UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, D.C. 20549~~

~~FORM 10-Q~~

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2020~~2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

~~Commission File Number 001-36613~~

Commission File Number 001-36613

Middlefield Banc Corp.

(Exact Name of Registrant as Specified in its Charter)

Ohio

34-1585111

~~Middlefield Banc Corp.~~

~~(Exact Name of Registrant as Specified in its Charter)~~

~~Ohio~~

~~34-1585111~~

State or Other Jurisdiction of

I.R.S. Employer Identification No.

Incorporation or Organization

15985 East High Street, Middlefield, Ohio

44062-0035

Address of Principal Executive Offices

Zip Code

440-632-1666

Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities Registered Pursuant to Section 12(b) of The Act:

~~440-632-1666~~

~~Registrant’s Telephone Number, Including Area Code~~

~~Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report~~

~~Securities Registered Pursuant to Section 12(b) of The Act:~~

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Without Par Value

MBCN

The NASDAQ Stock Market, LLC

(NASDAQ Capital Market)

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

~~Large accelerated filer ☐~~

~~Accelerated filer~~ ☒

~~Non-accelerated filer ☐~~

~~Smaller reporting company~~ ☒

~~Emerging growth company ☐~~

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

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

~~Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.~~

~~Outstanding at August 4, 2020: 6,378,110~~

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding at August 5, 2021: 6,146,389

MIDDLEFIELD BANC CORP.

INDEX

Part I – Financial Information

	Item 1.	Financial Statements (unaudited)

		Consolidated Balance Sheet as of June 30, ~~2020~~2021 and December 31, ~~2019~~ 2020	3

		Consolidated Statement of Income for the Three and Six Months ended June 30, ~~2020~~2021 and ~~2019~~2020	4

		Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, ~~2020~~2021 and ~~2019~~2020	5

		Consolidated Statement of Changes in Stockholders' Equity for the Three and Six Months ended June 30, ~~2020~~2021 and ~~2019~~2020	6

		Consolidated Statement of Cash Flows for the Six Months ended June 30, ~~2020~~2021 and ~~2019~~2020	8

		Notes to Unaudited Consolidated Financial Statements	10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

	~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~	45

	~~Item 4.~~	~~Controls and Procedures~~	46

~~Part II – Other Information~~

	~~Item 1.~~	~~Legal Proceedings~~	47

	~~Item 1a.~~	~~Risk Factors~~	47

	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	48

	~~Item 3.~~	~~Defaults by the Company on its Senior Securities~~	48

	~~Item 4.~~	~~Mine Safety Disclosures~~	48

	~~Item 5.~~	~~Other Information~~	48

	~~Item 6.~~	~~Exhibits and Reports on Form 8-K~~	49

~~Signatures~~			54 32

~~Exhibit 31.1~~Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	47

Part II – Other Information

~~Exhibit 31.2~~ Item 1.	Legal Proceedings	48

~~Exhibit 32~~Item 1a.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults by the Company on its Senior Securities	48

Item 4.	Mine Safety Disclosures	48

Item 5.	Other Information	48

Item 6.	Exhibits and Reports on Form 8-K	49

Signatures		54

Exhibit 31.1

Exhibit 31.2

Exhibit 32

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

	June 30,			December 31,			June 30,			December 31,
	2020			2019			2021			2020

ASSETS
Cash and due from banks	$	55,766		$	35,113		$	82,435		$	92,874
Federal funds sold		2,520			-			10,034			19,543
Cash and cash equivalents		58,286			35,113			92,469			112,417
Equity securities, at fair value		581			710			730			609
Investment securities available for sale, at fair value		112,529			105,733			150,850			114,360
Loans held for sale		4,151			1,220			790			878
Loans:
Commercial real estate:
Owner occupied		110,134			102,386			109,777			103,121
Non-owner occupied		300,577			302,180			304,324			309,424
Multifamily		37,604			62,028			34,926			39,562
Residential real estate		227,427			234,798			228,102			233,995
Commercial and industrial		240,096			89,527			200,558			232,044
Home equity lines of credit		117,196			112,248			107,685			112,543
Construction and other		66,015			66,680			62,229			63,573
Consumer installment		11,210			14,411			8,694			9,823
Total loans		1,110,259			984,258			1,056,295			1,104,085
Less: allowance for loan and lease losses		10,210			6,768			14,200			13,459
Net loans		1,100,049			977,490			1,042,095			1,090,626
Premises and equipment, net		18,962			17,874			17,680			18,333
Goodwill		15,071			15,071			15,071			15,071
Core deposit intangibles		1,890			2,056			1,564			1,724
Bank-owned life insurance		16,723			16,511			16,846			16,938
Other real estate owned								7,090			7,387
Accrued interest receivable and other assets		15,078			10,697			15,033			13,636

TOTAL ASSETS	$	1,343,320		$	1,182,475		$	1,360,218		$	1,391,979

LIABILITIES
Deposits:
Noninterest-bearing demand	$	270,738		$	191,370		$	326,665		$	291,347
Interest-bearing demand		136,722			107,844			207,725			195,722
Money market		168,842			160,826			183,453			198,493
Savings		218,545			192,003			252,171			243,888
Time		363,420			368,800			225,271			295,750
Total deposits		1,158,267			1,020,843			1,195,285			1,225,200
Short-term borrowings:
Federal funds purchased		-			75
Federal Home Loan Bank advances		20,417			5,000
Total short-term borrowings		20,417			5,075
Other borrowings		17,162			12,750			13,031			17,038
Accrued interest payable and other liabilities		6,779			6,032			5,858			5,931
TOTAL LIABILITIES		1,202,625			1,044,700			1,214,174			1,248,169

STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 7,298,829 and 7,294,792 shares issued; 6,369,467 and 6,423,630 shares outstanding		86,722			86,617
Common stock, no par value; 10,000,000 shares authorized, 7,325,918 and 7,308,685 shares issued; 6,215,511 and 6,379,323 shares outstanding								87,131			86,886
Retained earnings		67,150			65,063			76,150			69,578
Accumulated other comprehensive income		3,761			1,842			3,893			4,284
Treasury stock, at cost; 929,362 and 871,162 shares		(16,938	)		(15,747	)
Treasury stock, at cost; 1,110,407 and 929,362 shares								(21,130	)		(16,938	)
TOTAL STOCKHOLDERS' EQUITY		140,695			137,775			146,044			143,810

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,343,320		$	1,182,475		$	1,360,218		$	1,391,979

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended					Six Months Ended					Three Months Ended					Six Months Ended
	June 30,					June 30,					June 30,					June 30,
	2020		2019			2020			2019		2021		2020			2021		2020
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	12,281	$	12,706		$	24,359		$	25,194	$	11,885	$	12,281		$	24,052	$	24,359
Interest-earning deposits in other institutions		7		169			101			356		12		7			30		101
Federal funds sold		-		25			21			32		1		0			1		21
Investment securities:
Taxable interest		206		214			363			393		410		206			780		363
Tax-exempt interest		634		553			1,263			1,118		602		634			1,160		1,263
Dividends on stock		27		53			57			111		26		27			55		57
Total interest and dividend income		13,155		13,720			26,164			27,204		12,936		13,155			26,078		26,164

INTEREST EXPENSE
Deposits		2,336		3,277			5,201			6,222		1,010		2,336			2,215		5,201
Short-term borrowings		32		79			67			292		0		32			0		67
Other borrowings		62		95			138			191		39		62			78		138
Total interest expense		2,430		3,451			5,406			6,705		1,049		2,430			2,293		5,406

NET INTEREST INCOME		10,725		10,269			20,758			20,499		11,887		10,725			23,785		20,758

Provision for loan losses		1,000		110			3,740			350		200		1,000			900		3,740

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		9,725		10,159			17,018			20,149		11,687		9,725			22,885		17,018

NONINTEREST INCOME
Service charges on deposit accounts		566		530			1,119			1,038		856		566			1,643		1,119
Investment securities gains on sale, net		-		190			-			190
Gain (loss) on equity securities		31		(14	)		(129	)		44		40		31			121		(129	)
Earnings on bank-owned life insurance		105		109			212			214		106		105			332		212
Gain on sale of loans		381		98			495			157		221		381			813		495
Other income		412		386			872			788		409		412			941		872
Total noninterest income		1,495		1,299			2,569			2,431		1,632		1,495			3,850		2,569

NONINTEREST EXPENSE
Salaries and employee benefits		4,076		4,078			7,600			8,202		4,321		4,136			8,575		7,720
Occupancy expense		483		496			1,033			1,049		549		483			1,149		1,033
Equipment expense		307		291			580			526		313		307			670		580
Data processing costs		684		549			1,350			1,014		698		684			1,484		1,350
Ohio state franchise tax		281		261			549			520		286		281			572		549
Federal deposit insurance expense		74		100			197			230		150		74			294		197
Professional fees		369		403			718			834		323		369			742		718
Net loss (gain) on other real estate owned												22		(33	)		68		(32	)
Advertising expense		217		200			426			403		221		217			442		426
Software amortization expense		74		48			215			191		74		74			154		215
Core deposit intangible amortization		83		85			166			170		80		83			160		166
Other expense		1,041		971			2,107			1,843		889		1,014			1,969		2,019
Total noninterest expense		7,689		7,482			14,941			14,982		7,926		7,689			16,279		14,941

Income before income taxes		3,531		3,976			4,646			7,598		5,393		3,531			10,456		4,646
Income taxes		565		686			639			1,297		968		565			1,864		639

NET INCOME	$	2,966	$	3,290		$	4,007		$	6,301	$	4,425	$	2,966		$	8,592	$	4,007

EARNINGS PER SHARE
Basic	$	0.47	$	0.51		$	0.63		$	0.97	$	0.70	$	0.47		$	1.36	$	0.63
Diluted	$	0.46	$	0.50		$	0.62		$	0.97	$	0.70	$	0.46		$	1.35	$	0.62

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2020			2019			2020			2019			2021			2020			2021			2020

Net income	$	2,966		$	3,290		$	4,007		$	6,301		$	4,425		$	2,966		$	8,592		$	4,007

Other comprehensive income:
Net unrealized holding gain on available-for-sale investment securities		7,592			1,122			2,429			2,128
Other comprehensive income (loss):
Net unrealized holding gain (loss) on available-for-sale investment securities														1,235			7,592			(495	)		2,429
Tax effect		(1,594	)		(236	)		(510	)		(447	)		(259	)		(1,594	)		104			(510	)

Reclassification adjustment for investment securities gains included in net income		-			(190	)		-			(190	)
Tax effect		-			40			-			40

Total other comprehensive income		5,998			736			1,919			1,531
Total other comprehensive income (loss)														976			5,998			(391	)		1,919

Comprehensive income	$	8,964		$	4,026		$	5,926		$	7,832		$	5,401		$	8,964		$	8,201		$	5,926

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income (Loss)

Stock

Equity

Balance, March 31, 2020
7,298,829 $ 86,722 $ 65,140 $ (2,237 ) $ (16,938 ) $ 132,687

Net income
2,966 2,966
Other comprehensive income
5,998 5,998
Cash dividends ($0.15 per share)
(956 ) (956 )

Balance, June 30, 2020
7,298,829 $ 86,722 $ 67,150 $ 3,761 $ (16,938 ) $ 140,695

								Accumulated
								Other					Total
	Common Stock				Retained			Comprehensive		Treasury			Stockholders'
	Shares		Amount		Earnings			Income		Stock			Equity

Balance, March 31, 2021		7,323,487	$	87,073	$	72,729		$	2,917	$	(18,049	)	$	144,670

Net income						4,425								4,425
Other comprehensive income									976					976
Stock-based compensation, net		2,431		58										58
Treasury shares acquired (131,577)											(3,081	)		(3,081	)
Cash dividends ($0.16 per share)						(1,004	)							(1,004	)

Balance, June 30, 2021		7,325,918	$	87,131	$	76,150		$	3,893	$	(21,130	)	$	146,044

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income

Stock

Equity

Balance, March 31, 2019
7,285,070 $ 86,437 $ 58,139 $ 641 $ (13,518 ) $ 131,699

Net income
3,290 3,290
Other comprehensive income
736 736
Dividend reinvestment and purchase plan
7,524 149 149
Stock options exercised
400 4 4
Treasury shares acquired (35,494)
(706 ) (706 )
Cash dividends ($0.14 per share)
(912 ) (912 )

Balance, June 30, 2019
7,292,994 $ 86,590 $ 60,517 $ 1,377 $ (14,224 ) $ 134,260

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity

Balance, March 31, 2020		7,298,829	$	86,722	$	65,140		$	(2,237	)	$	(16,938	)	$	132,687

Net income						2,966									2,966
Other comprehensive income									5,998						5,998
Cash dividends ($0.15 per share)						(956	)								(956	)

Balance, June 30, 2020		7,298,829	$	86,722	$	67,150		$	3,761		$	(16,938	)	$	140,695

(continued on following page)

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands, except share and per share data)

(Unaudited, continued from previous page)

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income

Stock

Equity

Balance, December 31, 2019
7,294,792 $ 86,617 $ 65,063 $ 1,842 $ (15,747 ) $ 137,775

Net income
4,007 4,007
Other comprehensive income
1,919 1,919
Stock-based compensation, net
4,037 105 105
Treasury shares acquired (58,200)
(1,191 ) (1,191 )
Cash dividends ($0.30 per share)
(1,920 ) (1,920 )

