Document:

EX-10.9 Funding and Contingency Plan Agreement

 

Exhibit 10.9

Federal Home Loan Banks P&I Funding and Contingency Plan Agreement

This Federal Home Loan Banks P&I Funding and Contingency Plan Agreement (“Agreement”) is
entered into as of this 20th day of July, 2006 (the “Effective Date”) by and
among the Office of Finance (the “OF”) and each of the Federal Home Loan Banks
(“Banks”). The OF and the Banks are sometimes referred to herein individually as a “party”
and collectively as the “parties.” All references in this Agreement to any of the parties to this
Agreement include such party or any successor entity.

WHEREAS, the Banks are jointly and severally liable for the payment of consolidated obligations
issued pursuant to Section 11 of the Federal Home Loan Bank Act, as amended (12 U.S.C. §1431)
(“COs”);

WHEREAS, the OF has the authority under 12 CFR § 985.6(a) to issue and service (including making
timely payments on principal and interest due, subject to 12 CFR §§ 966.8 and 966.9) consolidated
obligations issued on behalf of the Banks pursuant to, and in accordance with, the policies and
procedures established by the OF Board of Directors; and

WHEREAS, the Federal Reserve Board has announced a change in its Policy Statement on Payments
System Risk (as the same may be amended, modified or supplemented, the “PSR Policy”) that
will cause the PSR Policy to be applied to the FHLBanks beginning July 20, 2006; and

WHEREAS, the OF and a task force of the Debt Management Sub-Committee of the Financial Officers’
Conference of the Banks have developed P&I Funding and Contingency Plan Procedures (as the same may
be amended, modified, or supplemented, the “Procedures”) to deal with the possibility that
a Bank may not make a payment of debt service on COs to the OF on a timely basis following the
application of the PSR Policy to the Banks; and

WHEREAS, the OF Board of Directors has approved the Procedures and determined that the OF should
obtain the written agreement of the Banks on several matters relating to the Procedures, which
matters are included in this Agreement; and

WHEREAS, the Federal Housing Finance Board (the “Finance Board”) has supported the adoption
of the Procedures by issuing the waiver attached hereto as Exhibit A (as the same may be
amended, modified or supplemented, the “Waiver”) of its prohibition of the direct placement
of COs with FHLBanks contained in 12 CFR § 966.8(c), to accommodate the implementation of the
Procedures, based in part on its view that timely payment of all principal and interest to
investors in COs is essential to maintain the confidence of investors and potential investors in
COs; and

WHEREAS, the Waiver provides that the interest rate paid by the Bank that has not remitted all the
funds to the OF by the agreed upon deadline on the CO issued pursuant to the Waiver shall be at
least 500 basis points above the federal funds rate.

1

 

NOW THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable
consideration, the receipt and sufficiency of which the parties acknowledge, the parties hereby
agree as follows:

	 	1.	 	Authorization of Issuance of COs

Each Bank agrees that if it is a “Delinquent Bank” (as defined below), the OF may cause one or more
overnight “Plan COs” (as defined below) to be issued on behalf of the Delinquent Bank for the
benefit of one or more “Contingency Banks” (as defined below), each such Plan CO to be issued to a
Contingency Bank in the principal amount equal to the amount of funds provided by that Contingency
Bank on behalf of that Delinquent Bank, to mature on the following Business Day (as defined below),
and to bear interest on such principal amount from the date of issuance to but not including that
maturity date, due and payable on that maturity date, at the rate per annum (the “Base
Cost”) equal to (a) the overnight fed funds quote obtained by the OF from a recognized funds
broker to be paid for any available funds delivered to the OF by a Contingency Bank or withheld
from its “positive net position” as described in Section 2 of this Agreement or (b) the actual cost
if funds are purchased by that Contingency Bank in the open market and delivered to the OF. All
such interest shall be calculated on an actual/360 basis based on the number of days the Plan CO is
outstanding, including non-Business Days. The Delinquent Bank shall also be obligated to pay
“Additional Interest” as set forth in Section 3 of this Agreement, all or a portion of which will
satisfy the obligation of the Delinquent Bank under the Waiver to pay an interest rate on the Plan
CO that is at least 500 basis points above the federal funds rate.

The OF shall issue a Plan CO in physical form under those circumstances and apply the proceeds
therefrom on behalf of that Delinquent Bank as provided for in the Procedures. Each Bank hereby
authorizes the OF, and the OF hereby agrees, to hold any Plan COs issued as agent for each such
Bank when it acts as a Contingency Bank.

For purposes of this Agreement,

a “Delinquent Bank” means a Bank that misses any funding time specified in the
Procedures, including a funding time for the repayment of Plan COs; and

a “Plan CO” means a CO issued on behalf of a Delinquent Bank to one or more
Contingency Banks. For the avoidance of doubt, although a Delinquent Bank is primarily
responsible for repayment of a Plan CO issued on its behalf, each Plan CO is the joint and
several obligation of all 12 Banks; and

a “Contingency Bank” means any Bank that provides funds for a Delinquent Bank under
the Procedures; and

“Business Day” means any day other than (i) a Saturday, (ii) a Sunday or (iii) any
day on which banking institutions in New York City are authorized or required by law or
executive order to close.

