.

The Company also recorded an identifiable intangible asset representing the core deposit base of Liberty. The discounted cash flow method was used in valuing this intangible. This method is based upon the principle of future benefits; economic value is based on anticipated future benefits as measured by cash flows expected to occur in the future. The estimated future cash flows are converted to a value indicator by determining the present value of the cash flows using a discount rate. The discount rate is based upon the nature of the business, the level of risk, and the expected stability of the estimated future cash flows. The higher the risk, the higher the discount rate, and the lower the value indicator.

Time deposit fair values were estimated using an income approach. The methodology entailed discounting the contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates. Interest and principal payments were projected for each category of CDs over the period from the valuation date to the maturity dates. These payments represent future cash flows to be paid to depositors until maturity. Using appropriate market interest rates for each category of CDs, the future cash flows were discounted to their present value equivalents.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *42*

------

The following table summarizes the purchase of Liberty as of *December 1, 2022:* 

---

| | | |
|:---|:---|:---|
| *(In Thousands, Except Per Share Data)* | | |
| Purchase Price Consideration in Common Stock |  |  |
| Middlefield Banc Corp. shares issued | 2561513 |  |
| Value assigned to Middlefield Banc Corp. common shares | $28.60 |  |
| Purchase price assigned to Liberty common shares exchanged for |  | 73259 |
| Purchase Price Consideration in Cash |  |  |
| Cash paid in lieu of fractional shares |  | 6 |
| Total Purchase Price |  | 73265 |
| Net Assets Acquired: |  |  |
| Liberty shareholders equity | $49041 |  |
| Adjustments to reflect assets acquired at fair value: |  |  |
| Loans |  |  |
| Allowance for loan loss | 4497 |  |
| Loans - interest rate | 646 |  |
| Loans - general credit | (3433) |  |
| Core deposit intangible | 6669 |  |
| Investments | (1461) |  |
| Mortgage servicing rights | 830 |  |
| Other | 94 |  |
| Adjustments to reflect liabilities acquired at fair value: |  |  |
| Time deposits | (228) |  |
| Deferred taxes | (54) |  |
| Total net assets acquired |  | 56601 |
| Goodwill resulting from merger |  | $16664 |

---

The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed, at fair value:

---

| | | |
|:---|:---|:---|
| *(In Thousands)* | | |
| Total purchase price |  | $73265 |
| Assets (liabilities) acquired: |  |  |
| Net assets acquired: |  |  |
| Cash | 18406 |  |
| Loans and loans held for sale | 312618 |  |
| Investments | 57907 |  |
| Premises and equipment, net | 6087 |  |
| Accrued interest receivable | 1563 |  |
| Bank-owned life insurance | 16290 |  |
| Core deposit intangible | 6670 |  |
| Mortgage servicing rights | 1680 |  |
| Other assets | 3111 |  |
| Time deposits | (69278) |  |
| Non-time deposits | (294684) |  |
| Accrued interest payable | (246) |  |
| Other liabilities | (3523) |  |
| Total net assets acquired |  | 56601 |
| Goodwill resulting from the Liberty merger |  | $16664 |

---

Middlefield recorded goodwill and intangibles associated with the purchase of Liberty totaling $16.7 million. Goodwill is *not* amortized, but is periodically evaluated for impairment. Middlefield Bank did not recognize any impairment during the year ended *December 31, 2022.*

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the year ended *December 31, 2022,* no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized over the estimated useful life of 10 years. The gross carrying amount of the core deposit intangible acquired in the Liberty merger that closed in *2022* was $6.7 million at *December 31, 2022* with $63,000 accumulated amortization as of that date.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *43*

------

As of *December 31, 2022,* the current year and estimated future amortization expense for the core deposit intangible associated with this merger is as follows:

---

| | |
|:---|:---|
| *(In Thousands)* | |
| Remaining 2023 | $763 |
| 2024 | 750 |
| 2025 | 734 |
| 2026 | 714 |
| 2027 | 691 |
| Thereafter | 2954 |
|  | $6606 |

---

The Company incurred $2.4 million in merger expenses, which were recognized in noninterest expense within the Consolidated Statement of Income for the year ended *December 31, 2022.*

Results of operations for Liberty prior to the acquisition date are *not* included in the Consolidated Statement of Income for the year ended *December 31, 2022.* The results of activities from the former Liberty operations that are included in the Consolidated Statement of Income from the date of acquisition through *December 31, 2022* are broken out in the following table:

---

| | |
|:---|:---|
|  | Actual from Acquisition Date<br> Through December 31, 2022 |
|  | (in thousands) |
| Net interest income | $1366 |
| Noninterest income | $117 |
| Net income | $867 |

---

The table below presents unaudited pro forma information as if the acquisition of Liberty had occurred on *January 1, 2021.* The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma information is *not* necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates, and accordingly, does *not* attempt to predict or suggest future results. Merger and acquisition integration costs and amortization of fair value adjustments are included in the amounts below.

---

| | | |
|:---|:---|:---|
|  | Pro Formas | Pro Formas |
|  | Twelve-month period ended December 31, | Twelve-month period ended December 31, |
|  | 2022 | 2021 |
|  | (in thousands, except per share data) | (in thousands, except per share data) |
| Net interest income | $63277 | $63770 |
| Noninterest income | 10151 | 9779 |
| Net income | $21142 | $16297 |
| Pro forma earnings per share: |  |  |
| Basic | $3.51 | $1.86 |
| Diluted | $3.50 | $1.86 |

---

Pro Forma net income was reduced by $8.5 million for the year ended *December 31, 2021* for additional estimated nonrecurring merger expenses and increased by $8.5 million for the year ended *December 31, 2022* to reflect the removal of merger expenses incurred for the year ended *December 31, 2022* but reflected in the pro-forma net income as of *December 31, 2021.*

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *44*

------

***Management***'***s Discussion and Analysis of Financial Condition and Results of Operations***

This information should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements.

This Management's Discussion and Analysis section of the Annual Report contains forward-looking statements. Forward-looking statements are based on a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond the Company's control. Although the Company believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a representation by the Company or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.

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

<u>Overview</u>

During 2022, the Company reported net income of $15.7 million, or $2.59 per diluted share, compared with $18.6 million, or $3.00 per diluted share, in 2021. The Company's return on average assets for 2022 and 2021 was 1.17% and 1.36%, respectively, while the Company's return on average equity was 11.25% and 12.74%, respectively.