Balance, June 30, 2020
7,298,829 $ 86,722 $ 67,150 $ 3,761 $ (16,938 ) $ 140,695

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income			Stock			Equity

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

Net income						8,592									8,592
Other comprehensive loss									(391	)					(391	)
Stock options exercised		10,650		94											94
Stock-based compensation, net		6,583		151											151
Treasury shares acquired (181,045)												(4,192	)		(4,192	)
Cash dividends ($0.32 per share)						(2,020	)								(2,020	)

Balance, June 30, 2021		7,325,918	$	87,131	$	76,150		$	3,893		$	(21,130	)	$	146,044

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income (Loss)

Stock

Equity

Balance, December 31, 2018
7,260,994 $ 85,925 $ 56,037 $ (154 ) $ (13,518 ) $ 128,290

Net income
6,301 6,301
Other comprehensive income
1,531 1,531
Dividend reinvestment and purchase plan
16,568 345 345
Stock options exercised
400 4 4
Stock-based compensation, net
15,032 316 316
Treasury shares acquired (35,494)
(706 ) (706 )
Cash dividends ($0.28 per share)
(1,821 ) (1,821 )

Balance, June 30, 2019
7,292,994 $ 86,590 $ 60,517 $ 1,377 $ (14,224 ) $ 134,260

								Accumulated
								Other					Total
	Common Stock				Retained			Comprehensive		Treasury			Stockholders'
	Shares		Amount		Earnings			Income		Stock			Equity

Balance, December 31, 2019		7,294,792	$	86,617	$	65,063		$	1,842	$	(15,747	)	$	137,775

Net income						4,007								4,007
Other comprehensive income				0		0			1,919		0			1,919
Stock-based compensation, net		4,037		105										105
Treasury shares acquired (58,200)											(1,191	)		(1,191	)
Cash dividends ($0.30 per share)						(1,920	)							(1,920	)

Balance, June 30, 2020		7,298,829	$	86,722	$	67,150		$	3,761	$	(16,938	)	$	140,695

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Six Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2021			2020
OPERATING ACTIVITIES
Net income	$	4,007		$	6,301		$	8,592		$	4,007
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,740			350			900			3,740
Investment securities gains on sale, net		-			(190	)
Loss (gain) on equity securities		129			(44	)
(Gain) loss on equity securities								(121	)		129
Depreciation and amortization of premises and equipment, net		437			524			723			437
Software amortization expense		215			191			154			215
Financing lease amortization expense		131			173			157			131
Gain on sale of premises and equipment		(27	)		-			0			(27	)
Amortization of premium and discount on investment securities, net		190			176			221			190
Accretion of deferred loan fees, net		(1,108	)		(429	)		(2,327	)		(1,108	)
Amortization of core deposit intangibles		166			170			160			166
Stock-based compensation (income) expense, net		(8	)		186
Stock-based compensation income, net								(21	)		(8	)
Origination of loans held for sale		(21,051	)		(6,781	)		(21,476	)		(21,051	)
Proceeds from sale of loans		18,615			7,104			22,377			18,615
Gain on sale of loans		(495	)		(157	)		(813	)		(495	)
Earnings on bank-owned life insurance		(212	)		(214	)		(332	)		(212	)
Deferred income tax		(534	)		183			162			(534	)
Net gain on other real estate owned		(62	)		(106	)
(Increase) decrease in accrued interest receivable		(2,070	)		66
(Decrease) increase in accrued interest payable		(18	)		292
Loss (gain) on other real estate owned								28			(62	)
Decrease (increase) in accrued interest receivable								844			(2,070	)
Decrease in accrued interest payable								(236	)		(18	)
Other, net		508			(2,885	)		(2,519	)		508
Net cash provided by operating activities		2,553			4,910			6,473			2,553

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		7,745			6,851			8,436			7,745
Proceeds from sale of securities		-			11,807
Purchases		(12,302	)		(17,193	)		(45,642	)		(12,302	)
Increase in loans, net		(125,775	)		(6,206	)
Decrease (increase) in loans, net								49,895			(125,775	)
Proceeds from the sale of other real estate owned		114			325			332			114
Net purchase of premises and equipment		(646	)		(681	)
Proceeds from bank-owned life insurance								424			0
Purchase of premises and equipment								(160	)		(646	)
Proceeds from the disposal of premises and equipment		27			-			0			27
Purchase of restricted stock		(1,600	)		(29	)		0			(1,600	)
Net cash used in investing activities		(132,437	)		(5,126	)
Redemption of restricted stock								401			0
Net cash provided by (used in) investing activities								13,686			(132,437	)

FINANCING ACTIVITIES
Net increase in deposits		137,424			35,440
Increase (decrease) in borrowings, net		18,744			(5,553	)
Restricted stock cash portion		-			(44	)
Net (decrease) increase in deposits								(29,915	)		137,424
Increase in short-term borrowings, net								0			18,744
Repayment of other borrowings								(4,074	)		0
Stock options exercised		-			4			94			0
Proceeds from dividend reinvestment and purchase plan		-			345
Repurchase of treasury shares		(1,191	)		(706	)		(4,192	)		(1,191	)
Cash dividends		(1,920	)		(1,821	)		(2,020	)		(1,920	)
Net cash provided by financing activities		153,057			27,665
Net cash (used in) provided by financing activities								(40,107	)		153,057

Increase in cash and cash equivalents		23,173			27,449
(Decrease) increase in cash and cash equivalents								(19,948	)		23,173

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		35,113			107,933			112,417			35,113

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	58,286		$	135,382		$	92,469		$	58,286

See accompanying notes to unaudited consolidated financial statements.

	Six Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2021			2020
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	5,424		$	6,413		$	2,529		$	5,424
Income taxes		-			1,330			2,854			0

Noncash operating transactions:
Operating lease assets added to other, net	$	-		$	(1,071	)
Operating lease liabilities added to other, net		-			1,071
Noncash investing transactions:
Transfers from loans to other real estate owned	$	584		$	38		$	63		$	584
Finance lease assets added to premises and equipment		(1,010	)		(3,801	)		(67	)		(1,010	)
Noncash financing transactions:
Finance lease liabilities added to borrowed funds	$	1,010		$	3,801
Finance lease liabilities added to other borrowings funds							$	67		$	1,010

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its bank subsidiary, The Middlefield Banking Company (“MBC” or “Middlefield Bank”), and a nonbank asset resolution subsidiary EMORECO, Inc. The consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI)~~, established~~ ~~March 13, 2019.~~ . All significant inter-company items have been eliminated.

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, ~~2019.~~2020. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments~~(“CECL”)~~, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In ~~November 2019,~~ ~~the FASB issued ASU~~ ~~2019~~-~~10,~~~~Financial Instruments ‒ Credit Losses (Topic~~ ~~326~~~~), Derivatives and Hedging (Topic~~ ~~815~~~~), and Leases (Topic~~ ~~842~~). This Update ~~defers the~~is effective ~~date of ASU~~ ~~2016~~-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. Management will continue to monitor model output throughout the deferral period.

CECL Adoption. The Company continues to monitor the opportunity to early adopt ASC Topic 326, which replaces the current incurred loss approach for measuring credit losses with an expected loss model ("CECL"). CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The adoption of this guidance is expected to result in an increase of the allowance for credit losses, an increase in the allowance for unfunded commitments, and a reduction of retained earnings. Incurred loss will be used until the tax benefits associated with increased reserves are maximized. Management may consider early adoption of CECL, which would have no initial impact to the income statement.

In ~~November 2019,~~May 2021, the FASB issued ASU ~~2019~~2021-~~11,~~04, ~~Codification Improvements~~Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to ~~Topic~~treat a modification of an equity-classified warrant that does ~~326,~~not ~~Financial Instruments – Credit Losses~~,cause the warrant to ~~clarify its new credit impairment guidance in ASC~~ ~~326,~~ based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets;become liability-classified as an ~~accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead~~exchange of the ~~prepayment assumptions applicable immediately prior~~original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the ~~restructuring event;~~terms and ~~extends~~conditions of the ~~practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis.~~warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The ~~effective dates~~amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the ~~same as those applicable for ASU~~ ~~2019~~-~~10.~~ ~~The Company is currently evaluating~~amendments prospectively to modifications or exchanges occurring on or after the ~~impact the adoption~~effective date of the ~~standard will~~amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Company’s financial ~~position or results of operations.~~ statements.

In ~~March 2020,~~July 2021, the FASB issued ASU ~~2020~~2021-305, Leases (Topic 842),~~Codification Improvements~~ which amends ASC 842 so that lessors are no longer required to ~~Financial Instruments.~~ ~~This ASU was issued~~recognize a selling loss upon commencement of a lease with variable lease payments that, prior to ~~improve~~the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and ~~clarify various financial instruments topics, including~~that would result in the ~~current expected credit losses (CECL) standard issued in~~ ~~2016.~~ ~~The ASU~~recognition of a selling loss at lease commencement, provided that the lease includes ~~seven~~ ~~issues~~variable lease payments that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and aredo not ~~expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than~~depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that ~~elected the fair value option, are required to provide certain fair value disclosures under~~have adopted ASC ~~825,~~~~Financial Instruments~~~~, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic~~ 842, ~~should be~~ the ~~contractual term used to measure expected credit losses under Topic~~ ~~326.~~ ~~Amendments related to ASU~~ ~~2019~~-04amendments are effective for fiscal years beginning after December 15, ~~2019,~~2021, ~~including~~and for interim periods within those fiscal years. ~~Early adoption is~~ ~~not~~ ~~permitted before an entity’s adoption of ASU~~ ~~2016~~-~~01.~~ ~~Amendments related to ASU~~ ~~2016~~-13 ~~for entities that have~~ ~~not~~ ~~yet adopted that guidance are effective upon adoption of the amendments in ASU~~ ~~2016~~-~~13.~~ ~~Early adoption is~~ ~~not~~ ~~permitted before an entity’s adoption of ASU~~ ~~2016~~-~~13.~~ ~~Amendments related to ASU~~ ~~2016~~-13 ~~for~~For all other entities that have adopted ~~that guidance~~ASC 842, the amendments are effective for fiscal years beginning after December 15, ~~2019,~~2021, ~~including~~and for interim periods within ~~those years. Other~~fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective ~~upon issuance of this ASU. The Company is currently evaluating the impact the adoption~~as of the ~~standard will~~same date as the guidance in ASC 842 for entities that havenot adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial ~~position or results of operations.~~

statements.

Reclassification of Comparative Amounts

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

NOTE 2 – REVENUE RECOGNITION

In accordance with 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, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise ~~92.4%~~91.1% of the total revenue of the Company.

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

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

~~Gains~~Net gains (losses) on sale of other real estate owned ~~(“OREO”~~(“OREO”) – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred and the payment terms, that the contract has a true commercial substance and that amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted, impacting the gain/loss and the carrying value of the asset.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,					For the Three Months Ended June 30,					For the Six Months Ended June 30,
Noninterest Income	2020		2019			2020			2019		2021		2020			2021		2020
(Dollar amounts in thousands)

Service charges on deposit accounts:
Overdraft fees	$	122	$	190		$	312		$	438	$	163	$	122		$	331	$	312
ATM banking fees		263		241			473			435		360		263			672		473
Service charges and other fees		181		99			334			165		333		181			640		334
Investment securities gains on sale, net ^(a)		-		190			-			190
Gain (loss) on equity securities ^(a)		31		(14	)		(129	)		44		40		31			121		(129	)
Earnings on bank-owned life insurance^(a)		105		109			212			214		106		105			332		212
Gain on sale of loans ^(a)		381		98			495			157		221		381			813		495
Revenue from investment services		137		124			268			262		212		137			339		268
Other income		275		262			604			526		197		275			602		604
Total noninterest income	$	1,495	$	1,299		$	2,569		$	2,431	$	1,632	$	1,495		$	3,850	$	2,569

Net gain on other real estate owned	$	62	$	63		$	62		$	106
Net loss (gain) on other real estate owned											$	22	$	(33	)	$	68	$	(32	)

(a) Not within scope of ASC 606

NOTE 3 - STOCK-BASED COMPENSATION

The Company had no0 nonvested stock options outstanding as of June 30, ~~2020~~2021 and ~~2019.~~2020.