2

 

	 	2.	 	Use of Proceeds to Purchase COs

Each Bank shall be obligated to provide and authorizes the OF to apply any “positive net position”
(i.e., the amount by which end-of-day proceeds received by a Bank from sale of COs on one day
exceed payments by that Bank on COs on the same day) of that Bank to the purchase of a Plan CO
issued on behalf of a Delinquent Bank, thereby causing such Bank to become a Contingency Bank,
based on the priority established in the matrix attached hereto as Exhibit B
(“Contingency Funding Matrix”) and otherwise in accordance with the Procedures.

	 	3.	 	Additional Interest

Each Bank agrees that if it is a Delinquent Bank, then it will pay an amount (“Additional
Interest”) in accordance with the following schedule in addition to interest equal to the Base
Cost:

	 	 	 	 	 
	1st offense

	 	—
	 	500 basis points per annum of the delinquent amount
	2nd offense

	 	—
	 	750 basis points per annum of the delinquent amount
	3rd and
subsequent offense

	 	—
	 	1,000 basis points per annum of the delinquent amount

The Additional Interest will be calculated on an actual/360 basis based on the actual number of
days the related Plan CO is outstanding, including non-Business Days, from the date of issuance to
but excluding the stated maturity date. For purposes of this calculation, Additional Interest
attributable to a delinquent amount that is not related to the principal amount of a Plan CO (i.e.,
because the Delinquent Bank pays all or a portion of its delinquent amount after a deadline but
before a Contingency Bank is entitled to have a Plan CO issued for its benefit on behalf of the
Delinquent Bank with respect to such amount) will be assessed on that delinquent amount assuming
that a Plan CO was issued with a principal amount equal to that delinquent amount and that the Plan
CO would mature on the next Business Day.

For purposes of calculating Additional Interest, each different time deadline established under the
Procedures will accrue its own separate count of the number of offenses, so that a Delinquent Bank
will pay a separate amount for each such time deadline missed, and the step-up in Additional
Interest for the occurrence of a particular offense will only be measured with regard to offenses
that have occurred within the 36-month period ending on the date of that particular offense (the
“Delinquency Measurement Period”). For example, if a Delinquent Bank twice misses a
morning deadline and once misses an afternoon deadline, all as established under the Procedures,
within a Delinquency Measurement Period, then the Delinquent Bank shall have been subject to
Additional Interest of 500 basis points with respect to the first morning deadline missed,
Additional Interest of 750 basis points with respect to the second morning deadline missed, and
Additional Interest of 500 basis points with respect to the afternoon deadline missed.

Each Bank agrees that (i) for each Plan CO issued, the first 100 basis points of the Additional
Interest shall be assessed against the Delinquent Bank for the benefit of the Contingency Bank that
purchased the Plan CO as provided in Section 1 of this

3

 

Agreement, and the balance of the Additional Interest assessed against the Delinquent Bank (i.e.,
400 basis points, 650 basis points, or 900 basis points) will be divided equally among the Banks
(including the Contingency Banks) that are not Delinquent Banks with respect to the same funding
time specified in the Procedures and (ii) for Additional Interest attributable to a delinquent
amount that is not related to a Plan CO, the Additional Interest will be divided equally among the
Banks that are not Delinquent Banks with respect to the same funding time specified in the
Procedures. Each of the Banks and the OF agree that any Additional Interest will be allocated and
paid through the monthly assessment from the OF, and that the Additional Interest is not the joint
and several obligation of the Banks.

Notwithstanding anything in this Section 3 or Section 7(a) or (b) of this Agreement to the
contrary, and subject to Sections 5(a) and (d) below, each Bank agrees that assessment of the
Additional Interest shall be subject to the appellate process contained in the Procedures and that
the OF shall have the authority to waive all or any portion of the Additional Interest or excuse
the occurrence of any offense as provided for in the Procedures. To the extent permitted under the
Waiver, the assessment of Additional Interest shall be suspended pending completion of the
appellate process.

	 	4.	 	Reallocation of COs

Each Bank agrees that if a Bank is a Delinquent Bank, with respect to each Plan CO issued to a
Contingency Bank on behalf of a Delinquent Bank, each Bank that is a “Reallocation Bank” (as
defined below) shall immediately have the obligation to purchase that Reallocation Bank’s “Pro Rata
Share” (as defined below) of such Plan CO from that Contingency Bank, with such obligation to
purchase being effective immediately upon the issuance of the Plan CO , subject to the proviso in
the following paragraph.