Highlights of the Company's performance in 2022 (on a year-over-year basis unless noted) include the following:

● Returned $11.6 million of capital to shareholders through cash dividends and the repurchase of 229,420 shares at an average price of $26.67 per share

● Net income was $15.7 million, or $2.59 per diluted share, compared to $18.6 million, or $3.00 per diluted share

● Non-GAAP <sup>(1)</sup> net income, adjusted for certain one-time items and expenses associated with the Liberty Bancshares, Inc. merger, was $18.3 million, or $3.03 per diluted share, compared to $18.5 million, or $2.98 per diluted share

● Non-GAAP<sup>(1)</sup> ROAE and ROATE, adjusted for certain one-time items and expenses associated with the Liberty Bancshares, Inc. merger, was 13.15% and 15.12%, respectively, compared to 12.67% and 14.29%, respectively

● Twelve-month pre-tax income benefited from $1.2 million of net fees associated with the Paycheck Protection Program ("PPP"), compared to $4.6 million in the 2021 full year

● Net interest margin improved by 30 basis points to 4.08%, compared to 3.78%

● Total loans were $1.35 billion, compared to $981.7 million at December 31, 2021

● Total loans increased organically by $91.4 million, or 9.6% from December 31, 2021, without the impact of PPP loan forgiveness and the Liberty Bancshares, Inc. merger

● Strong asset quality with nonperforming loans to total loans of 0.16%, compared to 0.49%

● Allowance for loan losses was 1.07% of total loans, compared to 1.46%

<sup>(1)</sup> A reconciliation of non-GAAP financial measures can be found in the following tables.

---

| | | |
|:---|:---|:---|
| **Reconciliation of Net Income, Less Merger and Certain Items** | **For the Twelve Months Ended** | **For the Twelve Months Ended** |
|  | **December 31,** | **December 31,** |
|  | **2022** | **2021** |
| Net Income | $15673 | $18633 |
| Acquisition related costs- after tax | 1882 |  |
| Net costs of other real estate owned - after tax <sup>(2)</sup> | 755 | (108) |
| Net Income- Adjusted | $18310 | $18525 |
| Diluted EPS excluding merger and one-time items | $3.03 | $2.98 |
| Return on average assets excluding merger and one-time items (annualized) | 1.37% | 1.35% |
| Return on average equity excluding merger and one-time items (annualized) | 13.15% | 12.67% |
| Return on average tangible common equity excluding merger and one-time items (annualized) | 15.12% | 14.29% |

---

<sup>(2)</sup> This includes OREO writedowns, gross OREO expenses, and gross rental income earned on OREO.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 45

------

**<u>Critical Accounting Policies</u>**

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

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

***Valuation of Securities***. Investment securities are classified as held to maturity or available for sale on the date of purchase. Only those securities classified as held to maturity are reported at amortized cost. Available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive (loss) income, net of related deferred income taxes, on the Consolidated Balance Sheet. The majority of the Company's securities are valued based on prices compiled by third-party vendors using observable market data. However, particular securities are less actively traded and do not always have quoted market prices. The determination of fair value for less actively traded securities, therefore, requires judgment, with such determination requiring benchmarking to similar instruments or analyzing default and recovery rates. Examples include certain collateralized mortgage and debt obligations and high-yield debt securities. Realized securities gains or losses are reported within noninterest income in the Consolidated Statement of Income. The cost of securities sold is based on the specific identification method.

Management evaluates securities for other-than-temporary impairment ("OTTI") at least quarterly and more frequently when economic or market conditions warrant such an evaluation. Investments in debt securities are generally evaluated for OTTI under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 320, Investments — Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions, and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or U.S. government-sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security, or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and the investment's fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Debt securities issued by state and political subdivisions and mortgage-backed securities in government-sponsored entities accounted for 81.7% of the total available-for-sale portfolio as of December 31, 2022, and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

● The length of time and the extent to which the fair value has been less than the amortized cost basis.

● Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions.

● The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities.

● Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer's industry and actions taken by the issuer to deal with the present economic climate.

Refer to Note 4 in the consolidated financial statements.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 46

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***Loans Held for Sale***

The Bank originates residential loans secured by first-lien mortgages on one-to-four family residential properties located within its market area for either portfolio or sale into the secondary market. At origination, a determination is made whether a loan will be held in the Bank's portfolio or is intended for sale in the secondary market. Mortgage loans held for sale are recorded at the lower of the aggregate cost or fair value. The Bank recognizes gains and losses on sales of the loans held for sale when the sale is completed. In addition to interest earned on loans and income recognized on the sale of loans, the Bank receives fees for servicing loans that it has sold.

***Income Taxes***

The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Company conducts business. Quarterly, management assesses the reasonableness of the Company's effective tax rate based on management's current estimate of the amount and components of net income, tax credits, and the applicable statutory tax rates expected for the entire year. The estimated income tax expense is recorded in the Consolidated Statement of Income.

Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in accrued taxes, interest, and expenses in the Consolidated Balance Sheet. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management's judgment that realization is more likely than not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest, and expenses in the Consolidated Balance Sheet. The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent, and other information and maintains tax accruals consistent with management's evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities, and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. When they occur, these changes can affect deferred taxes and accrued taxes as well as the current period's income tax expense and can be significant to the Company's operating results.

***Goodwill and Other Intangible Assets***

Goodwill is the excess of the purchase price over the fair value of the assets acquired in connection with business acquisitions accounted for as purchases. Other intangible assets consist of branch acquisition core deposit premiums. The Company is required to perform an annual impairment test by calculating the fair value of the reporting unit and comparing it against the reporting unit's carrying amount. If the fair value is less than the carrying value, an expense may be required to write down the goodwill to the proper carrying value.

**<u>Changes in Financial Condition</u>**

**General** The Company's total assets increased $356.7 million or 26.8% to $1.69 billion on December 31, 2022, from $1.33 billion on December 31, 2021. This increase was primarily due to an increase in net loans of $371.2 million largely due to the Liberty merger, which was partially offset by a decrease in cash of $65.7 million.

On December 1, 2022, the Company completed its acquisition of Liberty pursuant to a previously announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company's common stock in exchange for each share of Liberty common stock they owned immediately before the merger. Middlefield issued 2.6 million shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million.