Stock option activity during the six months ended June 30, ~~2020~~2021 is as follows:

Weighted-

average

Exercise Price

Shares

Per Share

Outstanding, January 1, 2020
14,500 $ 8.78
Exercised
(1,000 ) 8.78

Outstanding, June 30, 2020
13,500 $ 8.78

Exercisable, June 30, 2020
13,500 $ 8.78

				Weighted-
				average
				Exercise Price
	Shares			Per Share

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

Outstanding, June 30, 2021		0			0

Exercisable, June 30, 2021		0			0

The following table presents the activity during the six months ended June 30, ~~2020~~2021 related to awards of restricted stock:

Weighted-

average

Grant Date Fair

Units

Value Per Unit

Nonvested at January 1, 2020
61,040 $ 21.73
Granted
23,648 26.09
Nonvested at June 30, 2020
84,688 $ 22.94

Expected to vest as of June 30, 2020
1,000 $ 22.65

				Weighted-
				average
				Grant Date Fair
	Units			Value Per Unit

Nonvested at January 1, 2021		66,362		$	23.52
Granted		29,193			22.50
Vested		(17,622	)		(24.10	)
Nonvested at June 30, 2021		77,933		$	23.00

Expected to vest as of June 30, 2021		46,376		$	22.48

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

Share-based compensation expense of ~~$294,000~~$97,000 and $0$294,000 was recognized for the three-month periods ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Share-based compensation expense (recovery) of $97,000 and ($113,000) ~~and $90,000~~ was recognized for the six-month periods ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The expense recovery recorded for the six-month period ended June 30, 2020 is the result of the decrease in the market ~~valuations~~valuation of the ~~plans for~~ ~~December 31, 2019.~~ plans. Vesting of shares under the plan is contingent on a combination of service period and a performance condition tied to the total shareholder return on the Company’s stock. Due to the change in market conditions during ~~the~~ ~~first~~ ~~quarter of~~ 2020, there was a ~~significant~~ decrease in the probability of the achievement of the performance condition which resulted in a decrease in the liability related to the plan and a reversal of compensation expense. Since the shares of restricted stock are historically paid out at the vesting date in a combination of shares and cash, the Company has recorded a liability related to this plan which totals ~~$581,000~~$594,000 and ~~$236,000~~$581,000 at June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. When the shares vest, the amount distributed in shares is transferred to common stock and the remainder is distributed in cash.

Total unrecognized stock compensation cost related to nonvested share-based compensation on restricted stock as of June 30, ~~2020~~2021 totals ~~$374,000,~~$719,000, of which ~~$124,000~~$227,000 is estimated for the rest of ~~2020,~~ ~~$180,000 for~~ 2021, ~~$63,000~~$292,000 for 2022, ~~and $7,000~~$176,000 for ~~2023.~~2023, and $24,000 for 2024.

NOTE 4 - EARNINGS PER SHARE

The Company provides 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 Three						For the Six						For the Three						For the Six
	Months Ended						Months Ended						Months Ended						Months Ended
	June 30,						June 30,						June 30,						June 30,
	2020			2019			2020			2019			2021			2020			2021			2020

Weighted-average common shares issued		7,298,829			7,286,542			7,298,785			7,278,620			7,324,475			7,298,829			7,320,989			7,298,785

Average treasury stock shares		(929,362	)		(784,034	)		(905,497	)		(778,214	)		(1,027,404	)		(929,362	)		(989,633	)		(905,497	)

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		6,369,467			6,502,508			6,393,288			6,500,406			6,297,071			6,369,467			6,331,356			6,393,288

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		18,651			12,438			19,297			12,644			15,159			18,651			16,989			19,297

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		6,388,118			6,514,946			6,412,585			6,513,050			6,312,230			6,388,118			6,348,345			6,412,585

Outstanding at June 30, 2021 were 77,933 shares of restricted stock, 62,774 shares of which were anti-dilutive. There were 0 options to purchase shares of common stock outstanding as of June 30, 2021.

Options to purchase 13,500 shares of common stock at $8.78 per share were outstanding during the three and six months ended June 30, 2020. Also outstanding were 84,688 shares of restricted stock, 73,147 shares of which ~~were anti-dilutive.~~

~~Options to purchase 14,500 shares of common stock at $8.78 per share were outstanding during the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019.~~ ~~Also outstanding were 61,334 shares of restricted stock.~~ ~~None~~ ~~of the outstanding options or restricted stock~~ were anti-dilutive.

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of June 30, ~~2020,~~2021, the Company held ~~929,362~~1,110,407 of the Company’s shares, which is an increase of ~~58,200~~181,045 from the ~~871,162~~929,362 shares held as of December 31, ~~2019.~~2020.

NOTE 5- FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:

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.

			June 30, 2020								June 30, 2021
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	11,289	$	-	$	11,289	$	0	$	23,413	$	9,200	$	32,613
Obligations of states and political subdivisions		-		84,540		-		84,540		0		106,138		0		106,138
Mortgage-backed securities in government-sponsored entities		-		16,700		-		16,700		0		12,099		0		12,099
Total debt securities		-		112,529		-		112,529		0		141,650		9,200		150,850
Equity securities in financial institutions		581		-		-		581		730		0		0		730
Total	$	581	$	112,529	$	-	$	113,110	$	730	$	141,650	$	9,200	$	151,580

			December 31, 2019								December 31, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,126	$	-	$	4,126	$	0	$	14,047	$	7,250	$	21,297
Obligations of states and political subdivisions		-		82,977		-		82,977		0		78,302		0		78,302
Mortgage-backed securities in government-sponsored entities		-		18,630		-		18,630		0		14,761		0		14,761
Total debt securities		-		105,733		-		105,733		0		107,110		7,250		114,360
Equity securities in financial institutions		710		-		-		710		609		0		0		609
Total	$	710	$	105,733	$	-	$	106,443	$	609	$	107,110	$	7,250	$	114,969

The beginning balance of the level III investments was $7.3 million, which increased due to purchases of $1.9 million, and increased by $100,000 due to change in fair value during the period resulting in an ending balance of $9.3 million.

Investment Securities Available for Sale - The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II). Securities for which the pricing service is unable to calculate a market price are reported at book value and are classified under the Level III measurement.

Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy.

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value ~~at initial foreclosure or~~ subsequent to the initial measurement. No such devaluation occurred induring the six months ended June 30, ~~2020.~~2021.

			June 30, 2020								June 30, 2021
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	4,729	$	4,729	$	0	$	0	$	5,578	$	5,578
Other real estate owned										0		0		6,992		6,992

			December 31, 2019								December 31, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,166	$	5,166	$	0	$	0	$	4,111	$	4,111
Other real estate owned										0		0		6,992		6,992

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of ~~$2.1~~$1.2 million and $838,000 as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020, respectively.

Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore 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 above 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 to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Range (Weighted

Fair Value Estimate
Valuation Techniques Unobservable Input Average)
June 30, 2020

Impaired loans
$ 4,729
Appraisal of collateral (1)
Appraisal adjustments (2)
29.8% to 46.2% (34.7%)

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Range (Weighted

Fair Value Estimate
Valuation Techniques Unobservable Input Average)
December 31, 2019

Impaired loans
$ 5,166
Appraisal of collateral (1)
Appraisal adjustments (2)
40.3% to 47.4% (41.8%)

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)					Range (Weighted
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Average)
June 30, 2021
Impaired loans	$	5,578	Appraisal of collateral (1)	Appraisal adjustments (2)		25.0% to 69.9%	(39.7%)

Other real estate owned	$	6,992	Appraisal of collateral (1)	Appraisal adjustments (2)		19.9	%

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)					Range (Weighted
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Average)
December 31, 2020
Impaired loans	$	4,111	Appraisal of collateral (1)	Appraisal adjustments (2)		17.6% to 48.5%	(22.7%)

Other real estate owned	$	6,992	Appraisal of collateral (1)	Appraisal adjustments (2)		19.9	%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

1516

The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:

	June 30, 2020										June 30, 2021
	Carrying								Total		Carrying								Total
	Value		Level I		Level II		Level III		Fair Value		Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)										(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	58,286	$	58,286	$	-	$	-	$	58,286	$	92,469	$	92,469	$	0	$	0	$	92,469
Loans held for sale		4,151		-		4,151		-		4,151		790		0		790		0		790
Net loans		1,100,049		-		-		1,100,623		1,100,623		1,042,095		0		0		1,036,654		1,036,654
Bank-owned life insurance		16,723		16,723		-		-		16,723		16,846		16,846		0		0		16,846
Federal Home Loan Bank stock		5,448		5,448		-		-		5,448		4,656		4,656		0		0		4,656
Accrued interest receivable		5,541		5,541		-		-		5,541		4,366		4,366		0		0		4,366

Financial liabilities:
Deposits	$	1,158,267	$	794,847	$	-	$	369,173	$	1,164,020	$	1,195,285	$	970,014	$	0	$	227,622	$	1,197,636
Short-term borrowings		20,417		20,417		-		-		20,417
Other borrowings		17,162		-		-		13,211		13,211		13,031		0		0		13,031		13,031
Accrued interest payable		899		899		-		-		899		344		344		0		0		344

	December 31, 2019										December 31, 2020
	Carrying								Total		Carrying								Total
	Value		Level I		Level II		Level III		Fair Value		Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)										(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	35,113	$	35,113	$	-	$	-	$	35,113	$	112,417	$	112,417	$	0	$	0	$	112,417
Loans held for sale		1,220		-		1,220		-		1,220		878		0		878		0		878
Net loans		977,490		-		-		974,213		974,213		1,090,626		0		0		1,089,573		1,089,573
Bank-owned life insurance		16,511		16,511		-		-		16,511		16,938		16,938		0		0		16,938
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848		5,057		5,057		0		0		5,057
Accrued interest receivable		3,471		3,471		-		-		3,471		5,210		5,210		0		0		5,210

Financial liabilities:
Deposits	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236	$	1,225,200	$	929,450	$	0	$	299,651	$	1,229,101
Short-term borrowings		5,075		5,075		-		-		5,075
Other borrowings		12,750		-		-		12,783		12,783		17,038		0		0		15,250		15,250
Accrued interest payable		917		917		-		-		917		580		580		0		0		580

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the ~~instrument.~~instruments.

NOTE 6– – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income (“AOCI”) by component net of tax for the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively:

(Dollars in thousands)
Unrealized gains/(losses)
on available-for-sale
securities (a)

Balance as of March 31, 2020
$ (2,237 )
Other comprehensive income
5,998
Balance at June 30, 2020
$ 3,761

Balance as of December 31, 2019
$ 1,842
Other comprehensive income
1,919
Balance at June 30, 2020
$ 3,761

	Unrealized gains/(losses) on available-for-sale securities (a)

(Dollars in thousands)
Balance as of March 31, 2021	$	2,917
Other comprehensive income		976
Balance at June 30, 2021	$	3,893

Balance as of December 31, 2020	$	4,284
Other comprehensive loss		(391	)
Balance at June 30, 2021	$	3,893

(Dollars in thousands)
Unrealized gains/(losses)
on available-for-sale
securities (a)

Balance as of March 31, 2019
$ 641
Other comprehensive income
886
Amount reclassified from accumulated other comprehensive income
(150 )
Period change
736
Balance at June 30, 2019
$ 1,377

Balance as of December 31, 2018
$ (154 )
Other comprehensive income
1,681
Amount reclassified from accumulated other comprehensive income
(150 )
Period change
1,531
Balance at June 30, 2019
$ 1,377

	Unrealized gains on available-for-sale securities (a)

(Dollars in thousands)
Balance as of March 31, 2020	$	(2,237	)
Other comprehensive income		5,998
Balance at June 30, 2020	$	3,761

Balance as of December 31, 2019	$	1,842
Other comprehensive income		1,919
Balance at June 30, 2020	$	3,761

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

~~The following tables present significant~~There were 0 other reclassifications of amounts ~~reclassified~~ from ~~or to each component of AOCI:~~accumulated other comprehensive income for the three and six months ended June 30, 2021, and 2020.

Amounts Reclassified from Accumulated Other

Affected Line Item in
Comprehensive Income
the Statement Where
(Dollars in thousands)
For the Three and Six Months Ended
Net Income is
Details about other comprehensive income

June 30, 2020

June 30, 2019

Presented
Unrealized gains on available-for-sale securities (a)

$ - $ 190
Investment securities gains on sale, net
- (40 )
Income taxes
$ - $ 150

~~(a)~~

~~For unrealized gains on available-for-sale securities, amounts in parentheses indicate expenses and other amounts indicate income.~~

NOTE 7– INVESTMENT AND EQUITY SECURITIES

The amortized cost and fair values of investment securities available for sale are as follows:

	June 30, 2020								June 30, 2021
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses			Value

Subordinated debt	$	11,050	$	239	$	-	$	11,289	$	32,300	$	355	$	(42	)	$	32,613
Obligations of states and political subdivisions:
Taxable		500		2		-		502		500		2		0			502
Tax-exempt		80,155		3,883		-		84,038		101,345		4,369		(78	)		105,636
Mortgage-backed securities in government-sponsored entities		16,063		637		-		16,700		11,777		383		(61	)		12,099
Total	$	107,768	$	4,761	$	-	$	112,529	$	145,922	$	5,109	$	(181	)	$	150,850

December 31, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

(Dollar amounts in thousands)

Cost

Gains

Losses

Value

Subordinated debt
$ 4,000 $ 126 $ - $ 4,126
Obligations of states and political subdivisions:

Taxable
500 1 - 501
Tax-exempt
80,436 2,065 (25 ) 82,476
Mortgage-backed securities in government-sponsored entities
18,465 274 (109 ) 18,630
Total
$ 103,401 $ 2,466 $ (134 ) $ 105,733

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

Subordinated debt	$	21,050	$	254	$	(7	)	$	21,297
Obligations of states and political subdivisions:
Taxable		500		2		0			502
Tax-exempt		73,157		4,643		0			77,800
Mortgage-backed securities in government-sponsored entities		14,230		536		(5	)		14,761
Total	$	108,937	$	5,435	$	(12	)	$	114,360

Equity securities totaled $730,000 and $609,000 at June 30, 2021 and December 31, 2020, respectively.

The Company recognized a net gain on equity investments of $40,000 and $121,000, respectively, for the three and six months ended June 30, 2021. The Company recognized a net gain (loss) on equity investments of $31,000 and ($129,000), respectively, for the three and six months ended June 30, 2020. ~~The Company recognized a~~No net ~~(loss) gain on equity investments of ($14,000) and $44,000, respectively, for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019.~~ No ~~net~~ gains ~~or losses~~ on sold equity securities were realized from sales during these periods.