Each Bank agrees that if it is a Reallocation Bank, it will wire to the Contingency Bank that
holds a Plan CO an amount equal to (i) its Pro Rata Share of the principal amount of that Plan CO,
plus (ii) accrued interest thereon from the date of issue of the Plan CO until its stated maturity
date equal to the Base Cost, not later than 1:00 p.m., Eastern Time, on the second Business Day
following the date of issuance of that Plan CO; provided, however, that such Reallocation
Bank shall not be required to wire funds to the extent that it determines in good faith such
purchase will violate any rule, regulation or binding policy of the Finance Board, and under those
circumstances such Reallocation Bank shall be excused from its obligation to make such payment to
the Contingency Bank, but not from its joint and several obligation, with respect to such Plan CO.
The wire shall be sent to the account identified by the Contingency Bank for that purpose, and time
is of the essence with respect to the wire. In the event there are multiple Plan COs issued on a
particular date, Reallocation Banks shall not favor any Contingency Bank over any other Contingency
Bank, and shall purchase its Pro Rata Shares of such Plan COs on a proportional basis. To the
extent that a Plan CO is repaid prior to the settlement of a Reallocation Bank’s obligations to
purchase its Pro Rata Share, that Pro Rata Share shall be reduced proportionally by the amount so
repaid.

4

 

Each Contingency Bank shall promptly notify the OF of its receipt of payment of the Pro Rata Share
amounts from the Reallocation Banks. Promptly following receipt of that notice and confirmation of
the payment from the Reallocation Banks, the OF shall cancel such original outstanding physical
Plan CO and shall reissue replacement physical Plan COs with the principal amounts representing the
respective Pro Rata Shares of the Reallocation Banks that have paid for their purchase of the Plan
CO, along with a Plan CO representing the balance of the principal amount of the original Plan CO
that is retained by the Contingency Bank. Each such reissued Plan CO remains a “Plan CO” for
purposes of this Agreement and the Procedures, but a Reallocation Bank will not be treated as the
Contingency Bank with respect thereto. Each Bank hereby authorizes the OF, and the OF hereby
agrees, to hold any such reissued Plan COs payable to such Bank as agent for such Bank’s benefit,
and to pay debt service on such CO to the record owner of such Plan CO as reflected on the OF’s
books following reissuance.

For purposes of this Section,

          a “Reallocation Bank” with respect to a Plan CO means each Bank other than (i) any
Delinquent Bank on behalf of which that Plan CO or any other Plan CO was originally issued on the
same date, and (ii) the Contingency Bank that owns that Plan CO;

          “Pro Rata Share” of a Reallocation Bank means a fraction, the numerator of which is
the total amount of outstanding COs for which the Reallocation Bank is primary obligor as of the
Most Recent Measurement Date, and the denominator of which is the total amount of outstanding COs
for which all Reallocation Banks and the Contingency Bank are primary obligor as of the Most Recent
Measurement Date; and

          “Most Recent Measurement Date” means the most recent month-end data calculated by the
OF and available on the OF’s Debt Servicing System, which amount is not adjusted for inter-bank
ownership of COs.

The Banks agree that the provisions of this Section 4 shall not affect the allocation of Additional
Interest pursuant to the fourth paragraph of Section 3 of this Agreement, including without
limitation the allocation of the first 100 basis points of Additional Interest pursuant to such
paragraph to a Contingency Bank that acquired the Plan CO at original issuance.

One or more Contingency Banks and Reallocation Banks may agree among themselves to net their
payments to each other that are due as a result of multiple Plan COs having been issued and subject
to reallocation on the same date.

Each Bank agrees that the formula for determining the Pro Rata Shares has been agreed to by the
Banks solely for the purpose of this Agreement and is not intended to represent an agreed upon
allocation of risk or responsibility for any other purpose.

The provisions of this Section 4 shall survive any termination of this Agreement with respect to
any Plan CO issued prior to such termination.

5

 

	 	5.	 	Acknowledgements

Each Bank acknowledges and agrees that:

	 	(a)	 	the Base Cost plus the Additional Interest assessed against a Delinquent Bank
may not be lower than the amount required to be paid by the Delinquent Bank under the
Waiver;
	 
	 	(b)	 	the OF shall be required to provide any notice of issuance of a Plan CO
hereunder to the Office of Supervision of the Finance Board, which notice is presently
required by the Waiver to be provided no later than 5:00 P.M. eastern time on the date
of the issuance of the Plan CO;
	 
	 	(c)	 	its agreement in Section 1 of this Agreement with respect to any Plan CO
issued on its behalf as a Delinquent Bank satisfies the regulatory requirement
contained in 12 CFR § 966.8(b) that provides that COs may be offered for sale only in
the event Banks are committed to take the proceeds;
	 
	 	(d)	 	the appellate process referred to in the last paragraph of Section 3 of this
Agreement will be subject to the terms of the Waiver;
	 
	 	(e)	 	no Bank will be entitled to a Plan CO in the amount of any positive net
position except to the extent its end-of-day positive net position is used to purchase
a Plan CO; and
	 
	 	(f)	 	the Additional Interest will be calculated based on the principal amount of
a Plan CO, as well as any other delinquent amount paid late to the OF by the
Delinquent Bank.