**Cash and cash equivalents** Cash and due from banks and federal funds sold represent cash and cash equivalents, which decreased $65.7 million or 55.0% to $53.8 million on December 31, 2022, from $119.5 million on December 31, 2021. Deposits from customers into savings and checking accounts, loan and security repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases, and repayments of borrowed funds. The decrease in cash and cash equivalents since December 31, 2021, was primarily due to a decrease in deposits, an increase in loan fundings, partially offset by an increase in short-term borrowings.

**Investment securities** Management's objective in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. The balance of available-for-sale investment securities decreased $5.2 million, or 3.1%, compared to 2021. Securities purchased were $32.3 million. The Company sold the entire $57.9 million investment portfolio acquired in the Liberty Bancshares merger. These securities were acquired at fair value and then sold. Therefore, there were no realized gains or losses recognized during the year ended December 31, 2022.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 47

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The municipal bond portfolio totaled $127.3 million or 77.2% of the Company's total investment portfolio on December 31, 2022. Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is evaluated on attributes that have historically influenced default incidences in the municipal market, such as sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. These investments have historically proven to have extremely low credit risk.

On December 31, 2022, the Company held $30.2 million of subordinated debt in other banks compared to $32.5 million on December 31, 2021. The average yield on this portfolio was 4.79% on December 31, 2022 and 2021

**Loans receivable** The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company's market area, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers' businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well dispersed geographically. The following table summarizes fluctuation within the primary segments of the loan portfolio (dollars in thousands):

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| | | | | |
|:---|:---|:---|:---|:---|
|  | 2022 | 2021 | $ change | % change |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $191748 | $111470 | 80278 | 72.0% |
| Non-owner occupied | 380580 | 283618 | 96962 | 34.2% |
| Multifamily | 58251 | 31189 | 27062 | 86.8% |
| Residential real estate | 296308 | 240089 | 56219 | 23.4% |
| Commercial and industrial | 195602 | 148812 | 46790 | 31.4% |
| Home equity lines of credit | 128065 | 104355 | 23710 | 22.7% |
| Construction and other | 94199 | 54148 | 40051 | 74.0% |
| Consumer installment | 8119 | 8010 | 109 | 1.4% |
| Total loans | 1352872 | 981691 | 371181 | 37.8% |
| Less: Allowance for loan and lease losses | (14438) | (14342) | (96) | 0.7% |
| Net loans | $1338434 | $967349 | 371085 | 38.4% |

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Net loans increased $371.1 million or 38.4% to $1.34 billion on December 31, 2022, from $967.3 million on December 31, 2021. The increase was due to the acquisition of $312.7 million in loans as part of the Liberty merger, coupled with strong organic loan growth of $55.9 million.

The product mix in the loan portfolio consists of CRE non-owner occupied loans equaling 28.1% of total loans, residential real estate loans 21.9%, commercial and industrial loans 14.5%, HELOC loans 9.5%, CRE owner-occupied loans 14.2%, construction and other loans 7.0%, CRE multifamily loans 4.3%, and consumer installment loans 0.6%, at December 31, 2022 compared with 28.9%, 24.5%, 15.2%, 10.6%, 11.3%, 5.5%, 3.2%, and 0.8%, respectively, at December 31, 2021.

Loans contributed 88.4% of total interest income in 2022 and 91.5% in 2021. The loan portfolio yield of 4.79% in 2022 was 34 basis points higher than the average yield for total interest-earning assets. Management recognizes that while the loan portfolio holds some of the Company's highest-yielding assets, it is inherently the riskiest portfolio. Accordingly, management balances credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after approval. Management follows additional procedures to obtain current borrower financial information annually throughout the life of the loan obligation.

To minimize risks associated with changes in the borrower's future repayment capacity, the Company generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

The Company expects loan growth to be minimal but will not lower the conservative credit standards to increase loan originations in a slowing economy. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the portfolio.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. According to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions that have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions that are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management concerning their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans. On December 31, 2022, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represented 266.5% of total risk-based capital. Construction, land, and land development loans represent 47.1% of total risk-based capital. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and robust underwriting criteria for its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows owing to interest rate increases and declines in net operating income.

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

**Other real estate owned (**"**OREO**"**).** OREO decreased $1.2 million from December 31, 2021, to $5.8 million on December 31, 2022 due to $1.2 million in write-downs for the twelve months ended December 31, 2022. As of December 31, 2022, the Company held one commercial property with a carrying amount of $5.8 million and one residential mortgage with a carrying amount of $28,000 in OREO. As of December 31, 2021, the Company held one commercial property with a carrying amount of $7.0 million in OREO.

**Restricted stock.** The Company's investment in FHLB's restricted stock increased $1.4 million, or 31.3%, to $5.8 million on December 31, 2022, compared to $4.4 million on December 31, 2021. The increase was primarily due to the merger.

**Premises and equipment, net.** The Company's net premises and equipment increased $4.7 million, or 27.1%, to $22.0 million at December 31, 2022, compared to $17.3 million at December 31, 2021. This increase was primarily due to the acquisition of $6.1 million in fixed assets as part of the Liberty merger, $884,000 in purchases of fixed assets, partially offset by $1.3 million in depreciation.

**Goodwill and other intangibles.** The carrying value of goodwill was $31.7 million on December 31, 2022 compared to $15.1 million on December 31, 2021. The carrying value of core deposit intangibles was $7.7 million on December 31, 2022 compared to $1.4 million on December 31, 2021. In 2022, the Company recorded net increases in goodwill and core deposit intangibles of $16.6 million and $6.3 million, respectively. These increases are the direct result of the Liberty merger that closed on December 1, 2022.

Goodwill is assessed annually for impairment and any such impairment is recognized in the period identified by a charge to earnings. The process of evaluating goodwill for impairment requires management to make significant estimates and judgments. The use of different estimates, judgments or approaches to estimate fair value could result in a different conclusion regarding impairment of goodwill. Each of the valuation methods used by the Company requires significant assumptions. Depending on the specific method, assumptions are made regarding growth rates, discount rates for cash flows, control premiums, and selected multiples. Changes to any of the assumptions could result in significantly different results. Based on the analysis, management has determined that there is no goodwill impairment as of December 31, 2022.