The amortized cost and fair value of debt securities at June 30, ~~2020,~~2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized

Fair

(Dollar amounts in thousands)

Cost

Value

Due in one year or less
$ 3 $ 3
Due after one year through five years
887 911
Due after five years through ten years
22,176 22,713
Due after ten years
84,702 88,902
Total
$ 107,768 $ 112,529

~~Proceeds from the sales of investment securities and the gross realized gains and losses are as follows:~~

(Dollars amounts in thousands)
For the Three Months Ended June 30,

For the Six Months Ended June 30,

2020

2019

2020

2019

Proceeds from sales
$ - $ 11,807 $ - $ 11,807
Gross realized gains
- 223 - 223
Gross realized losses
- (33 ) - (33 )

	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value

Due in one year or less	$	190	$	191
Due after one year through five years		2,079		2,143
Due after five years through ten years		39,416		39,983
Due after ten years		104,237		108,533
Total	$	145,922	$	150,850

There were no0 securities sold during thethree and six months ended June 30, ~~2020.~~2021, and 2020, respectively.

Investment securities with an approximate carrying value of ~~$53.6~~$63.9 million and ~~$55.6~~$71.1 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure deposits and for other purposes as required by law.

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

	December 31, 2019															June 30, 2021
	Less than Twelve Months					Twelve Months or Greater					Total					Less than Twelve Months					Twelve Months or Greater				Total
			Gross					Gross					Gross					Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses		Value		Losses

Subordinated debt																$	5,908	$	(42	)	$	0	$	0	$	5,908	$	(42	)
Obligations of states and political subdivisions:
Tax-exempt	$	4,324	$	(25	)	$	-	$	-		$	4,324	$	(25	)		9,248		(78	)		0		0		9,248		(78	)
Mortgage-backed securities in government-sponsored entities		1,409		(2	)		8,223		(107	)		9,632		(109	)		2,055		(61	)		0		0		2,055		(61	)
Total	$	5,733	$	(27	)	$	8,223	$	(107	)	$	13,956	$	(134	)	$	17,211	$	(181	)	$	0	$	0	$	17,211	$	(181	)

	December 31, 2020
	Less than Twelve Months					Twelve Months or Greater				Total
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses		Value		Losses

Subordinated debt	$	4,243	$	(7	)	$	0	$	0	$	4,243	$	(7	)
Mortgage-backed securities in government-sponsored entities		2,748		(5	)		0		0		2,748		(5	)
Total	$	6,991	$	(12	)	$	0	$	0	$	6,991	$	(12	)

There were no ~~securities in a gross unrealized loss position at~~ ~~June 30, 2020.~~

~~There were~~ no18 securities considered temporarily impaired at June 30, ~~2020.~~2021.

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The Company assesses whether the unrealized loss is other than temporary.

OTTI losses are recognized in earnings when the Company has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other than temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss of an OTTI is recorded as a component of investment securities gains (losses) in the accompanying Consolidated Statement of Income, while the remaining portion of the impairment loss is recognized in other comprehensive income, provided the Company does not intend to sell the underlying debt security and it is “more likely than not” that the Company will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for ~~90%~~78% of the total available-for-sale portfolio as of June 30, ~~2020~~2021 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of the state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

•

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

	•	Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
	•	The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
	•	Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

For the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, there were no0 available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of June 30, ~~2020~~2021 or December 31, ~~2019~~2020 represented an other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities is expected to recover as payments are received on these securities and they approach maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

NOTE 8- LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties. The Company also serves the central Ohio market with offices in Dublin, Plain City, Powell, Sunbury, and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

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 on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest payments received on nonaccrual loans are applied against the unpaid principal balance until accrual status is restored.

Loan origination fees and certain direct loan origination costs are deferred with the net amount amortized over the contractual life of the loan as an adjustment of the related loan’s yield.

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

June 30, 2020

Impairment Evaluation

Individually

Collectively

Total Loans

Loans:

Commercial real estate:

Owner occupied
$ 3,486 $ 106,648 $ 110,134
Non-owner occupied
14,685 285,892 300,577
Multifamily
- 37,604 37,604
Residential real estate
1,259 226,168 227,427
Commercial and industrial
1,127 238,969 240,096
Home equity lines of credit
347 116,849 117,196
Construction and other
- 66,015 66,015
Consumer installment
- 11,210 11,210
Total
$ 20,904 $ 1,089,355 $ 1,110,259

December 31, 2019

Impairment Evaluation

Individually

Collectively

Total Loans

Loans:

Commercial real estate:

Owner occupied
$ 3,474 $ 98,912 $ 102,386
Non-owner occupied
7,084 295,096 302,180
Multifamily
- 62,028 62,028
Residential real estate
1,278 233,520 234,798
Commercial and industrial
882 88,645 89,527
Home equity lines of credit
351 111,897 112,248
Construction and other
- 66,680 66,680
Consumer installment
1 14,410 14,411
Total
$ 13,070 $ 971,188 $ 984,258

June 30, 2021
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	1,460	$	108,317	$	109,777
Non-owner occupied		4,694		299,630		304,324
Multifamily		0		34,926		34,926
Residential real estate		1,216		226,886		228,102
Commercial and industrial		722		199,836		200,558
Home equity lines of credit		238		107,447		107,685
Construction and other		0		62,229		62,229
Consumer installment		0		8,694		8,694
Total	$	8,330	$	1,047,965	$	1,056,295

December 31, 2020
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	1,565	$	101,556	$	103,121
Non-owner occupied		4,123		305,301		309,424
Multifamily		0		39,562		39,562
Residential real estate		1,319		232,676		233,995
Commercial and industrial		834		231,210		232,044
Home equity lines of credit		246		112,297		112,543
Construction and other		0		63,573		63,573
Consumer installment		0		9,823		9,823
Total	$	8,087	$	1,095,998	$	1,104,085

The ~~amounts above include net deferred~~commercial and industrial loan ~~origination costs~~portfolio as of ~~$4.7 million and $1.3 million at~~ June 30, ~~2020~~2021 and December 31, ~~2019,~~ ~~respectively. The net deferred loan origination costs at~~ ~~June 30,~~ 2020 ~~include $4.0~~includes $90.2 million ~~of unearned deferred fees from~~and $116.1 million in loans issued through the Paycheck Protection Program (“PPP”), respectively (see Note 9). Although the SBA guarantees PPP ~~loans.~~loans if certain criteria are met, minimal risk still exists in the portfolio. Therefore, a 0.4% qualitative adjustment, equaling $361,000 is reserved for loss.

June 30, 2020

Ending Allowance Balance Attributable to Loans:

Individually
Evaluated
for
Impairment

Collectively
Evaluated
for
Impairment

Total
Allocation

Loans:

Commercial real estate:

Owner occupied
$ 10 $ 1,028 $ 1,038
Non-owner occupied
1,874 3,285 5,159
Multifamily
- 291 291
Residential real estate
22 1,145 1,167
Commercial and industrial
43 1,062 1,105
Home equity lines of credit
27 1,176 1,203
Construction and other
- 236 236
Consumer installment
- 11 11
Total
$ 1,976 $ 8,234 $ 10,210

December 31, 2019

Ending Allowance Balance Attributable to Loans:

Individually
Evaluated
for
Impairment

Collectively
Evaluated
for
Impairment

Total
Allocation

Loans:

Commercial real estate:

Owner occupied
$ 45 $ 756 $ 801
Non-owner occupied
582 2,800 3,382
Multifamily
- 340 340
Residential real estate
28 698 726
Commercial and industrial
3 453 456
Home equity lines of credit
2 930 932
Construction and other
- 103 103
Consumer installment
- 28 28
Total
$ 660 $ 6,108 $ 6,768

The amounts above include net deferred loan origination fees of $5.2 million and $4.4 million at June 30, 2021 and December 31, 2020, respectively. The net deferred loan origination fees at June 30, 2021 include $3.4 million of unearned deferred fees from PPP loans.

June 30, 2021
Ending Allowance Balance by Impairment Evaluation:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,515	$	1,525
Non-owner occupied		856		6,768		7,624
Multifamily		0		449		449
Residential real estate		17		1,775		1,792
Commercial and industrial		169		954		1,123
Home equity lines of credit		22		1,239		1,261
Construction and other		0		408		408
Consumer installment		0		18		18
Total	$	1,074	$	13,126	$	14,200

December 31, 2020
Ending Allowance Balance by Impairment Evaluation:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,332	$	1,342
Non-owner occupied		371		6,446		6,817
Multifamily		0		461		461
Residential real estate		20		1,663		1,683
Commercial and industrial		48		1,305		1,353
Home equity lines of credit		41		1,364		1,405
Construction and other		0		378		378
Consumer installment		0		20		20
Total	$	490	$	12,969	$	13,459

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate (“CRE”) which is further segmented into Owner Occupied (“CRE OO”), Non-owner Occupied (“CRE NOO”), and Multifamily Residential, 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 for the purpose of financing the activities of commercial real estate owners and operators. The residential real estate and HELOC loan segments consist of loans made for the purpose of financing the activities of residential homeowners. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. Although PPP loans are included with C&I loans, the nature of PPP loans differs considerably from the rest of the category. 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. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for the CRE, RRE, C&I, HELOC, and Construction portfolios were partially offset by a decrease in the allowance for the Consumer Installment portfolios.

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

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

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

June 30, 2020
June 30, 2021								June 30, 2021
Impaired Loans	Impaired Loans							Impaired Loans
				Unpaid							Unpaid
		Recorded		Principal		Related			Recorded		Principal		Related
		Investment		Balance		Allowance			Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied		$	3,028	$	3,033	$	-		$	1,031	$	1,071	$	-
Non-owner occupied			7,538		7,538		-			0		0		-
Residential real estate			781		908		-			818		843		-
Commercial and industrial			659		1,148		-			59		575		-
Home equity lines of credit			179		189		-			74		89		-
Total		$	12,185	$	12,816	$	-		$	1,982	$	2,578	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied		$	458	$	458	$	10		$	429	$	429	$	10
Non-owner occupied			7,147		7,147		1,874			4,694		5,240		856
Residential real estate			478		478		22			398		398		17
Commercial and industrial			468		468		43			663		671		169
Home equity lines of credit			168		168		27			164		164		22
Total		$	8,719	$	8,719	$	1,976		$	6,348	$	6,902	$	1,074

Total:
Commercial real estate:
Owner occupied		$	3,486	$	3,491	$	10		$	1,460	$	1,500	$	10
Non-owner occupied			14,685		14,685		1,874			4,694		5,240		856
Residential real estate			1,259		1,386		22			1,216		1,241		17
Commercial and industrial			1,127		1,616		43			722		1,246		169
Home equity lines of credit			347		357		27			238		253		22
Total		$	20,904	$	21,535	$	1,976		$	8,330	$	9,480	$	1,074

December 31, 2019

Impaired Loans

Unpaid

Recorded
Principal
Related

Investment
Balance
Allowance

With no related allowance recorded:

Commercial real estate:

Owner occupied
$ 1,772 $ 1,772 $ -
Non-owner occupied
3,845 3,845 -
Residential real estate
759 829 -
Commercial and industrial
747 1,524 -
Home equity lines of credit
220 228 -
Consumer installment
1 1 -
Total
$ 7,344 $ 8,199 $ -

With an allowance recorded:

Commercial real estate:

Owner occupied
$ 1,702 $ 1,713 $ 45
Non-owner occupied
3,239 3,239 582
Residential real estate
519 569 28
Commercial and industrial
135 135 3
Home equity lines of credit
131 131 2
Total
$ 5,726 $ 5,787 $ 660

Total:

Commercial real estate:

Owner occupied
$ 3,474 $ 3,485 $ 45
Non-owner occupied
7,084 7,084 582
Residential real estate
1,278 1,398 28
Commercial and industrial
882 1,659 3
Home equity lines of credit
351 359 2
Consumer installment
1 1 -
Total
$ 13,070 $ 13,986 $ 660

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

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

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

The tables above include troubled debt restructuring totaling ~~$3.2~~$2.7 million and ~~$3.6~~$2.9 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The amounts allocated within the allowance for losses for troubled debt restructurings was ~~$37,000~~$67,000 and ~~$33,000~~$45,000 at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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

For the Three Months Ended June 30, 2020

For the Six Months Ended June 30, 2020

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Commercial real estate:

Owner occupied
$ 3,459 $ 32 $ 3,464 $ 65
Non-owner occupied
10,864 209 9,604 258
Residential real estate
1,206 14 1,230 25
Commercial and industrial
1,019 11 973 21
Home equity lines of credit
347 2 348 4
Consumer installment
1 - 1 -
Total
$ 16,896 $ 268 $ 15,620 $ 373

									For the Three Months Ended June 30, 2021				For the Six Months Ended June 30, 2021
									Average		Interest		Average		Interest
									Recorded		Income		Recorded		Income
									Investment		Recognized		Investment		Recognized
	For the Three Months Ended June 30, 2019				For the Six Months Ended June 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	3,819	$	35	$	4,014	$	72	$	1,489	$	15	$	1,514	$	31
Non-owner occupied		6,419		50		5,989		100		4,776		23		4,558		67
Residential real estate		1,716		15		1,761		27		1,227		13		1,257		24
Commercial and industrial		1,970		23		2,170		45		864		6		854		13
Home equity lines of credit		104		-		109		-		239		1		241		3
Construction and other		1,620		-		1,080		-
Consumer installment		2		-		2		-
Total	$	15,650	$	123	$	15,125	$	244	$	8,595	$	58	$	8,424	$	138