	 	6.	 	Representations and Warranties of the Parties

As of the date of its execution and delivery of this Agreement, each party represents and warrants
to the other parties that:

          (a) This Agreement is within such party’s powers and has been duly authorized by all necessary
corporate action.

          (b) This Agreement has been duly executed and delivered by such party and constitutes a legal,
valid and binding obligation of such party enforceable in accordance with its terms.

	 	7.	 	Termination and Amendments

          (a) This Agreement will be deemed to be effective as of the Effective Date and will continue
in full force until such time as (i) at least two-thirds (2/3) of the Banks agree to its
termination, (ii) the Finance Board rescinds the Waiver or (iii) the Finance Board takes any
action, including without limitation modification of the Waiver, that

6

 

makes compliance by the OF or the Banks with this Agreement not commercially reasonable.

          (b) This Agreement may be amended only in a signed writing executed and delivered by all of
the Banks and the OF. Any such amendment shall be effective as of the effective date set forth in
the amendment.

          (c) This Agreement shall also be subject to termination at 11:59 p.m. on December 31, 2008,
and at 11:59 p.m. on each third December 31 thereafter (e.g. December 31, 2011, December 31, 2014,
etc.) (“Expiration Time”) if at least one-third (1⁄3) of the Banks provide notice of their
respective election to terminate to each other Bank and the OF at least one year prior to the
Expiration Time. Such notice shall identify with reasonable specificity the reason or reasons such
Bank wishes to terminate the Agreement at the next Expiration Time. The Banks and the OF agree to
negotiate in good faith toward the resolution of the issues raised in the notices of termination
with a view of reaching agreement on a new agreement at or prior to the Expiration Time.

	 	8.	 	Successors and Assigns

This Agreement shall be binding upon and inure to the benefit of the successors and permitted and
authorized assigns of each Bank and the OF.

	 	9.	 	Governing Law; Severability

This Agreement shall be governed by the statutory and common law of the United States and, to the
extent federal law incorporates or defers to state law, the laws (exclusive of the choice of law
provisions) of the State of New York. Any term or provision of this Agreement that is determined
to be invalid or unenforceable shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms and provisions of
this Agreement.

	 	10.	 	Notice

Except for any notices of payment delivered pursuant to Section 4 of this Agreement, which shall be
delivered promptly either telephonically or electronically, any notice required or permitted to be
given or made under this Agreement, including a notice to effect a change in a party’s address for
notice, must be in writing and addressed to the other parties at the addresses of such parties set
forth beneath their signatures below, and will be deemed to be properly given or made on the
earliest of (i) actual delivery, (ii) two (2) Business Days after being sent, with delivery charges
paid by the sending party, by a nationally recognized commercial courier service for delivery on
the next Business Day, and (iii) three (3) Business Days after being sent through the United States
Postal Service, certified mail, return receipt requested, postage prepaid.

7

 

	 	11.	 	Counterparts

This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an
original and all of which together shall constitute one and the same agreement.

	 	12.	 	Entire Agreement; Conflicts

This Agreement constitutes the entire agreement of the parties and supersedes all prior
understandings or agreements, oral or written, among the parties on the subjects addressed in this
Agreement. Nothing in this Agreement, including without limitation the right of Banks to terminate
it or the right of Banks to withhold approval of an amendment, shall be construed to (i) conflict
with or limit the authority of the OF to carry out its duties pursuant to law, including without
limitation Federal Housing Finance Board regulations; or (ii) alter the Banks’ joint and several
liability on COs, including the Plan COs issued hereunder. This Agreement does not constitute “an
agreement to obtain financial assistance to meet a Bank’s current obligations... due during this
quarter”, a “consolidated obligation payment plan,” an “inter-Bank assistance agreement” or “a
payment on any [CO] on behalf of another Bank” as these terms are used in 12 CFR § 966.9. If any
applicable provision contained in the Procedures irreconcilably conflicts with any express
provision of this Agreement, then such express provision of this Agreement shall control.

	 	13.	 	No Third Party Rights Created

Nothing in this Agreement shall create or be deemed to create any rights in any third party.

	 	14.	 	Suspension of Obligations

If the Finance Board issues any order or enters into or amends any written agreement, including
without limitation a written agreement within the meaning of 12 USC § 1422b(a)(5), that prohibits
or prevents a party to this Agreement from either being a party to this Agreement, or from
performing its obligations under this Agreement, after the Effective Date, then that party’s duty
to perform its obligations under this Agreement shall be suspended while such order by or agreement
with the Finance Board is in effect.