The Company also monitors the ongoing value of mortgage servicing rights ("MSR"). As of December 31, 2022, the Company recorded an increase in MSR of $1.5 million to $2.1 million on December 31, 2022, as compared to $542,000 as of December 31, 2021. This increase is a direct result of the Liberty merger that closed on December 1, 2022.

**Bank-owned life insurance.** BOLI increased by $16.8 million to $33.9 million as of December 31, 2022, from $17.1 million at the end of 2021 due to the merger.

**Deposits.** Interest-earning assets are generally funded by both interest-bearing and noninterest-bearing core deposits. Deposits are influenced by changes in interest rates, economic conditions, and competition from other banks. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which represented 95.6% of the Company's total funding sources on December 31, 2022. The deposit base consists of demand deposits, savings, money market accounts, and time deposits. The following table summarizes fluctuation within the primary segments of the deposit portfolio (in thousands):

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| | | | | |
|:---|:---|:---|:---|:---|
|  | December 31, | December 31, |  |  |
|  | 2022 | 2021 | $ change | % change |
| Noninterest-bearing demand | $503907 | $334171 | $169736 | 50.8% |
| Interest-bearing demand | 164677 | 196308 | (31631) | -16.1% |
| Money market | 187498 | 177281 | 10217 | 5.8% |
| Savings | 307917 | 260125 | 47792 | 18.4% |
| Time | 238020 | 198725 | 39295 | 19.8% |
| Total deposits | $1402019 | $1166610 | $235409 | 20.2% |

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Deposits increased $235.4 million or 20.2% to $1.40 billion on December 31, 2022, from $1.17 billion on December 31, 2021. The increase was due to the acquisition of $364.0 million in deposits as part of the Liberty merger, offset by a $128.6 million decrease in deposits.

Savings, money market deposits, and NOW accounts have been stable sources of funds, making up 47.1% of total deposits as of December 31, 2022. The Company uses specific non-core funding instruments to grow the balance sheet and maintain liquidity. These deposits, from either a broker or a listing service, were $5.0 million on December 31, 2022, compared to $15.1 million on December 31, 2021.

**Borrowed funds.** The Company uses short-term and long-term borrowings as another funding source for asset growth and liquidity needs. These borrowings primarily include advances from the FHLB, subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings increased to $65.0 million as of December 31, 2022. Other borrowings were relatively unchanged at $12.1 million as of December 31, 2022 compared to $12.9 million at December 31, 2021.

In July 2017, the United Kingdom FCA, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Subsequently, in November 2020, the FCA proposed end dates immediately following the December 31, 2021 publication for the one-week and two-month LIBOR settings, and the June 30, 2023 publication for other LIBOR tenors. The Company formed a special purpose entity to issue $8.0 million of floating rate mandatorily redeemable trust preferred securities ("TruPS"). The rate on the TruPS adjusts quarterly, equal to LIBOR plus 1.67%. The cessation of LIBOR quotes in 2023 will affect our TruPS. It is too early to predict whether a new rate index replacement will have a material impact on the Company's financial statements.

**Stockholders**' **equity.** The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. All of the capital ratios exceeded the regulatory well-capitalized guidelines. Stockholders' equity increased $52.4 million, or 36.0%, to $197.7 million on December 31, 2022, from $145.3 million on December 31, 2021. This increase was mostly the result of the $73.3 million increase in common stock due to the Liberty merger that closed in the fourth quarter and a $10.2 million increase in retained earnings due to year-to-date net income, less dividends paid. These increases were offset by a $25.6 million decrease in accumulated other comprehensive income due to fair value adjustments of available-for-sale securities, and the $6.1 million increase in treasury stock due to the Company repurchasing 229,420 of its outstanding shares during the twelve months ended December 31, 2022.

The Company's tangible book value per share, which is a non-GAAP financial measure, was $19.19 at December 31, 2022 compared to $21.88 at December 31, 2021. Tangible equity has declined due to unrealized losses of the Company's available-for-sale investment securities portfolio. The market value decline was a result of the yield curve steepening caused by inflation and the tightening of monetary policy by the Federal Reserve Board beginning in March of 2022 and throughout the remaining months of 2022. Gross unrealized losses from available-for-sale investment securities were $28.0 million as of December 31, 2022, compared to unrealized gains of $4.4 million at December 31, 2021.

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| | | |
|:---|:---|:---|
| **Reconciliation of Common Stockholders' Equity to Tangible Common Equity** | **For the Twelve Months Ended** | **For the Twelve Months Ended** |
| (Dollar amounts in thousands) | **December 31,** | **December 31,** |
|  | **2022** | **2021** |
| Stockholders' Equity (GAAP) | $197691 | $145335 |
| Less Goodwill and other intangibles | 39436 | 16474 |
| Tangible Common Equity (Non-GAAP) | $158255 | $128861 |
| Shares outstanding | 8245235 | 5888737 |
| Tangible book value per share | $19.19 | $21.88 |

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**Average Balance Sheet and Yield/Rate Analysis.** The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the consequent average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages, and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax-exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21% for the years ended December 31, 2022 and 2021. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | For the Twelve Months Ended December 31, | For the Twelve Months Ended December 31, | For the Twelve Months Ended December 31, | For the Twelve Months Ended December 31, | For the Twelve Months Ended December 31, | For the Twelve Months Ended December 31, |
|  | 2022 | 2022 | 2022 | 2021 | 2021 | 2021 |
|  | Average |  | Average | Average |  | Average |
| (Dollar amounts in thousands) | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost |
| Interest-earning assets: |  |  |  |  |  |  |
| Loans receivable <sup>(3)</sup> | $1014896 | $48513 | 4.79% | $1052351 | $47896 | 4.56% |
| Investment securities <sup>(3)</sup> | 174514 | 5518 | 3.73% | 142705 | 4244 | 3.45% |
| Interest-earning deposits with other banks <sup>(4)</sup> | 67030 | 875 | 1.31% | 97417 | 195 | 0.20% |
| Total interest-earning assets | 1256440 | 54906 | 4.45% | 1292473 | 52335 | 4.11% |
| Noninterest-earning assets | 84484 |  |  | 78802 |  |  |
| Total assets | $1340924 |  |  | $1371275 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing demand deposits | $164569 | 554 | 0.34% | $212063 | 274 | 0.13% |
| Money market deposits | 174377 | 1055 | 0.61% | 186009 | 869 | 0.47% |
| Savings deposits | 259225 | 527 | 0.20% | 255267 | 162 | 0.06% |
| Certificates of deposit | 188617 | 1882 | 1.00% | 231662 | 2608 | 1.13% |
| Short-term borrowings | 8576 | 307 | 3.58% | 85 |  | 0.00% |
| Other borrowings | 12626 | 404 | 3.20% | 13313 | 282 | 2.12% |
| Total interest-bearing liabilities | 807990 | 4729 | 0.59% | 898399 | 4195 | 0.47% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Noninterest-bearing demand deposits | 386296 |  |  | 320104 |  |  |
| Other liabilities | 7368 |  |  | 6535 |  |  |
| Stockholders' equity | 139270 |  |  | 146237 |  |  |
| Total liabilities and stockholders' equity | $1340924 |  |  | $1371275 |  |  |
| Net interest income |  | $50177 |  |  | $48140 |  |
| Interest rate spread <sup>(1)</sup> |  |  | 3.86% |  |  | 3.64% |
| Net interest margin <sup>(2)</sup> |  |  | 4.08% |  |  | 3.78% |
| Ratio of average interest-earning assets to average interest-bearing liabilities |  |  | 155.50% |  |  | 143.86% |