	For the Three Months Ended June 30, 2020				For the Six Months Ended June 30, 2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized



Commercial real estate:
Owner occupied	$	3,459	$	32	$	3,464	$	65
Non-owner occupied		10,864		209		9,604		258
Residential real estate		1,206		14		1,230		25
Commercial and industrial		1,019		11		973		21
Home equity lines of credit		347		2		348		4
Consumer installment		1		0		1		0
Total	$	16,896	$	268	$	15,620	$	373

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 have potential weaknesses, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as payment delinquency, bankruptcy, repossession, or death, occurs to raise awareness of a possible credit quality event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $500,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and criticized relationships greater than $150,000. Detailed reviews, including plans for resolution, are performed on criticized loans on at least a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business that may result in the liquidation of the business assets securing the loan. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

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

Special

Total

June 30, 2020

Pass

Mention

Substandard

Doubtful

Loans

Commercial real estate:

Owner occupied
$ 103,644 $ 3,042 $ 3,448 $ - $ 110,134
Non-owner occupied
270,678 3,749 26,150 - 300,577
Multifamily
37,604 - - - 37,604
Residential real estate
224,316 410 2,701 - 227,427
Commercial and industrial
235,535 2,658 1,903 - 240,096
Home equity lines of credit
115,617 - 1,579 - 117,196
Construction and other
66,015 - - - 66,015
Consumer installment
11,191 - 19 - 11,210
Total
$ 1,064,600 $ 9,859 $ 35,800 $ - $ 1,110,259

			Special						Total				Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans
June 30, 2021											Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	95,518	$	3,951	$	2,917	$	-	$	102,386	$	98,287	$	5,912	$	5,578	$	0	$	109,777
Non-owner occupied		292,192		3,038		6,950		-		302,180		250,159		326		53,839		0		304,324
Multifamily		62,028		-		-		-		62,028		34,926		0		0		0		34,926
Residential real estate		231,633		420		2,745		-		234,798		224,915		158		3,029		0		228,102
Commercial and industrial		84,136		3,619		1,772		-		89,527		196,629		1,102		2,827		0		200,558
Home equity lines of credit		111,354		-		894		-		112,248		106,743		0		942		0		107,685
Construction and other		66,680		-		-		-		66,680		54,644		7,585		0		0		62,229
Consumer installment		14,398		-		13		-		14,411		8,688		0		6		0		8,694
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258	$	974,991	$	15,083	$	66,221	$	0	$	1,056,295

			Special						Total
December 31, 2020	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	93,939	$	7,084	$	2,098	$	0	$	103,121
Non-owner occupied		258,974		983		49,467		0		309,424
Multifamily		39,562		0		0		0		39,562
Residential real estate		230,944		265		2,786		0		233,995
Commercial and industrial		227,765		1,800		2,479		0		232,044
Home equity lines of credit		111,208		0		1,335		0		112,543
Construction and other		58,082		0		5,491		0		63,573
Consumer installment		9,816		0		7		0		9,823
Total	$	1,030,290	$	10,132	$	63,663	$	0	$	1,104,085

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

Nonperforming assets are nonaccrual loans including nonaccrual troubled debt restructurings (“TDR”), loans 90 days or more past due, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against the principal balance.

The following tables present the aging of the recorded investment in past-due loans by class of loans (in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total				30-59 Days		60-89 Days		90 Days+		Total		Total
June 30, 2020	Current		Past Due		Past Due		Past Due		Past Due		Loans
June 30, 2021													Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	108,989	$	-	$	350	$	795	$	1,145	$	110,134	$	109,777	$	0	$	0	$	0	$	0	$	109,777
Non-owner occupied		295,729		-		742		4,106		4,848		300,577		303,161		0		0		1,163		1,163		304,324
Multifamily		37,604		-		-		-		-		37,604		34,926		0		0		0		0		34,926
Residential real estate		223,820		1,539		893		1,175		3,607		227,427		226,721		707		172		502		1,381		228,102
Commercial and industrial		239,836		160		-		100		260		240,096		200,397		49		52		60		161		200,558
Home equity lines of credit		116,818		189		50		139		378		117,196		107,498		63		124		0		187		107,685
Construction and other		60,524		5,491		-		-		5,491		66,015		62,229		0		0		0		0		62,229
Consumer installment		10,977		-		1		232		233		11,210		8,477		0		0		217		217		8,694
Total	$	1,094,297	$	7,379	$	2,036	$	6,547	$	15,962	$	1,110,259	$	1,053,186	$	819	$	348	$	1,942	$	3,109	$	1,056,295

			30-59 Days		60-89 Days		90 Days+		Total		Total				30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2020													Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	101,264	$	64	$	-	$	1,058	$	1,122	$	102,386	$	102,587	$	418	$	0	$	116	$	534	$	103,121
Non-owner occupied		298,941		-		-		3,239		3,239		302,180		305,613		1,844		1,373		594		3,811		309,424
Multifamily		62,028		-		-		-		-		62,028		39,562		0		0		0		0		39,562
Residential real estate		232,518		1,439		34		807		2,280		234,798		230,996		2,364		95		540		2,999		233,995
Commercial and industrial		88,965		190		66		306		562		89,527		231,534		260		219		31		510		232,044
Home equity lines of credit		111,792		274		29		153		456		112,248		112,325		120		0		98		218		112,543
Construction and other		66,680		-		-		-		-		66,680		63,529		44		0		0		44		63,573
Consumer installment		13,378		622		216		195		1,033		14,411		9,424		71		108		220		399		9,823
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258	$	1,095,570	$	5,121	$	1,795	$	1,599	$	8,515	$	1,104,085

The decrease in loans past due 30-89 days is due to loans having become current. The increase in the 90 days or more category is due to one loan for $739,000 moving from the 60-89 days past due category.

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 Due				90+ Days Past Due
June 30, 2020	Nonaccrual		and Accruing
June 30, 2021					Nonaccrual		and Accruing

Commercial real estate:
Owner occupied	$	1,266	$	-	$	382	$	0
Non-owner occupied		4,106		-		3,439		0
Multifamily						0		0
Residential real estate		2,646		-		2,830		0
Commercial and industrial		519		-		543		0
Home equity lines of credit		1,021		-		349		0
Construction and other						0		0
Consumer installment		245		-		217		0
Total	$	9,803	$	-	$	7,760	$	0

			90+ Days Past Due				90+ Days Past Due
December 31, 2019	Nonaccrual		and Accruing
December 31, 2020					Nonaccrual		and Accruing

Commercial real estate:
Owner occupied	$	1,162	$	-	$	458	$	0
Non-owner occupied		3,289		-		3,758		0
Residential real estate		2,576		-		2,487		0
Commercial and industrial		946		-		509		0
Home equity lines of credit		709		-		422		0
Consumer installment		197		-		224		0
Total	$	8,879	$	-	$	7,858	$	0

Interest income that would have been recorded had these loans not been placed on nonaccrual status was ~~$128,000~~$124,000 for the three months ended June 30, ~~2020~~2021 and ~~$47,000~~$126,000 for the three months ended December 31, ~~2019.~~2020. Interest income that would have been recorded had these loans not been placed on nonaccrual status was ~~$228,000~~$183,000 for the six months ended June 30, ~~2020~~2021 and ~~$342,000~~$179,000 for the ~~year~~six months ended December 31, ~~2019.~~2020.

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Company’s ALLL. Management also performs impairment analyses on TDRs, which may result in specific reserves.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the call code level. The historical charge-off factor was calculated using the last twelve consecutive historical quarters.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following tables summarize the ALLL within the primary segments of the loan portfolio and the activity within those segments (in thousands):

For the six months ended June 30, 2020

Allowance for Loan and Lease Losses

Balance

Balance

December 31, 2019

Charge-offs

Recoveries

Provision

June 30, 2020

Loans:

Commercial real estate:

Owner occupied
$ 801 $ (50 ) $ 14 $ 273 $ 1,038
Non-owner occupied
3,382 - 74 1,703 5,159
Multifamily
340 - - (49 ) 291
Residential real estate
726 (51 ) 30 462 1,167
Commercial and industrial
456 (170 ) 239 580 1,105
Home equity lines of credit
932 (54 ) 16 309 1,203
Construction and other
103 - 34 99 236
Consumer installment
28 (391 ) 11 363 11
Total
$ 6,768 $ (716 ) $ 418 $ 3,740 $ 10,210

	For the six months ended June 30, 2019												For the six months ended June 30, 2021
	Allowance for Loan and Lease Losses												Allowance for Loan and Lease Losses
	Balance										Balance		Balance										Balance
	December 31, 2018		Charge-offs			Recoveries		Provision			June 30, 2019		December 31, 2020		Charge-offs			Recoveries		Provision			June 30, 2021
Loans:
Commercial real estate:
Owner occupied	$	1,315	$	(32	)	$	2	$	(419	)	$	866	$	1,342	$	0		$	43	$	140		$	1,525
Non-owner occupied		2,862		-			-		726			3,588		6,817		(263	)		0		1,070			7,624
Multifamily		474		-			-		(62	)		412		461		0			0		(12	)		449
Residential real estate		761		-			39		(53	)		747		1,683		(27	)		3		133			1,792
Commercial and industrial		969		(355	)		40		(115	)		539		1,353		0			51		(281	)		1,123
Home equity lines of credit		820		(138	)		7		247			936		1,405		0			52		(196	)		1,261
Construction and other		100		-			45		(48	)		97		378		0			28		2			408
Consumer installment		127		(88	)		6		74			119		20		(102	)		56		44			18
Total	$	7,428	$	(613	)	$	139	$	350		$	7,304	$	13,459	$	(392	)	$	233	$	900		$	14,200

	For the three months ended June 30, 2020												For the six months ended June 30, 2020
	Allowance for Loan and Lease Losses												Allowance for Loan and Lease Losses
	Balance										Balance		Balance										Balance
	March 31, 2020		Charge-offs			Recoveries		Provision			June 30, 2020		December 31, 2019		Charge-offs			Recoveries		Provision			June 30, 2020
Loans:
Commercial real estate:
Owner occupied	$	1,099	$	(50	)	$	11	$	(22	)	$	1,038	$	801	$	(50	)	$	14	$	273		$	1,038
Non-owner occupied		4,364		-			-		795			5,159		3,382		0			74		1,703			5,159
Multifamily		386		-			-		(95	)		291		340		0			0		(49	)		291
Residential real estate		1,164		(5	)		-		8			1,167		726		(51	)		30		462			1,167
Commercial and industrial		716		(109	)		132		366			1,105		456		(170	)		239		580			1,105
Home equity lines of credit		1,240		(41	)		12		(8	)		1,203		932		(54	)		16		309			1,203
Construction and other		254		-			17		(35	)		236		103		0			34		99			236
Consumer installment		21		(3	)		2		(9	)		11		28		(391	)		11		363			11
Total	$	9,244	$	(208	)	$	174	$	1,000		$	10,210	$	6,768	$	(716	)	$	418	$	3,740		$	10,210

	For the three months ended June 30, 2021
	Allowance for Loan and Lease Losses
	Balance										Balance
	March 31, 2021		Charge-offs			Recoveries		Provision			June 30, 2021
Loans:
Commercial real estate:
Owner occupied	$	1,427	$	0		$	41	$	57		$	1,525
Non-owner occupied		7,248		(263	)		0		639			7,624
Multifamily		488		0			0		(39	)		449
Residential real estate		1,747		0			1		44			1,792
Commercial and industrial		1,440		0			32		(349	)		1,123
Home equity lines of credit		1,330		0			44		(113	)		1,261
Construction and other		424		0			23		(39	)		408
Consumer installment		18		(28	)		28		0			18
Total	$	14,122	$	(291	)	$	169	$	200		$	14,200

	For the three months ended June 30, 2019												For the three months ended June 30, 2020
	Allowance for Loan and Lease Losses												Allowance for Loan and Lease Losses
	Balance										Balance		Balance										Balance
	March 31, 2019		Charge-offs			Recoveries		Provision			June 30, 2019		March 31, 2020		Charge-offs			Recoveries		Provision			June 30, 2020
Loans:
Commercial real estate:
Owner occupied	$	830	$	-		$	1	$	35		$	866	$	1,099	$	(50	)	$	11	$	(22	)	$	1,038
Non-owner occupied		2,857		-			-		731			3,588		4,364		0			0		795			5,159
Multifamily		492		-			-		(80	)		412		386		0			0		(95	)		291
Residential real estate		773		-			30		(56	)		747		1,164		(5	)		0		8			1,167
Commercial and industrial		586		(9	)		24		(62	)		539		716		(109	)		132		366			1,105
Home equity lines of credit		832		(48	)		3		149			936		1,240		(41	)		12		(8	)		1,203
Construction and other		748		-			23		(674	)		97		254		0			17		(35	)		236
Consumer installment		88		(41	)		5		67			119		21		(3	)		2		(9	)		11
Total	$	7,206	$	(98	)	$	86	$	110		$	7,304	$	9,244	$	(208	)	$	174	$	1,000		$	10,210

The provision fluctuations during the three-month and six-month periods ended June 30, 2021 allocated to:

●

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

●

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

●

home equity lines of credit are due to a decrease in outstanding balances.