[Signature Page to Follow]

8

 

IN WITNESS WHEREOF, this Agreement has been executed, on the date(s) set forth below, as of the day
and year first above written.

	 	 	 	 	 	 	 	 	 
	Federal Home Loan Bank of Atlanta	 	Federal Home Loan Bank of Boston
	 
	 	 	 	 	 	 	 	 
	By:	 	/s/ W. Wesley McMullan
 
	 	President:	 	/s/ Michael A. Jessee
 

	 

	 	Name:
	 	W. Wesley McMullan
 

	 	Date:
	 	5-23-06

 

	 	 	Title:	 	Executive Vice President

 
	 	Address for notice:
	 

	 	 	 	 	 	 	 	111 Huntington Avenue

Boston, MA 02199
	By:	 	/s/ D. Haddon Foster, II
 
	 	 	 	 
	 

	 	Name:
	 	D. Haddon Foster, II
 
	 	 	 	 
	 

	 	Title:
	 	First Vice President

 
	 	 	 	 
	Date:	 	May 23, 2006
 
	 	 	 	 
	Address for notice:	 	 	 	 
	1475 Peachtree Street, NE	 	 	 	 
	Atlanta, GA 30309	 	 	 	 
	Attention: Director, Financial Management	 	 	 	 

	 	 	 	 	 	 	 
	Federal Home Loan Bank of Chicago	 	Federal Home Loan Bank of Cincinnati
	 
	 	 	 	 	 	 
	President:

	 	/s/ Mike Thomas

 

	 	President:
	 	/s/ David H. Hehman
 

	Date:

	 	6/16/06

 

	 	Date:
	 	June 16, 2006
 

	Address for notice:	 	Address for notice:
	Federal Home Loan Bank of Chicago	 	Federal Home Loan Bank of Cincinnati
	111 East Wacker Drive	 	221 East Fourth Street, Suite 1000
	Chicago, Illinois 60601	 	Cincinnati, OH 45202
	Attention: General Counsel	 	SVP/Treasurer:	 	/s/ Carole L. Cossé
 

	 
	 	 	 	 	 	 
	Federal Home Loan Bank of Dallas	 	Federal Home Loan Bank of Des Moines
	 
	 	 	 	 	 	 
	President:

	 	/s/ Terry Smith

 

	 	President:
	 	/s/ Neil N. Fruechte
 

	Date:

	 	5/10/06

 

	 	Date:
	 	May 11, 2006
 

	Address for notice:	 	Address for notice:
	 

	 	8500 Freeport Parkway South
	 	 	 	907 Walnut
	 

	 	Suite 100
	 	 	 	Des Moines, IA 50309
	 

	 	Irving, Texas 75063	 	 	 	 
	 
	 	 	 	 	 	 
	Federal Home Loan Bank of Indianapolis	 	Federal Home Loan Bank of New York
	 
	 	 	 	 	 	 
	President:

	 	/s/ Martin L. Heger
 

	 	President:
	 	/s/ Alfred A. DelliBovi
 

	Date:

	 	June 1, 2006
 

	 	Date:
	 	May 22, 2006
 

	Address for notice:	 	Address for notice:
	 	 	8250 Woodfield Crossing Blvd.	 	 101 Park Avenue, Floor 5
	 	 	Indianapolis, IN 46240	 	New York, NY
	 	 	Attention: Milton Miller, CFO	 	 10178-0599

9

 

	 	 	 	 	 	 	 
	Federal Home Loan Bank of Pittsburgh	 	Federal Home Loan Bank of San Francisco
	 
	 	 	 	 	 	 
	President:

	 	/s/ John R. Price
 

	 	President:
	 	/s/ Dean Schultz

 

	Date:

	 	May 24, 2006
 

	 	Date:
	 	April 27, 2006
 

	Address for notice:	 	Address for notice:
	 	 	601 Grant Street	 	600 California Street, 4th Floor
	 	 	Attn: Capital Markets	 	San Francisco, California 94108
	 

	 	Pittsburgh, PA 15219	 	 	 	 
	 
	 	 	 	 	 	 
	Federal Home Loan Bank of Seattle	 	Federal Home Loan Bank of Topeka
	 
	 	 	 	 	 	 
	President:

	 	/s/ James E. Gilleran
 

	 	President:
	 	 /s/ Andrew J. Jetter
 

	Date:

	 	May 17, 2006
 

	 	Date:
	 	May 12, 2006
 

	Address for notice:	 	Address for notice:
	 	 	1501 Fourth Ave., Ste. 1800	 	 Federal Home Loan Bank of Topeka
	 	 	Seattle, WA 98101-1693	 	One Security Benefit Place, Suite100
	 	 	 	 	Topeka, KS 66606-2444
	 	 	 	 	Attn: General Counsel

	 	 	 	 	 	 	 
	Office of Finance	 	 
	 
	 	 	 	 	 	 
	Managing Director:	 	/s/ John K. Darr
 
	 	 
	Date:	 	5-22-06

 
	 	 