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| |
|:---|
| (1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
| (2) Net interest margin represents net interest income as a percentage of average interest-earning assets. |
| (3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were $1,046 and $752, for 2022 and 2021, respectively. |
| (4) Includes dividends received on restricted stock. |

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&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 51

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**Interest Rates and Interest Differential**

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | 2022 versus 2021 | 2022 versus 2021 | 2022 versus 2021 | 2021 versus 2020 | 2021 versus 2020 | 2021 versus 2020 |
|  | Increase (decrease) due to | Increase (decrease) due to | Increase (decrease) due to | Increase (decrease) due to | Increase (decrease) due to | Increase (decrease) due to |
| (Dollars in thousands) | Volume | Rate | Total | Volume | Rate | Total |
| Interest-earning assets: |  |  |  |  |  |  |
| Loans receivable | $(1708) | $2325 | $617 | $(1247) | $140 | $(1107) |
| Investment securities | 1097 | 177 | 1274 | 1207 | (344) | 863 |
| Interest-bearing deposits with other banks | (61) | 741 | 680 | 186 | (245) | (59) |
| Total interest-earning assets | (672) | 3243 | 2571 | 146 | (449) | (303) |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing demand deposits | (62) | 342 | 280 | 206 | (377) | (171) |
| Money market deposits | (55) | 241 | 186 | 117 | (749) | (632) |
| Savings deposits | 2 | 363 | 365 | 107 | (455) | (348) |
| Certificates of deposit | (486) | (240) | (726) | (2170) | (1728) | (3898) |
| Short-term borrowings |  | 307 | 307 | (79) |  | (79) |
| Other borrowings | (15) | 137 | 122 | (31) | 104 | 73 |
| Total interest-bearing liabilities | (616) | 1150 | 534 | (1850) | (3205) | (5055) |
| Net interest income | $(56) | $2093 | $2037 | $1996 | $2756 | $4752 |

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The following table sets forth consolidated selected financial highlights for periods ended December 31:

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| | | |
|:---|:---|:---|
| (Dollars in thousands) | 2022 | 2021 |
| Average total assets | $1340924 | $1371275 |
| Average shareholders' equity | $139270 | $146237 |
| Net income | $15673 | $18633 |
| Cash dividends declared per share | $0.81 | $0.69 |
| Return on average total assets | 1.17% | 1.36% |
| Return on average shareholders' equity | 11.25% | 12.74% |
| Dividend payout ratio (1) | 37.23% | 22.76% |
| Average shareholders' equity to average assets | 10.39% | 10.66% |

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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 52

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**Allowance for Loan and Lease Losses.** The allowance for loan and lease losses ("ALLL") represents the amount management estimates to be adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The ALLL is established through a provision for loan losses charged to operations. The provision is based on management's periodic evaluation of the adequacy of the ALLL, taking into account the overall risk characteristics of the various portfolio segments, the Company's loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the ALLL, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant changes in the near term. The total ALLL combines a specific allowance for identified problem loans and a general allowance for homogeneous loan pools.

The allowance for loan and lease loss balance as of December 31, 2022, totaled $14.4 million, representing a $96,000 increase from the end of 2021. There was no provision for loan losses in 2022, which represented a decrease of $700,000 compared to the provision for loan losses in 2021. During 2022, net recoveries decreased by $87,000 to $96,000 in net recoveries compared to $183,000 in net recoveries in 2021.

The specific allowance incorporates the results of measuring impaired loans. The allowance formula is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management's determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio, and consideration of historical loss experience.

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

Although management uses the best information available to determine the adequacy of the ALLL on December 31, 2022, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions, and reductions in income. See Notes 5 for further discussion on the bank's ALLL assessment. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review a bank's ALLL. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available at the time of their examination.

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

---

| | | |
|:---|:---|:---|
|  | For the Years Ended | For the Years Ended |
|  | December 31, | December 31, |
|  | 2022 | 2021 |
| (Dollars in Thousands) |  |  |
| Ratio of allowance for loan and lease losses to loans outstanding at end of period | 1.07% | 1.46% |
| Net (recoveries) charge-offs to average loans | -0.01% | -0.02% |
| Nonperforming loans/total loans | 0.16% | 0.49% |
| Allowance for loan losses/nonperforming loans | 683.94% | 295.16% |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 53

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

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| | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|
|  | At December 31, | At December 31, | At December 31, | At December 31, | At December 31, | At December 31, |
|  | 2022 | 2022 | 2022 | 2021 | 2021 | 2021 |
|  | Average Loan<br> Balance | Net<br> (recoveries)<br> charge-offs | Net<br> (recoveries)<br> charge-offs to<br> average loans | Average Loan<br> Balance | Net<br> (recoveries)<br> charge-offs | Net<br> (recoveries)<br> charge-offs to<br> average loans |
| (Dollars in Thousands) |  |  |  |  |  |  |
| <u>Type of Loans:</u> |  |  |  |  |  |  |
| Commercial real estate: |  |  |  |  |  |  |
| Owner occupied | $131817 | $(5) | (0.00)% | $108269 | $(45) | (0.04)% |
| Non-owner occupied | 288744 | 127 | 0.04 | 299212 | 175 | 0.06 |
| Multifamily | 38882 |  | 0.00 | 35696 |  |  |
| Residential real estate | 233186 | (61) | (0.03) | 239193 |  | 0.00 |
| Commercial and industrial | 149726 | (272) | (0.18) | 192156 | (193) | (0.10) |
| Home equity lines of credit | 101039 | 25 | 0.02 | 109433 | (56) | (0.05) |
| Construction and other | 64490 |  | 0.00 | 59395 | (46) | (0.08) |
| Consumer installment | 7012 | 90 | 1.28 | 8997 | (18) | (0.20) |
| Total | $1014896 | $(96) | (0.01)% | $1052351 | $(183) | (0.02)% |

---

Refer to Note 5 in the consolidated financial statements.