The provision fluctuations during the six-month period ended June 30, 2020 allocated to:

●

a $2.2 million increase in all lending categories’ qualitative factors during the second quarter of 2020 due to the economic uncertainty resulting from the COVID-19 pandemic.

●

non-owner occupied portfolio are due to the increase of specific reserves for two relationships totaling $1.3 million.

●

commercial and industrial loans are due to growth in loan volume along with an allocation for the PPP loans in the amount of $423,000.

The provision fluctuations during the ~~six~~~~-month period ended~~ ~~June 30, 2019~~ ~~allocated to:~~

●

~~commercial and industrial loans are due to the charge-off of a large relationship of $336,000 from a previous reserve of $358,000 in the~~ ~~first~~ ~~quarter.~~

●

~~residential real estate and home equity lines of credit loans are due to charge-offs and portfolio growth.~~

●

~~non-owner occupied loans are due to the reclassification of a large construction loan, with a~~ ~~first~~ ~~quarter reserve of $661,000, from construction and other.~~

~~The provision fluctuations during the~~ three-month period ended June 30, 2020 allocated to:

●

non-owner occupied ~~portfolio~~loans are due to the increase of specific reserves for two relationships totaling $776,000.

●

commercial and industrial loans are due to growth in loan volume along with an allocation for the PPP loans in the amount of $423,000.

~~The provision fluctuation during the~~ ~~three~~~~-month period ended~~ ~~June 30, 2019~~ ~~allocated to:~~

●

~~non-owner occupied loans are due to the reclassification of a large construction loan, with a~~ ~~first~~ ~~quarter reserve of $661,000, from construction and other.~~

TDR describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:

●

reduction in the interest rate to below-market rates

●

extension of repayment requirements beyond normal terms

●

reduction of the principal amount owed

●

reduction of accrued interest due

●

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

In each case, the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk. See Note 9 of the financial statements for disclosure of COVID-19 loan forbearance programs.

OnAdditionally, on April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not ~~TDRs.~~TDRs (see Note 9).

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

For the Six Months Ended

June 30, 2020

June 30, 2021

Number of Contracts

Pre-Modification

Post-Modification

Number of Contracts

Pre-Modification

Post-Modification

Term

Outstanding Recorded

Term

Outstanding Recorded

Troubled Debt Restructurings

Modification

Other

Total

Investment

Modification

Other

Total

Investment

Residential real estate

Commercial and industrial

118

117

For the Three and Six Months Ended

June 30, 2019

For the Six Months Ended

Number of Contracts

Pre-Modification

Post-Modification

June 30, 2020

Term

Outstanding Recorded

Number of Contracts

Pre-Modification

Post-Modification

Troubled Debt Restructurings

Modification

Other

Total

Investment

Term

Outstanding Recorded

Modification

Other

Total

Investment

Residential real estate

140

Commercial and industrial

118

117

There were no0 troubled debt restructurings during the three-month ~~period~~periods endedJune 30, 2021 and June 30, 2020.

There were no0 subsequent defaults of troubled debt restructurings for the three-month periods ended June 30, ~~2020~~2021 and June 30, ~~2019,~~2020, or for the six-month periods ended June 30, ~~2020~~2021 and June 30, ~~2019.~~2020.

NOTENOTE 9 –~~STOCK SPLIT DISCLOSURE~~

On ~~October 9, 2019,~~ ~~the Board of Directors of Middlefield Banc Corp. authorized a~~ ~~two-for-~~~~one~~ ~~stock split. Each shareholder of record at the close of business on~~ ~~October 25, 2019,~~ ~~received~~ ~~one~~ ~~additional share for every outstanding share held on the record date. The additional shares were paid on~~ ~~November 8, 2019.~~ ~~As a result, all share and earnings per share information have been retroactively adjusted to reflect the stock split.~~

~~With respect to the~~ ~~June 30, 2020~~ ~~and~~ ~~2019~~ ~~financial statements, the effect of the stock split on~~ ~~June 30, 2019~~ amounts was recognized retroactively in the stockholders’ equity accounts in the Consolidated Balance Sheets, and in all share data in the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effect of the stock split on per share amounts and weighted average common shares outstanding for the ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019~~ ~~is as follows:~~

For the three months ended

For the six months ended

June 30, 2019

June 30, 2019

Restated net income per common share - basic
$ 0.51 $ 0.97
Restated net income per common share - diluted
$ 0.50 $ 0.97
Restated weighted-average common shares issued
7,286,542 7,278,620
Restated average treasury stock shares
784,034 778,214
Restated average shares outstanding - basic
6,502,508 6,500,406
Restated stock options and restricted stock
12,438 12,644
Restated average shares outstanding - diluted
6,514,946 6,513,050
Restated period ending shares outstanding
6,485,170 6,485,170
Restated treasury shares outstanding
807,824 807,824

~~NOTE~~ 10 – RISKS AND UN~~CERTAINTIES~~UNCERTAINTIES

COVID-19 Update

~~The following table provides information with respect to our commercial loans by type at~~ ~~June 30, 2020~~ ~~that management considers to be at the highest exposure to risk related to the COVID-~~19 ~~pandemic.~~

At Risk Loans at June 30, 2020

Loan Type

Number of
Loans

Balance
(in thousands)

% of Total
Loans

Retail
270 $ 195,550 17.6 %
Multifamily & Residential NOO
354 120,697 10.9 %
Ambulatory Care, Nursing/Rehabilitation and Social Assistance
218 81,491 7.3 %
Hospitality and tourism
58 44,923 4.1 %
Restaurant/food service/bar
136 24,938 2.2 %
Other
219 20,208 1.8 %
Total
1,255 $ 487,807 43.9 %

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and ~~authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new~~ 7~~(a) loan program called the Paycheck Protection Program (“PPP”). As~~as a qualified SBA lender, we were automatically authorized to originate PPP loans. During the 12 months endedJune 30, 2021, we originated $70.1 million of loans under the PPP and helped customers receive $122.4 million of forgiveness payments under the terms of the program. The balance of PPP loans outstanding at June 30, 2021 approximates $90.2 million.

On December 27, 2020, President Trump signed another COVID-19 relief bill that extended and modified several provisions of the PPP. This included an additional allocation of $284 billion for PPP loans. The SBA reactivated the PPP on January 11, 2021. Middlefield Bank has originated additional PPP loans through the PPP, which was extended through May 31, 2021. In the six months ended June 30, 2021, Middlefield Bank had generated and received SBA approval on 683 PPP loans totaling $67.6 million and received $3.0 million in related deferred PPP fees under the 2021 PPP authorization.

As of June 30, ~~2020,~~2021, ~~we approved 1,343 applications for up to $142.7 million of loans under the PPP.~~

~~As of~~ ~~June 30, 2020,~~ ~~we modified 362~~8 loans aggregating ~~$214.8~~$17.7 million ~~primarily consisting~~were modified for deferral, compared to 11 loans aggregating $24.5 million at December 31, 2020. Modifications consist of the deferral of principal ~~and interest~~ payments and the extension of the maturity ~~date for up to~~ ~~three~~ ~~months.~~

~~Details with respect to actual commercial loan deferrals are~~date. Of the loans on deferral as ~~follows:~~

Type

Number of
Loans

Balance
(in thousands)

% of Total
Loans

Retail
58 $ 89,438 8.1 %
Hospitality and tourism
23 35,700 3.2 %
Ambulatory Care, Nursing/Rehabilitation and Social Assistance
10 22,456 2.0 %
Multifamily & Residential NOO
16 7,628 0.7 %
Restaurant/food service/bar
10 5,216 0.5 %
Other
245 54,379 4.9 %
Total
362 $ 214,817 19.4 %

~~An eligible business can apply for a PPP loan up to the greater of: (~~1) ~~2.5~~ ~~times its average monthly payroll costs; or (~~2) ~~$10.0~~ ~~million. PPP loans will have: (a) an interest rate of~~ ~~1.0%,~~ ~~(b) a~~ ~~two~~~~-year loan term to maturity; and (c) principal and interest payments deferred for~~ ~~six~~ ~~months from the date of disbursement. The SBA will guarantee~~ ~~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 reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and ~~75%~~ ~~of the loan proceeds are used for payroll expenses, with the remaining~~ ~~25%~~ ~~of the loan proceeds used for other qualifying expenses.~~

As of June 30, ~~2020,~~2021, ~~PPP loan amounts that could be forgiven under this provision~~5 loans are ~~as follows:~~interest-only deferrals aggregating $11.2 million.

Number of
Loans

Loan Balance
(in thousands)

> $2 million
6 $ 14,774
$350,000 - $2 million
92 69,361
$150,000 - $350,000
96 20,768
< $150,000
1,108 36,397
Total
1,302 $ 141,300

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

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

COVID-19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. According to the Interagency ~~Stateme~~ntStatement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term ~~(e.g.~~(e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at June 30, ~~2020.~~2021.

NOTE 10– COMMITMENTS AND CONTINGENCIES

Cannabis Industry

We provide deposit services to customers that are licensed by the State of Ohio to do business in (or are related to) the Medical Marijuana Control Program as growers, processors and dispensaries. Medical Marijuana businesses are regulated by the Ohio Department of Commerce and legal in the State of Ohio, although it is not legal at the federal level. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis business. A financial institution that provides services to cannabis-related businesses can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines. We maintain stringent written policies and procedures related to the acceptance of such businesses and to the monitoring and maintenance of such business accounts. We conduct a significant due diligence review of the cannabis business before the business is accepted, including confirmation that the business is properly licensed by the State of Ohio. Throughout the relationship, we continue monitoring the business, including site visits, to ensure that the business continues to meet our stringent requirements, including maintenance of required licenses and periodic financial reviews of the business.

While we believe we are operating in compliance with the FinCEN guidelines, there can be no assurance that federal enforcement guidelines will not change. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the Federal government’s enforcement position, could cause us to immediately cease providing banking services to the cannabis industry. We are upfront with our customers regarding the fact that we may have to terminate our relationship if a change occurs with the Federal government’s position and that the termination may come with little or no notice.

June 30, 2021 and December 31, 2020, deposit balances from cannabis customers were approximately $13.1 million and $11.8 million, or 1.1% and 1.0% of total deposits, respectively.

Item 2. ~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis (MD&A) provides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.

The information contained or incorporated by reference in this report on Form 10-Q contains forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital infrastructure and the ~~potential~~ impact of the COVID-19 pandemic. Significant progress has been made to combat the outbreak of COVID-19. While it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as of June 30, 2021, if there is a resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and any potential resulting measures to curtail its spread, will have on the Company's future operations, the Company is disclosing potentially material items of which it is aware.

All forward-looking statements included in this report on Form 10-Q are based on information available at the time of the report. Middlefield Banc Corp. assumes no obligation to update any forward-looking statement.

CHANGES IN FINANCIAL CONDITION

Overview

The following is management’s discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of June 30, 2021, as compared with December 31, 2020, and operating results for the three and six month periods ended June 30, 2021 and 2020. These comments should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.

This discussion contains certain performance measures determined by methods other than in accordance with GAAP. Management of the Company uses these non-GAAP measures in its analysis of the Company’s performance. These measures are useful when evaluating the underlying performance and efficiency of the Company’s operations and balance sheet. The Company’s management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results with prior periods and demonstrate the effects of significant gains and charges in the current period. The Company’s management believes that investors may use these non-GAAP financial measures to evaluate the Company’s financial performance without the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Non-GAAP measures include tangible book value per common share, return on average tangible common equity, and pre-tax, pre-provision income. The Company calculates the regulatory capital ratios using current regulatory report instructions. The Company’s management uses these measures to assess the quality of capital and believes that investors may find them useful in their evaluation of the Company. These capital measures may or may not be necessarily comparable to similar capital measures that may be presented by other companies.