	Address for notice:	 	 
	 	 	Two Fountain Square	 	 
	 	 	11921 Freedom Drive Suite 1000	 	 
	 	 	Reston, VA 20190	 	 

10

 

EXHIBIT A

WAIVER

A-1

 

	 	 	 	 	 
	

	 	

Number:

Date:
	 	

2005-22

December 14, 2005

Federal Housing Finance Board

Waiver Concerning the Direct Placement of Consolidated Obligations

WHEREAS, section 2A of the Federal Home Loan Bank Act (12 U.S.C. § 1422a(a)(3)) requires the
Federal Housing Finance Board (Finance Board) to ensure that the Federal Home Loan Banks (Banks)
remain adequately capitalized and able to raise funds in the capital markets to the extent
consistent with ensuring the safe and sound operation of the Banks;

WHEREAS, timely payment of all principal and interest to investors in consolidated obligations
(COs) is essential to maintain the confidence of investors and potential investors in COs;

WHEREAS, the Federal Reserve Bank of New York will implement procedures that will prevent a Bank or
any other government sponsored enterprise from incurring an overdraft in the accounts at the
Federal Reserve Bank of New York used to pay the principal and interest due on securities;

WHEREAS, the Banks Office of Finance (OF) serves as agent for each Bank in remitting to the Federal
Reserve Bank of New York all funds due for principal and interest payments on COs;

WHEREAS, under 12 C.F.R. §§ 907.2 and 907.6, any party may request a waiver of a provision,
restriction, or requirement of the Finance Board regulations not otherwise required by law if such
waiver is not inconsistent with the law, does not adversely affect any substantial existing rights
and the Finance Board finds that application of the restriction would adversely effect achievement
of the purposes of the Bank Act, or upon a showing of good cause;

WHEREAS, on October 18, 2005, the OF submitted to the Finance Board a request to waive the
prohibition on direct placement of COs in 12 C.F.R. § 966.8(c) when a Bank has not provided to the
OF by the agreed upon deadline all funds for principal and interest payments due that day on COs,
or portions of COs, for which that Bank is the primary obligor; and

WHEREAS, Finance Board staff has reviewed the waiver request and determined that it is consistent
with the Bank Act, for good cause, and raises no legal or safety and soundness concerns if the
waiver is granted pursuant to the terms of this resolution.

NOW, THEREFORE, IT IS RESOLVED that effective July 1, 2006, the Board of Directors hereby waives 12
C.F.R. § 966.8(c) when direct placement of COs is necessary to assure that the Federal Reserve Bank
of New York has sufficient funds to timely pay all principal and interest due that day on COs or portions of COs;

B-1

 

Resolution Number 2005-22

Page 2 of 2

IT IS FURTHER RESOLVED that the OF must notify the Office of Supervision no later than 5:00 pm,
eastern time, on any day it directly places a CO pursuant to this waiver; and

IT IS FURTHER RESOLVED that the interest rate paid by the Bank that has not remitted all the funds
to the OF by the agreed upon deadline on the CO issued pursuant to this waiver shall be at least
500 basis points above the federal funds rate.

	 	 	 	 	 
	 	By the Board of Directors of the Federal Housing Finance Board

 	 
	 	/s/ Ronald A. Rosenfeld
 	 
	 	Ronald A. Rosenfeld  	 
	 	Chairman 	 
	 

 

 

EXHIBIT B

Contingency Funding Matrix

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Priority
	 	 	1	 	2	 	3	 	4	 	5	 	6	 	7	 	8	 	9	 	10	 	11	 	12
	Jan

	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	Feb

	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	Mar

	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	Apr

	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	May

	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	Jun

	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	Jul

	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	Aug

	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	Sep

	 	DALL
	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	Oct

	 	TPKA
	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	Nov

	 	SNFR
	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	Dec

	 	STTL
	 	BOST
	 	NWYK
	 	PITT
	 	ATLA
	 	CINC
	 	INDP
	 	CHIC
	 	DSMN
	 	DALL
	 	TPKA
	 	SNFR

B-1exv10w2

 

EXHIBIT 10.2

Severance Agreement

     This Severance Agreement is entered into as of this 11th day of July,
2006, by and between Middlefield Banc Corp., an Ohio corporation (“Middlefield”), and Thomas G.
Caldwell, President and Chief Executive Officer 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 subsidiary bank, The
Middlefield Banking Company, 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 The Middlefield Banking Company,
Middlefield entered into an Amended and Restated Severance Agreement with the Executive dated as of
August 12, 2003,

     Whereas, Middlefield and the Executive have agreed to changes in the terms of the
 August 12, 2003 Amended and Restated Severance Agreement,

     Whereas, Middlefield and the Executive intend that this Severance Agreement supersede
and replace in its entirety the August 12, 2003 Amended and Restated Severance Agreement, 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. Change in Control. (a) Change in Control Benefit. If a Change in Control occurs
before the Executive’s employment termination, Middlefield shall make a lump-sum payment to the
Executive in cash in an amount equal to 2.5 times the Executive’s annual compensation. For this
purpose annual compensation means (x) the Executive’s annual base salary on the date of the Change
in Control, 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. 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.
The amount payable to the Executive hereunder shall not be reduced to account for the time value of
money or discounted to present value. Subject to section 17 of this Severance Agreement, the
payment required under this section 1(a) is payable

 

 

within five business days after the date of the Change in Control. The Executive shall be entitled
to a payment under this paragraph (a) on no more than one occasion.