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

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| | | | | |
|:---|:---|:---|:---|:---|
|  | At December 31, | At December 31, | At December 31, | At December 31, |
|  | 2022 | 2022 | 2021 | 2021 |
|  |  | Percent of |  | Percent of |
|  |  | Loans in Each |  | Loans in Each |
|  |  | Category to |  | Category to |
|  | Amount | Total Loans | Amount | Total Loans |
| (Dollars in Thousands) |  |  |  |  |
| <u>Type of Loans:</u> |  |  |  |  |
| Commercial real estate: |  |  |  |  |
| Owner occupied | $2203 | 14.17% | $1836 | 11.35% |
| Non-owner occupied | 5597 | 28.13 | 7431 | 28.89 |
| Multifamily | 662 | 4.31 | 454 | 3.18 |
| Residential real estate | 2047 | 21.90 | 1740 | 24.46 |
| Commercial and industrial | 1483 | 14.46 | 882 | 15.16 |
| Home equity lines of credit | 1753 | 9.47 | 1452 | 10.63 |
| Construction and other | 609 | 6.96 | 533 | 5.52 |
| Consumer installment | 84 | 0.60 | 14 | 0.82 |
| Total | $14438 | 100.0% | $14342 | 100.0% |

---

**Nonperforming assets.** Nonperforming assets include nonaccrual loans, loans 90 days or more past due, OREO, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about the collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of principal and interest is doubtful after considering economic and business conditions. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.

Nonperforming loans exclude TDRs that perform according to their terms over a prescribed period. TDRs are those loans which the Company, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 23 TDRs accruing interest with a balance of $3.1 million as of December 31, 2022, compared to 24 TDRs with a balance of 1.7 million as of December 31, 2021. Nonperforming loans amounted to $2.1 million or 0.16% of total loans and $4.9 million or 0.49% of total loans on December 31, 2022, and December 31, 2021, respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 54

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A significant factor in determining the appropriateness of the ALLL is the type of collateral that secures the loans. Although this does not insure against all losses, real estate collateral provides substantial recovery, even in a distressed sale and declining-value environment. The Bank's objective is to work with the borrower to minimize the debt service burden and reduce the future loss exposure to the Company.

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

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

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $125,000 in 2022 and $204,000 in 2021. 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.

<u>Changes in Results of Operations</u> 

2022 Results Compared to 2021 Results

**General** The Company posted net income of $15.7 million, compared to $18.6 million for the year ended December 31, 2021. On a per-share basis, 2022 earnings were $2.59 per diluted share, representing a decrease from the $3.00 per diluted share for the year ended December 31, 2021. The return on average equity for the year ended December 31, 2022, was 11.25%, and the Company's return on average assets was 1.17%, compared to 12.74% and 1.36%, respectively, for the year ended December 31, 2021. Non-GAAP net income, adjusted for certain one-time items and expenses associated with the merger, was $18.3 million, or $3.03 per diluted share for the 2022 twelve-month period, compared to $18.5 million, or $2.98 per diluted share for the same period last year. Non-GAAP return on average equity and return on average assets, adjusted one-time items and expenses associated with the merger, for the 2022 twelve-month period was 13.15% and 15.12%, respectively, compared to 12.65% and 14.27% for the same period in 2021, respectively.

**Net interest income** Net interest income, the Company's largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest-earning assets and interest-bearing liabilities. Net interest income increased by $2.0 million in 2022 to $50.2 million compared to $48.1 million in 2021. This increase results from a $2.6 million increase in interest income, partially offset by a $534,000 increase in interest expense. Interest-earning assets averaged $1.26 billion during 2022, a year-over-year decrease of $36.0 million from $1.29 billion in 2021. The Company's average interest-bearing liabilities decreased from $898.4 million in 2021 to $808.0 million in 2022. A key performance indicator, net interest margin, is net interest income as a percentage of total interest-earning assets. For 2022, the net interest margin, measured on a fully taxable-equivalent basis, increased to 4.08%, compared to 3.78% in 2021. The improvement in the net interest margin is attributable to a 34 basis point increase in the yield earned on total interest-earning assets, partially offset by a 12 basis point increase in the cost of interest-bearing liabilities for the year ended December 31, 2022.

The Company is in an asset-sensitive position. A rising interest rate environment should lead to an expansion of net interest margin as the Company's interest-earning assets reprice faster than its interest-bearing liabilities. Much of the Company's asset sensitivity is due to commercial loans that have variable interest rates. As part of the Company's strategy, floor rates are used to protect the Company's net interest margin in a declining interest rate environment. As of December 31, 2022, nearly all loan contracts with floor rates exceed their contractual floor rates and are repricing accordingly with rising interest rates. Although the Company expects to benefit from a rising interest rate environment, deposit pricing is expected to increase to maintain liquidity. The Liberty merger did not significantly change our interest-rate sensitivity position or outlook as Liberty's and our balance sheets were similarly structured.

**Interest and dividend income** Interest and dividend income increased $2.6 million to $54.9 million for 2022, attributable to a $1.2 million increase in interest on investment securities and a $617,000 increase on interest and fees on loans. The average balance of investment securities increased by $31.8 million, or 22.3%, and the 3.73% yield on the investment portfolio increased by 28 basis points, from 3.45%, for the same period in the prior year. The primary driver for the increase in interest on loans was a 23 basis point increase in the yield earned on loans from 4.56% in 2021 to 4.79% in 2022. The average balance of loans receivable decreased by 37.5 million or 3.6% to $1.01 billion for the year ended December 31, 2022, compared to $1.05 billion for the year ended December 31, 2022. The decrease in the average loan balance for year ended December 31, 2022, is due in part to the forgiveness of PPP loans, partially offset by loan growth.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 55

------

**Interest expense** Interest expense increased $534,000 or 12.7% to $4.7 million for 2022, compared with $4.2 million for 2021. This increase is attributable to an increase in interest expense on short-term borrowings and deposits of $307,000 and $105,000, respectively. The increase in short-term borrowings expense is a result of the Bank taking on FHLB advances in 2022, while there were no short-term borrowings during 2021. The increase in interest expense on deposits was due to a slight increase in the cost of deposits, which is expected to continue to trend upwards in the rising interest rate environment.