2021 First Half Financial Highlights Include (on a year-over-year basis unless noted):

●

Net income of $8.6 million, or $1.35 per diluted share driven by record second quarter earnings of $4.4 million, or a record $0.70 per diluted share

●

Net interest margin improved by 16 basis points to 3.72%, compared to 3.56%

●

Total noninterest income was up 49.9% to $3.9 million

●

Pre-tax, pre-provision⁽¹⁾ income increased 35.4% to $11.4 million

●

Return on average assets increased to 1.26% from 0.64%

●

Return on average equity increased to 11.88% from 5.79%

●

Return on average tangible common equity⁽¹⁾ increased to 13.41% from 6.59%

●

Efficiency ratio improved to 57.60%, compared to 62.33%

●

Year-to-date net charge-offs declined 46.6% to $159,000

(1)

See reconciliation of non-GAAP measures in following tables

(Dollar amounts in thousands, except per share and share amounts, unaudited)

	For the Three Months Ended															For the Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2021			2021			2020			2020			2020			2021			2020
Per common share data
Net income per common share - basic	$	0.70		$	0.65		$	0.39		$	0.29		$	0.47		$	1.36		$	0.63
Net income per common share - diluted	$	0.70		$	0.65		$	0.39		$	0.29		$	0.46		$	1.35		$	0.62
Dividends declared per share	$	0.16		$	0.16		$	0.15		$	0.15		$	0.15		$	0.32		$	0.30
Book value per share (period end)	$	23.50		$	22.80		$	22.54		$	22.27		$	22.09		$	23.50		$	22.09
Tangible book value per share (period end) ^{(2) (3)}	$	20.82		$	20.17		$	19.91		$	19.63		$	19.43		$	20.82		$	19.43
Dividends declared	$	1,004		$	1,016		$	957		$	957		$	956		$	2,020		$	1,920
Dividend yield		2.72	%		3.10	%		2.65	%		3.09	%		2.91	%		2.73	%		2.91	%
Dividend payout ratio		22.69	%		24.38	%		38.45	%		51.65	%		32.23	%		23.51	%		47.92	%
Average shares outstanding - basic		6,297,071			6,364,132			6,378,706			6,376,291			6,369,467			6,331,356			6,393,288
Average shares outstanding - diluted		6,312,230			6,378,493			6,397,681			6,385,765			6,388,118			6,348,345			6,412,585
Period ending shares outstanding		6,215,511			6,344,657			6,379,323			6,378,110			6,369,467			6,215,511			6,369,467

Selected ratios
Return on average assets		1.30	%		1.22	%		0.72	%		0.54	%		0.90	%		1.26	%		0.64	%
Return on average equity		12.10	%		11.65	%		6.76	%		5.11	%		8.57	%		11.88	%		5.79	%
Return on average tangible common equity ^{(2) (4)}		13.65	%		13.17	%		7.64	%		5.79	%		9.76	%		13.41	%		6.59	%
Efficiency ⁽¹⁾		57.28	%		57.91	%		59.29	%		51.96	%		61.29	%		57.60	%		62.33	%
Equity to assets at period end		10.74	%		10.42	%		10.33	%		10.41	%		10.47	%		10.74	%		10.47	%
Noninterest expense to average assets		0.58	%		0.60	%		0.57	%		0.52	%		0.58	%		1.18	%		1.19	%

(1)	The efficiency ratio is calculated by dividing noninterest expense less amortization of intangibles by the sum of net interest income on a fully taxable equivalent basis plus noninterest income
(2)	See reconciliation of non-GAAP measures below
(3)	Calculated by dividing tangible common equity by shares outstanding
(4)	Calculated by dividing annualized net income for each period by average tangible common equity

	For the Three Months Ended															For the Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
Yields	2021			2021			2020			2020			2020			2021			2020
Interest-earning assets:
Loans receivable ⁽²⁾		4.43	%		4.48	%		4.28	%		4.48	%		4.53	%		4.45	%		4.73	%
Investment securities ⁽²⁾		3.47	%		3.75	%		3.65	%		3.66	%		3.76	%		3.60	%		3.69	%
Interest-earning deposits with other banks		0.18	%		0.20	%		0.21	%		0.27	%		0.23	%		0.19	%		0.72	%
Total interest-earning assets		4.05	%		4.11	%		4.00	%		4.23	%		4.27	%		4.08	%		4.47	%
Deposits:
Interest-bearing demand deposits		0.12	%		0.16	%		0.21	%		0.32	%		0.35	%		0.14	%		0.38	%
Money market deposits		0.46	%		0.47	%		0.53	%		0.70	%		0.93	%		0.47	%		1.17	%
Savings deposits		0.06	%		0.07	%		0.11	%		0.20	%		0.21	%		0.07	%		0.35	%
Certificates of deposit		1.19	%		1.28	%		1.56	%		1.77	%		2.00	%		1.24	%		2.06	%
Total interest-bearing deposits		0.46	%		0.53	%		0.70	%		0.93	%		1.11	%		0.50	%		1.25	%
Non-Deposit Funding:
Borrowings		1.18	%		1.10	%		0.95	%		0.45	%		0.53	%		1.14	%		0.83	%
Total interest-bearing liabilities		0.47	%		0.54	%		0.71	%		0.91	%		1.07	%		0.50	%		1.23	%
Cost of deposits		0.34	%		0.40	%		0.54	%		0.72	%		0.85	%		0.37	%		0.98	%
Cost of funds		0.35	%		0.41	%		0.55	%		0.71	%		0.83	%		0.38	%		0.98	%
Net interest margin ⁽¹⁾		3.72	%		3.73	%		3.49	%		3.57	%		3.49	%		3.72	%		3.56	%

(1)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

(2)	Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were determined using an effective tax rate of 21%.

Reconciliation of Common Stockholders' Equity to Tangible Common Equity	For the Three Months Ended										For the Six Months Ended
(Dollar amounts in thousands, unaudited)	June 30,		March 31,		December 31,		September 30,		June 30,		June 30,		June 30,
	2021		2021		2020		2020		2020		2021		2020

Stockholders' Equity (GAAP)	$	146,044	$	144,670	$	143,810	$	142,056	$	140,695	$	146,044	$	140,695
Less Goodwill and other intangibles		16,635		16,715		16,795		16,878		16,961		16,635		16,961
Tangible Common Equity (Non-GAAP)	$	129,409	$	127,955	$	127,015	$	125,178	$	123,734	$	129,409	$	123,734

Shares outstanding		6,215,511		6,344,657		6,379,323		6,378,110		6,369,467		6,215,511		6,369,467
Tangible book value per share (Non-GAAP)	$	20.82	$	20.17	$	19.91	$	19.63	$	19.43	$	20.82	$	19.43

Reconciliation of Average Equity to Return on Average Tangible Common Equity	For the Three Months Ended															For the Six Months Ended

	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2021			2021			2020			2020			2020			2021			2020

Average Stockholders' Equity (GAAP)	$	146,719		$	145,065		$	146,374		$	144,167		$	139,212		$	145,892		$	139,287
Less Average Goodwill and other intangibles		16,674			16,754			16,836			16,919			17,002			16,714			17,043
Average Tangible Common Equity (Non-GAAP)	$	130,045		$	128,311		$	129,538		$	127,248		$	122,210		$	129,178		$	122,244

Net income	$	4,425		$	4,167		$	2,489		$	1,853		$	2,966		$	8,592		$	4,007
Return on average tangible common equity (annualized) (Non-GAAP)		13.65	%		13.17	%		7.64	%		5.79	%		9.76	%		13.41	%		6.59	%

Reconciliation of Pre-Tax Pre-Provision Income (PTPP)	For the Three Months Ended										For the Six Months Ended

	June 30,		March 31,		December 31,		September 30,		June 30,		June 30,		June 30,
	2021		2021		2020		2020		2020		2021		2020

Net income	$	4,425	$	4,167	$	2,489	$	1,853	$	2,966	$	8,592	$	4,007
Add Income Taxes		968		896		467		295		565		1,864		639
Add Provision for loan losses		200		700		2,100		4,000		1,000		900		3,740
PTPP	$	5,593	$	5,763	$	5,056	$	6,148	$	4,531	$	11,356	$	8,386

General. The Company’s total assets ended the June 30, ~~2020~~2021 quarter at ~~$1.34~~$1.36 billion, ~~an increase~~a decrease of ~~$160.8~~$31.8 million from December 31, ~~2019.~~2020. For the same time period, cash and cash equivalents ~~increased $23.2~~decreased $19.9 million, or ~~66.0%~~17.7%, while net loans ~~increased $122.6~~decreased $48.5 million, or ~~12.5%.~~4.4%, offset by an increase of $36.5 million in investments. Total liabilities ~~increased $157.9~~decreased $34.0 million or ~~15.1%~~2.7%, while stockholders’ equity increased ~~$2.9~~$2.2 million, or ~~2.1%~~1.6%.

Cash and cash equivalents. Cash and cash equivalents ~~increased $23.2~~decreased $19.9 million, or ~~66.0%~~17.7%, to ~~$58.3~~$92.5 million at June 30, ~~2020~~2021 from ~~$35.1~~$112.4 million at December 31, ~~2019.~~2020. Deposits from customers into savings and checking accounts, loan and securities repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases ~~of investment securities~~ and repayments of borrowed and brokered funds. Elevated levels of cash can be traced primarily to pandemic-related government stimulus. This resulted in increased deposits, as both retail and commercial customers keep excess funds in liquid deposits accounts. The decrease in cash and cash equivalents from December 31, 2020 is due to an increase in the investment portfolio.

The Company will continue to hold elevated levels of cash and cash equivalents to meet the demands of customers during the economic downturn. The Company monitors cash and cash equivalents on a daily basis to ensure adequate liquidity positions are ~~maintained.~~ maintained, while searching for quality earning assets for excess funds.

Investment securities. Investment securities available for sale on June 30, ~~2020~~2021 totaled ~~$112.5~~$150.9 million, an increase of ~~$6.8~~$36.5 million, or ~~6.4%~~31.9%, from ~~$105.7~~$114.4 million at December 31, ~~2019.~~2020. During this period, the Company recorded repayments, calls, and maturities of ~~$7.8~~$8.4 million and a net unrealized holding ~~gain~~loss through AOCI of ~~$2.4 million.~~$495,000. Securities purchased were ~~$12.3~~$45.6 million, and there were no sales of securities for the six months ended June 30, ~~2020.~~2021. The Company recorded ~~$129,000~~$121,000 in ~~losses~~gains on equity securities as of June 30, ~~2020~~2021 on the Company’s Consolidated Statement of Income and Consolidated Statement of Cash Flows. The ~~loss~~gain on equity securities is the result of remeasurements of fair value of the equity securities held during this six-month period.

At June 30, 2021, the Company held $32.6 million of subordinated debt in other banks, as compared to $21.3 million at December 31, 2020. The average yield on this portfolio was 4.98% at June 30, 2021 as compared to 5.19% at December 31, 2020.

Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is assessed on attributes that have historically influenced default incidence in the municipal market, such as: sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. Municipal bonds compose ~~75%~~70% of the overall portfolio. ~~While these~~These investments have historically proven to have extremely low credit risk, the current economic environment may pose a threat to the cash flows of these governmental entities. The March 31, 2020 review shows portfolio credit quality to be strong with 99.5% of the portfolio having an assigned investment-grade rating or secured by an escrow of US government or agency securities, 80% of the portfolio is either pre-refunded or rated in the broad rating categories of AA or AAA. While not included in the assessment of the credit quality of portfolio holdings, 17.6% benefit from a bond insurance policy, which provides an additional layer of payment support for the securities.risk.

Loans ~~receivab~~~~le.~~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 ~~disbursed, geographically, with the five branches in the~~dispersed geographically. The central Ohio market ~~comprising 23.6%~~comprises 23.7% of the Company’s total loans. Net loans receivable ~~increased $122.6~~decreased $48.5 million, or ~~12.5%~~4.4%, to ~~$1.10~~$1.04 billion as of June 30, ~~2020 from $977.5 million at December 31, 2019. Included~~2021. Loans receivable had an increase in the ~~total increase for loans receivable were increases~~owner-occupied portfolio of $6.7 million, or 6.5%, and decreases in the ~~commercial~~consumer installment, construction and ~~industrial, CRE owner occupied, and~~other, multifamily, home equity lines of credit, portfolios of $150.6 million, or 168.2%, $7.8 million, or 7.6%, and $5.0 million, or 4.4%, respectively. This increase is net of decreases in the construction and other, CRE non-owner occupied, consumer installment,non-owner-occupied, residential real estate, and ~~CRE multifamily~~commercial and industrial portfolios of ~~$665,000, or 1.0%, $1.6~~$1.1 million, or ~~0.5%~~11.5%, ~~$3.2~~$1.3 million, or ~~22.2%~~2.1%, ~~$7.4~~$4.6 million, or ~~3.1%~~11.7%. $4.9 million, or 4.3%, $5.1 million, or 1.6%, $5.9 million, or 2.5%, and ~~$24.4~~$31.5 million, or ~~39.4%~~13.6%, respectively. The ~~increase~~decrease in the commercial and industrial portfolio includes the forgiveness of PPP loans ~~issued as~~ of $93.5 million during the six months ended June 30, ~~2020~~2021. The Company expects muted loan growth through the remainder of ~~$142.7 million.~~the year as a result of excess liquidity throughout the economy.

The Company’s Mortgage Banking operation generates loans for sale to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Loans held for sale on June 30, ~~2020~~2021 totaled ~~$4.2 million, an increase~~$790,000, a decrease of ~~$2.9 million,~~$88,000, or ~~240.2%~~10.0%, from December 31, ~~2019.~~2020. This ~~increase~~decrease is the result of ~~more saleable loans being held at quarter end.~~decreased activity due to fewer refinance opportunities. The Company recorded proceeds from the sale of ~~$18.6~~$22.4 million of these loans for ~~$495,000~~$813,000 in gains on sale of loans as of June 30, ~~2020~~2021 on the Company’s Consolidated Statement of Cash Flows.

The federal banking regulators have issued guidance for those institutions which 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 which 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 which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At June 30, ~~2020~~2021 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent ~~295.5%~~279.3% of total risk-based capital. Construction, land and land development loans represent ~~46.1%~~41.8% 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 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, owing to 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.

The Company monitors daily fluctuations in unused commitments as a means of identifying potentially material drawdowns on existing lines of credit. At June 30, ~~2020,~~2021, unused line of credit commitments ~~is unchanged~~increased $10.8 million, or 4.2%, from December 31, ~~2019.~~2020.