     (b) Accelerated Vesting If Employment Terminates Within Two Years. If the Executive’s
employment terminates within 24 months after the Change in Control, Middlefield shall also (x)
cause the Executive to become fully vested in any qualified and 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, (y) contribute or cause to be contributed to the
Executive’s 401(k) plan account the matching and profit-sharing contributions, if any, that the
Executive is entitled to based upon all W-2 income earned by the Executive for the plan year in
which termination occurs, and (z) continue or cause to be continued life, health, and disability
insurance coverage substantially identical to the coverage maintained for the Executive before
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. At the end of the
24-month period, the Executive shall have the option to continue health insurance coverage at the
Executive’s expense for a period not less than the number of months by which the Consolidated
Omnibus Budget Reconciliation Act (COBRA) continuation period exceeds 24 months. But instead of
providing continued life, health, and disability coverage for the Executive, Middlefield may elect
to increase the lump-sum amount payable under paragraph (a) of this section 1 by an amount in cash
equal to the present value of Middlefield’s projected cost to maintain the Executive’s life,
health, and disability coverage for 24 months if under the terms of the life, health, or disability
policy coverage maintained by Middlefield it is not possible to continue the Executive’s coverage
after termination or if Middlefield determines that continued life, health, or disability coverage
would be considered deferred compensation under section 409A of the Internal Revenue Code of 1986.

     2. Definition of Change in Control. For purposes of this Severance Agreement, the
term Change in Control means any of the following events occur, provided the event constitutes a
change in control within the meaning of Internal Revenue Code section 409A and provided the
occurrence of the event is objectively determinable and does not require the exercise of judgment
or discretion on the part of any person —

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

     (b) Change in Effective Control: (x) any one person, or more than one person acting as a
group, acquires within a 12-month period ownership of stock of Middlefield possessing 35% or more
of the total voting power of Middlefield’s 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

     (c) Change in Ownership of a Substantial Portion of Assets: a change in the ownership of a
substantial portion of Middlefield’s assets occurs on the date any one person, or more than one
person acting as a group, acquires assets from Middlefield having a total gross fair market value
equal to or exceeding 40% of the total gross fair market value of all of the assets of

 

 

Middlefield 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.

     For purposes of paragraphs (a) through (c) of this section 2, persons shall be considered to
be acting as a group if they would be considered to be acting as a group under Internal Revenue
Code section 409A.

     3. No Benefits After Termination for Cause. (a) Despite anything in this Severance
Agreement to the contrary, under no circumstance shall the Executive be entitled to benefits under
this Severance Agreement if the Executive’s employment terminates for Cause. For purposes of this
Severance Agreement, the term Cause means 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,

     3) removal of the Executive from office or permanent prohibition of the Executive from
participating in The Middlefield Banking Company’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), 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 for 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
Severance 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.

     (b) For purposes of this Severance Agreement, no act or failure to act on the part of the
Executive 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 the best interests of Middlefield. 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 the best interests of
Middlefield. For purposes of this Severance Agreement, the term subsidiary means any entity in
which Middlefield directly or indirectly beneficially owns 50% or more of the outstanding voting
securities.

     (c) The Executive shall not be deemed under this Severance Agreement to have been terminated
for Cause unless and until there is delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of at least three-fourths (3/4) 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 his 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 Severance Agreement limits the Executive’s or his beneficiaries’
right to contest the validity or propriety of the board’s determination of Cause, and they shall
have the right to contest the validity or propriety of the board’s determination of Cause even if
that right does not exist under any employment agreement of the Executive.

     4. No Benefits after Termination Because of Death or Disability. Despite anything in
this Severance Agreement to the contrary, under no circumstance shall the Executive be entitled to
benefits under this Severance Agreement 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 Severance

 

 

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 Severance Agreement.

     5. Term of Agreement. The initial term of this Severance Agreement shall be for a
period of three years, commencing July 11, 2006. On the first anniversary of the July 11,
2006 effective date of this Severance Agreement and on each anniversary thereafter this
Severance 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 Severance 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 Severance Agreement mean the initial term and extensions of the initial term.
Unless terminated earlier, this Severance Agreement shall terminate when the Executive attains age
65. If the board of directors decides not to extend the term of this Severance Agreement, this
Severance Agreement shall nevertheless remain in force until its term expires.