**Provision for loan losses** The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan and lease losses at an amount considered adequate to cover probable losses incurred in the ordinary course of lending. There was no provision for loan losses for the year ended December 31, 2022, compared to $700,000 in 2021. The loan loss provision is based upon management's assessment of various factors, including types and amounts of nonperforming loans, historical loss experience, collectability of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management's judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan and lease losses, actual loan losses could exceed the amounts charged to operations.

The ratio of nonperforming loans to total loans was 0.16% on December 31, 2022, decreasing from 0.49% on December 31, 2021. The ratio of the allowance for loan and lease losses to total loans decreased to 1.07% of total loans on December 31, 2022, compared to 1.46% on December 31, 2021. The decrease in this ratio is directly attributable to the merger and the increase in period end loans. This ratio is expected to increase with the adoption of CECL. The Company remains confident in its conservative and disciplined approach to credit and risk management.

With the passage of the PPP, administered by the Small Business Administration ("SBA"), the Company has actively assisted its customers with applications for resources through the program. On December 31, 2022, the Company carried $229,000 of PPP loans classified as C&I loans for reporting purposes. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans.

**Noninterest income** Noninterest income decreased $503,000 or 5.9% to $6.7 million for 2022 compared to $7.2 million for 2021. This decrease resulted from gain on sale of loans and gain on equity securities, which decreased $1.2 million and $382,000, respectively. The decrease in gain on sale of loans, resulted from the decline in demand for residential refinances. The decrease in the gain on equity securities resulted from decreases in the stock price for the underlying securities. These decreases were partially offset by increases in gross rental income from an OREO property and service charges on deposit accounts of $771,000 and $425,000, respectively. The Company also recognized $707,000 in gross OREO expenses in 2022, which is included in noninterest expense in the Consolidated Statement of Income. Therefore, the net impact on the Consolidated Statement of Income for this OREO property was a $244,000 profit in 2022. The increase in service charges on deposit accounts was primarily due to an increase in checking account fees as a result of a new checking account program offered to customers.

**Noninterest expense** Operating expenses increased $6.0 million, or 18.9% to $38.0 million for 2022 compared to $31.9 million for 2021. The increase was primarily the result of a $2.4 million increase in merger-related costs, a $1.2 million increase in OREO writedowns, a $1.3 million increase in other expense, a $653,000 increase in gross OREO expenses, and a $403,000 increase in data processing and information technology costs. Gross OREO expenses of $707,000 primarily relate to rental expenses incurred on one commercial OREO property. The Company also recognized $951,000 in gross rental income from this OREO property in 2022, which is included in noninterest income in the Consolidated Statement of Income. Therefore, the net impact on the Consolidated Statement of Income for this OREO property was a $244,000 profit in 2022.

**Provision for income taxes** The provision for income taxes decreased by $845,000, or 20.8%, to $3.2 million for 2022 from $4.1 million for 2021. The Company's effective federal income tax rate in 2022 was 17.0% compared to 17.9% in 2021. The decrease in the effective income tax rate year over year was a result of increases in tax-exempt income.

**<u>Asset and Liability Management</u>**

The primary objective of the Company's asset and liability management function is to maximize net interest income while maintaining an acceptable level of interest rate risk given the Company's operating environment, capital and liquidity requirements, performance objectives, and overall business focus. The principal determinant of the exposure of the Company's earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the re-pricing or maturity of its interest-bearing liabilities. The Company's asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Company's Board of Directors continues to believe in a strong asset/liability management process to insulate the Company from material and prolonged increases in interest rates.

The Company's Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management. This committee, which meets quarterly, generally monitors asset and liability management policies and strategies.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 56

------

**<u>Interest Rate Sensitivity Simulation Analysis</u>**

The Company engages an external consultant to facilitate income simulation modeling quarterly. This modeling measures interest rate risk and sensitivity. The Asset and Liability Management Committee of the Company believes the various rate scenarios of the simulation modeling enable the Company to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, various loan and mortgage-backed security prepayments, and deposit decay assumptions.

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

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

Net interest income simulation ("NII") - Projected net interest income over the next twelve months will not be reduced by more than 10% given a gradual shift (i.e., over 12 months) in interest rates of up to 200 basis points (+ or -) and assuming no balance sheet growth.

Portfolio equity simulation - Portfolio equity is the net present value of the Company's existing assets and liabilities. The Company uses an Economic Value of Equity ("EVE") analysis which shows the estimated changes in portfolio equity considering certain long-term shock rates. Given a 200 basis point immediate and permanent increase in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders' equity. Given a 100 basis point immediate and permanent decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 10% of stockholders' equity.

The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market interest rates on net interest income and the change in portfolio equity. This analysis was done assuming the interest-earning asset and interest-bearing liability levels at December 31, 2022, and December 31, 2021, remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over one year from the December 31, 2022, and December 31, 2021 levels for net interest income and portfolio equity. The impact of market-rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2022, and December 31, 2021, for portfolio equity:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | December 31, 2022 | December 31, 2022 | December 31, 2021 | December 31, 2021 |
| Change in Rates | % Change in NII | % Change in EVE | % Change in NII | % Change in EVE |
| +200bp | (0.50)% | (2.80)% | 2.40% | 2.50% |
| -100bp | (0.30)% | (1.30)% | (1.40)% | (12.70)% |

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**<u>Liquidity and Capital Resources</u>**

**Liquidity.** Liquidity management involves monitoring the ability to meet the cash flow needs of bank customers, such as borrowings or deposit withdrawals and the Company's financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold, and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, the ability to borrow funds under line of credit agreements with correspondent banks, a borrowing agreement with the Federal Home Loan Bank of Cincinnati, brokered deposits, and the adjustment of interest rates to obtain deposits. Management believes the Company has the capital adequacy, profitability, and reputation for meeting its customers' current and projected needs.