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

     7. 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 Severance Agreement, or could institute or cause or attempt to cause Middlefield to
institute litigation seeking to have this Severance Agreement declared unenforceable, or could take
or attempt to take other action to deny Executive the benefits intended under this Severance
Agreement. In these circumstances, the purpose of this Severance Agreement would be frustrated.
It is Middlefield’s intention that the Executive not be required to incur the expenses associated
with the enforcement of rights under this Severance 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. It is Middlefield’s intention that the Executive not be
forced to negotiate settlement of rights under this Severance 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 Severance Agreement, or (y)
Middlefield or any other person has taken any action to declare this Severance 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 7, to represent the
Executive in connection with 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 7, 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 such counsel in accordance with such 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 7 operates separately from and in addition to
any legal fee reimbursement obligation Middlefield may have with the Executive under any separate
severance or other agreement. Despite any contrary provision of this Severance 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].

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

     9. Successors and Assigns. (a) This Severance Agreement Is Binding on Middlefield’s
Successors. This Severance 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 Severance Agreement and Middlefield’s obligations under this Severance 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 Severance Agreement in the same manner and to the same extent Middlefield would be required to
perform if no such succession had occurred.

     (b) This Severance Agreement Is Enforceable by the Executive’s Heirs. This Severance
Agreement will inure to the benefit of and be enforceable by the Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributes, and legatees.

     (c) This Severance Agreement Is Personal in Nature and Is Not Assignable. This Severance
Agreement is personal in nature. Without written consent of the other party, neither party shall
assign, transfer, or delegate this Severance Agreement or any rights or obligations under this
Severance Agreement except as expressly provided in this section 9. 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 9, Middlefield shall have no liability
to pay any amount to the assignee or transferee.

 

 

     10. Notices. Any notice under this Severance 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 or registered mail, delivered by a
reputable overnight delivery service, or sent by facsimile. 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.

     11. Captions and Counterparts. The headings and subheadings used in this Severance
Agreement are included solely for convenience and shall not affect the interpretation of this
Severance Agreement. This Severance 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.

     12. Amendments and Waivers. No provision of this Severance Agreement may be
modified, waived, or discharged unless such 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 compliance with any condition or provision of this
Severance Agreement to be performed by such other party will be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent time.

     13. Severability. The provisions of this Severance Agreement are severable. The
invalidity or unenforceability of any provision shall not affect the validity or enforceability of
the other provisions of this Severance 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.

     14. Governing Law. The validity, interpretation, construction, and performance of
this Severance 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.

     15. Entire Agreement. This Severance Agreement constitutes the entire agreement
between Middlefield and the Executive concerning the subject matter. No rights are granted to the
Executive under this Severance 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 Severance Agreement. This
Severance Agreement supersedes and replaces in its entirety the August 12, 2003 Amended and
Restated Severance Agreement between Middlefield and the Executive, and from and after the date of
this Severance Agreement the August 12, 2003 Amended and Restated Severance Agreement shall be of
no further force or effect.

     16. 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. Accordingly, Middlefield further acknowledges that the payment of benefits by
Middlefield under this Severance 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
Severance Agreement by seeking other employment or otherwise, nor will 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.

     17. Internal Revenue Code Section 409A. Middlefield and the Executive intend that
their exercise of authority or discretion under this Severance Agreement shall comply with section
409A of the Internal Revenue Code of 1986. If when the Executive’s employment terminates the
Executive is a specified employee, as defined in section 409A of the Internal Revenue Code of 1986,
and if any payments or benefits under this Severance Agreement will result in additional tax or
interest to the Executive because of section 409A, then despite any provision of this Severance
Agreement to the contrary the Executive will not be entitled to the payments or benefits 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. As promptly as possible after the end of the period during which payments or
benefits are delayed under this provision, the entire amount of the delayed payments shall be paid
to the Executive in a single lump sum. If any provision of this Severance Agreement does not
satisfy the requirements of section 409A, such provision shall be applied in a manner consistent
with those requirements, despite any contrary provision of this Severance Agreement. If any
provision of this Severance Agreement would subject the Executive to additional tax or interest
under section 409A, Middlefield shall reform the provision. However, Middlefield shall maintain to
the maximum extent practicable the original intent of the applicable provision without subjecting
the Executive to additional tax or interest, and Middlefield shall not be required to incur any
additional compensation expense as a result of the reformed provision. References in this
Severance Agreement to section 409A of the Internal Revenue Code of 1986 include rules,
regulations, and guidance of general application issued by the Department of the Treasury under
Internal Revenue Code section 409A.

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

	 	 	 	 	 
	Executive

	 	Middlefield Banc Corp.
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	Thomas G. Caldwell

	 	 	 	James R. Heslop, II
	 

	 	Its:
	 	Executive Vice President and Chief Operating 

Officer

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