Liquidity is managed based on factors including core deposits as a percentage of total deposits, the degree of funding source diversification, the allocation and amount of deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets readily converted to cash without undue loss, the amount of cash and liquid securities we hold, and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities and other factors.

The Company's liquid assets consist of cash and cash equivalents, including investments in very short-term investments (*i.e.*, federal funds sold), equity securities, and investment securities classified as available for sale. The level of these assets is dependent on the Company's operating, investing, and financing activities during any given period. On December 31, 2022, cash and cash equivalents totaled $53.8 million or 3.2% of total assets, equity securities totaled $915,000 or 0.1% of total assets, and investment securities classified as available for sale totaled $165.0 million or 9.8% of total assets. Management believes that the company's liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, junior subordinated debt, brokered deposits, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 57

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Operating activities provided net cash of $18.4 million and $15.4 million for 2022 and 2021, respectively, generated principally from net income of $15.7 million and $18.6 million in these respective periods.

Investing activities used net cash of $8.7 million, which consisted primarily of an increase in loans of $55.9 million and investment purchases of $32.3 million. This was partially offset by investment sales of $57.9 million and $18.4 million in cash acquired in the merger. For the same period ended in 2021, investing activities provided net cash of $70.9 million, which consisted primarily of a decrease in loans of $127.3 million and investment repayments and maturities of $11.5 million. This was partially offset by investment purchases of $68.9 million.

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, and the payment of dividends. During 2022, net cash used by financing activities totaled $75.4 million, principally derived from a decrease in deposits of $128.6 million, $6.1 million was a result of the repurchase of treasury shares, and $5.5 million was a result of the payment of dividends. The Company repurchased 229,420 of its outstanding shares during the twelve months ended December 31, 2022. These changes were partially offset by a $65.0 million increase in short-term borrowings. During 2021, net cash used by financing activities totaled $79.2 million, principally derived from a decrease in deposits of $58.6 million, and $12.3 million was a result of the repurchase of treasury shares.

Management monitors projected liquidity needs and determines the desired level based partly on the Company's commitment to making loans and management's assessment of the Company's ability to generate funds. As a result, the Company anticipates having sufficient liquidity to satisfy estimated short and long-term funding needs.

**Capital Resources**. The Company's primary source of capital is retained earnings. Historically, the Company has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to ensure regulatory compliance and capital adequacy for future expansion.

**Registrant's Common Equity and Related Stockholder Matters**

The Company had approximately 1,169 stockholders of record as of December 31, 2022. The Company's common stock is traded and authorized for quotation on NASDAQ under the symbol "MBCN." The Company currently expects consistency in the payout of future cash dividends.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 58

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**MANAGEMENT**'**S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.

Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management believes that, as of December 31, 2022, the Company's internal control over financial reporting was effective.

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

<u>/s/ James R. Heslop, II</u>

By: James R. Heslop, II

Chief Executive Officer

(Principal Executive Officer)

Date: March 15, 2023

<u>/s/ Donald L. Stacy</u>

By: Donald L. Stacy

Treasurer

(Principal Financial & Accounting Officer)

Date: March 15, 2023

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 59

## Ex-21

Exhibit 21

Middlefield Banc Corp. Subsidiaries

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| | |
|:---|:---|
| 1 | The Middlefield Banking Company ("MBC"), an Ohio-chartered commercial bank that began operations in 1901, engages in general commercial banking in northeastern and central Ohio. MBC's consolidated financial statements also include the accounts of MBC's subsidiaries, Middlefield Investments, Inc. ("MI"), established in March of 2019, MB Insurance Services, LLC. (MIS), established in March of 2022, and LBSI Insurance, LLC. The principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-0035. |

---

---

| | |
|:---|:---|
| 2 | On October 23, 2009 Middlefield received approval from the Federal Reserve Bank of Cleveland to establish an asset resolution subsidiary. Organized as an Ohio corporation under the name EMORECO, Inc. and wholly owned by Middlefield Banc Corp, the purpose of the asset resolution subsidiary is to maintain, manage, and ultimately dispose of nonperforming loans and real estate acquired by the subsidiary bank as the result of borrower default on real estate-secured loans. |

---

## Ex-23

Exhibit 23

![s01.jpg](s01.jpg)

<u>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</u>

We consent to the incorporation by reference in Registration Statements File No. 333-213607 and 333-219313 on Form S-3; File No. 333-218859 on Form S-8; and File No. 333-183497 on Form S-3D and Form S-3DPOS, effective September 13, 2012, of Middlefield Banc Corp. of our report dated March 15, 2023, relating to our audit of the consolidated financial statements, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K of Middlefield Banc Corp. for the year ended December 31, 2022.

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

Cranberry Township, Pennsylvania

March 15, 2023

## Exhibit 31.1

*Exhibit 31.1*

![m01.jpg](m01.jpg)

**Certification of Principal Executive Officer**

I, James R. Heslop, II, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this annual report on Form 10-K of Middlefield Banc Corp.;

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

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

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;<br>

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

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

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

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

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

---

| | |
|:---|:---|
| Date: March 15, 2023 | /s/ James R. Heslop, II |
|  | James R. Heslop, II |
|  | Chief Executive Officer |

---

## Exhibit 31.2

*Exhibit 31.2*

![m01.jpg](m01.jpg)

**Certification of Principal Financial and Accounting Officer**

I, Donald L. Stacy, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this annual report on Form 10-K of Middlefield Banc Corp.;

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

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

&nbsp;&nbsp;&nbsp;&nbsp;4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;<br>

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

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

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

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

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

---

| | |
|:---|:---|
| Date: March 15, 2023 | /s/ Donald L. Stacy |
|  | Donald L. Stacy |
|  | Principal Financial and Accounting Officer |

---

## Ex-32

*Exhibit 32*

![m01.jpg](m01.jpg)

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

In connection with the Annual Report of Middlefield Banc Corp. (the "Company") on Form 10-K for the period ending December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Thomas G. Caldwell, President, and Donald L. Stacy, Chief Financial Officer, certify, pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

---

| | |
|:---|:---|
| /s/ James R. Heslop, II | /s/ Donald L. Stacy |
| James R. Heslop, II | Donald L. Stacy |
| Chief Executive Officer | Principal Financial and Accounting Officer |

---

Date: March 15, 2023

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