Allowance for Loan and Lease L~~osses~~Losses and Asset ~~Quali~~~~ty.~~Quality. The allowance for loan and lease losses increased ~~$3.4 million,~~$741,000, or ~~50.9%~~5.5%, to ~~$10.2~~$14.2 million at June 30, ~~2020~~2021 from ~~$6.8~~$13.5 million at December 31, ~~2019.~~2020. For the three months ended June 30, ~~2020,~~2021, net loan charge-offs totaled $122,000, or 0.05% of average loans, annualized, compared to net charge-offs of $34,000, or 0.01% of average loans, ~~compared to net charge-offs of $12,000~~annualized, for the same period in ~~2019.~~2020. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of ~~$1.0 million~~$200,000 in the three-month period ended June 30, ~~2020.~~2021. For the six months ended June 30, ~~2020,~~2021, net loan charge-offs totaled $159,000, or 0.03% of average loans, annualized, compared to net charge-offs of $298,000, or 0.06% of average loans, ~~compared to net charge-offs of $474,000, or 0.10% of average loans,~~annualized, for the same period in ~~2019.~~2020. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of ~~$3.7 million~~$900,000 in the six-month period ended June 30, ~~2020.~~2021. The ratio of the allowance for loan and lease losses to nonperforming loans was ~~104.2%~~182.99% for the three-month period ended June 30, ~~2020,~~2021, compared to ~~68.1%~~104.15% for the same period in the prior year. This is due to ~~an increase in impaired loans and~~ the allowance being adjusted to address the economic slowdown ~~during~~since the ~~six months ended June 30, 2020. See additional discussions on~~beginning of the ~~provision for loan losses section below.~~COVID-19 pandemic.

Management analyzes the adequacy of the allowance for loan and lease losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values, and changes in the amount and composition of the loan portfolio. The allowance for loan and lease losses is a significant estimate that is particularly susceptible to changes in the near term. Management’s analysis includes a review of all loans designated as impaired, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan and lease losses. Future additions or reductions to the allowance for loan and lease losses will be dependent on these factors. Additionally, the Company uses an outside party to conduct an independent review of commercial and commercial real estate loans that is designed to validate management conclusions of risk ratings and the appropriateness of the allowance allocated to these loans. The Company uses the results of this review to help determine the effectiveness of policies and procedures and to assess the adequacy of the allowance for loan and lease losses allocated to these types of loans. Management believes the allowance for loan and lease losses is appropriately stated at June 30, ~~2020.~~2021. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for loan and lease losses is considered a critical accounting policy.

Goodwill. The carrying value of goodwill was $15.1 million at June 30, 2021 and December 31, 2020. The Company ~~considers~~performs a periodic quantitative analysis of goodwill using multiple approaches. The primary methodology is the ~~negative economic impact resulting from~~discounted cash flow approach, while also considering a market approach of comparing to multiples of similar public companies as well as market price with control premiums.

Each of the ~~COVID-19 shutdowns~~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 ~~be a triggering event necessitating a mid-cycle analysis for impairment.~~any of the assumptions could result in significantly different results. Based on the most recent analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired. The Company also performed a qualitative assessment of goodwill as of September 30, 2020 with no resulting goodwill impairment.

~~Accrued Interest Receivable and~~ ~~Other Assets.~~ Accrued interest receivable and other assets increased $4.4 million, or 41.0%, to $15.1 million at June 30, 2020 from $10.7 million at December 31, 2019. Income receivable on loans has increased $2.1 million as a result of the COVID-19 payment deferral program. Also included in this increase are increases in FHLB stock owned of $1.6 million, other real estate owned of $532,000, and an increase in the holding company franchise tax asset of $551,000.

Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, other real estate owned, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.

	Asset Quality History															Asset Quality History

(Dollar amounts in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			June 30, 2021			March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020

Nonperforming loans	$	9,803		$	8,405		$	8,879		$	10,053		$	10,729		$	7,760		$	8,958		$	7,858		$	6,690		$	9,803
Other real estate owned		687			456			155			89			89			7,090			7,372			7,387			7,391			687

Nonperforming assets	$	10,490		$	8,861		$	9,034		$	10,142		$	10,818		$	14,850		$	16,330		$	15,245		$	14,081		$	10,490

Allowance for loan and lease losses		10,210			9,244			6,768			7,001			7,304			14,200			14,122			13,459			11,359			10,210

Ratios:
Nonperforming loans to total loans		0.88	%		0.84	%		0.90	%		1.01	%		1.07	%		0.73	%		0.81	%		0.71	%		0.59	%		0.88	%
Nonperforming assets to total assets		0.78	%		0.73	%		0.76	%		0.79	%		0.84	%		1.09	%		1.18	%		1.10	%		1.03	%		0.78	%
Allowance for loan and lease losses to total loans		0.92	%		0.93	%		0.69	%		0.70	%		0.73	%		1.34	%		1.28	%		1.22	%		1.01	%		0.92	%
Allowance for loan and lease losses to nonperforming loans		104.15	%		109.98	%		76.22	%		69.64	%		68.08	%		182.99	%		157.65	%		171.28	%		169.79	%		104.15	%

Nonperforming loans exclude TDRs that are performing in accordance with their terms over a prescribed period of time. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 2524 TDRs accruing interest with a balance of ~~$2.8~~$2.4 million as of June 30, ~~2020.~~2021. A TDR that yields a market interest rate at the time of restructuring and is in compliance with its modified terms is no longer reported as a TDR in calendar years after the year in which the restructuring took place. To be in compliance with its modified terms, a loan that is a TDR must not be in nonaccrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms. Nonperforming loans secured by real estate totaled ~~$9.1~~$7.1 million as of June 30, ~~2020, an increase~~2021, a decrease of ~~$1.3 million~~$135,000 from ~~$7.8~~$7.2 million at December 31, ~~2019.~~2020.

A major factor in determining the appropriateness of the allowance for loan and lease losses is the type of collateral which secures the loans. Of the total nonperforming loans at June 30, ~~2020, 93.3%~~2021, 91.20% were secured by real estate. Although this does not insure against all losses, real estate typically provides for at least partial recovery, even in a distressed-sale and declining-value environment. The Company’s objective is to minimize the future loss exposure of the Company.

The allowance for loan and lease losses to total loans ratio increased from ~~0.69%~~1.22% as of December 31, ~~2019~~2020 to ~~0.92%~~1.34% as of June 30, ~~2020.~~2021.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling ~~$1.16~~$1.20 billion or ~~103.9%~~97.5% of the Company’s total average funding sources at June 30, ~~2020.~~2021. Total deposits ~~increased $137.4~~decreased $29.9 million ~~or 13.5%,~~ at June 30, ~~2020~~2021 from ~~$1.02~~$1.23 billion at December 31, ~~2019.~~2020. The total ~~increase~~decrease in deposits is the net of increases in noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits of $35.3 million, or 12.1%, $12.0 million, or 6.1%, and $8.3 million, or 3.4%, respectively, and decreases in money market deposits ~~of $79.4 million, or 41.5%, $28.9 million, or 26.8%, $26.5 million, or 13.8%,~~ and ~~$8.0 million, or 5.0%, respectively, and a decrease in~~ time deposits of ~~$5.4~~$15.0 million, or ~~1.5%~~7.6%, and $70.5 million, or 23.8%, respectively, at June 30, ~~2020,~~2021, as some maturing certificates are not being renewed in the current low interest rate environment. ~~Included in the net increase are $58.8 million of new PPP deposits.~~ The Company uses certain non-core funding instruments in order to grow the balance sheet and maintain liquidity. These deposits, either from a broker or a listing service, were ~~$54.9~~$15.4 million at June 30, ~~2020,~~2021, as compared to ~~$117.1~~$66.9 million at December 31, ~~2019.~~2020.

Borrowed funds. The Company uses short-term and long-term borrowings as another source of funding for asset growth and liquidity needs. These borrowings primarily include ~~FHLB~~ advances ~~junior~~from the Federal Home Loan Bank of Cincinnati (the “FHLB”), subordinated debt, short-term borrowings from other banks, and federal funds purchased. ~~Short-term~~Other borrowings ~~increased $15.3~~decreased $4.0 million, or 23.5%, to ~~$20.4~~$13.0 million as of June 30, ~~2020. Other borrowings increased $4.4 million, or 34.6%, to $17.2 million as of June 30, 2020~~2021 from ~~$12.8~~$17.0 million as of December 31, ~~2019.~~2020.

~~Stockholders’~~Stockholders’ equity. Stockholders’ equity increased ~~$2.9~~$2.2 million, or ~~2.1%~~1.6%, to ~~$140.7~~$146.0 million at June 30, ~~2020~~2021 from ~~$137.8~~$143.8 million at December 31, ~~2019.~~2020. This increase was the result of increases in retained earnings of ~~$2.1 million, AOCI of $1.9~~$6.6 million, and common stock of ~~$105,000.~~$245,000. This increase is net of a decrease in AOCI of $391,000, and an increase in treasury stock of ~~$1.2 million, or 7.6%, to $16.9 million as of June 30, 2020, from $15.7 million as of December 31, 2019.~~$4.2 million. The change in retained earnings is due to the year-to-date net income offset by dividends paid, the change in AOCI is due to fair value adjustments of available-for-sale securities, and the change in treasury stock is due to the Company repurchasing ~~58,200~~181,045 of its outstanding shares during the six months ended June 30, ~~2020.~~2021.

The Company suspended its stock repurchase program as a result of the economic slowdown and the focus on capital preservation. The suspension will continue until economic clarity arises and the Company is certain it is the best use of capital.

RESULTS OF OPERATIONS

General. Net income for the three months ended June 30, ~~2020,~~2021, was ~~$3.0~~$4.4 million, a ~~$324,000,~~$1.5 million, or ~~9.8%~~49.2%, ~~decrease~~increase from the amount earned during the same period in ~~2019.~~2020. Diluted earnings per share for the quarter ~~decreased~~increased to ~~$0.46,~~$0.70, compared to ~~$0.50~~$0.46 from the same period in ~~2019.~~2020. Net income for the six months ended June 30, ~~2020,~~2021, was ~~$4.0~~$8.6 million, a ~~$2.3~~$4.6 million, or ~~36.4%~~114.4%, ~~decrease~~increase from the amount earned during the same period in ~~2019.~~2020. Diluted earnings per share for this six-month period ~~decreased~~increased to ~~$0.62,~~$1.35, compared to ~~$0.97~~$0.62 from the same period in ~~2019.~~2020.

The Company’s annualized return on average assets (“ROA”) and return on average equity (“ROE”) for the quarter were ~~0.90%~~1.30% and ~~8.56%~~12.10%, respectively, compared with ~~1.09%~~0.90% and ~~9.79%~~8.57% for the same period in ~~2019.~~2020. The Company’s ROA and ROE for the six-month period were ~~0.78%~~1.26% and ~~5.79%~~11.88%, respectively, compared with ~~1.05%~~0.64% and ~~9.58%~~5.79% for the same period in ~~2019.~~2020.

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest-earning assets and interest-bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities, in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest-earning assets and liabilities affect the Company’s net interest income. Management’s goal is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations.

Net interest income for the three months ended June 30, ~~2020~~2021 totaled ~~$10.7~~$11.9 million, an increase of ~~4.4%~~10.8% from that reported in the comparable period of ~~2019.~~2020. The net interest margin was ~~3.49%~~3.72% for the second quarter of ~~2020, a decrease~~2021, an increase from the ~~3.65%~~3.49% reported for the same quarter of ~~2019.~~2020. The ~~decline~~increase in the net interest margin is attributable to ~~a 56 basis point decrease~~an increase in ~~loans receivable yield~~the average balance of investment securities along with a ~~198~~decrease in yield on certificates of deposits of 81 basis ~~point~~points and the decrease in the ~~yield on interest-earning~~average balance of certificates of deposits ~~with other banks. This decline was partially offset by an increase in average loan balances~~ of ~~$89.8 million or 9.0%. PPP loans reduced the net interest margin for the second quarter by 10 basis points from the first quarter of 2020.~~$116.4 million. Net interest income for the six months ended June 30, ~~2020~~2021 totaled ~~$20.8~~$23.8 million, an increase of ~~1.3%~~14.6% from that reported in the comparable period of ~~2019.~~2020. The net interest margin was ~~3.56%~~3.72% for the six-month period ended June 30, ~~2020, a decrease~~2021, an increase from the ~~3.67%~~3.56% reported for the ~~comparable period~~same quarter of ~~2019.~~2020. The ~~decline~~increase in the net interest margin is attributable to a ~~35 basis point~~ decrease in ~~loans receivable~~ yield ~~along with~~on certificates of deposits and money market deposits of 82 and 70 basis points, respectively, as well as a ~~152 basis point~~ decrease in the ~~yield on interest-earning~~average balance of certificates of deposits ~~with other banks. This decline was partially offset by an increase in average loan balances~~ of ~~$36.7 million or 3.7%.~~$110.4 million. The Company’s net interest margin may be subject to ~~further decline~~fluctuation as a result of the ~~abrupt decrease in interest rates during the first quarter~~rate of ~~2020, the reduced interest income on floating-rate commercial loans, and the business disruptions caused by the COVID-19 pandemic.~~PPP loan forgiveness. As the Company is in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as the Company’s interest-earning assets reprice faster than its interest-bearing liabilities. Much of our asset-sensitivity is due to commercial ~~and consumer~~ loans that have variable interest rates. Both loan types have floor rates. The benefit of these floors ~~will become~~is more evident ~~in future quarters~~ if the Federal Reserve maintains short-term interest rates at the low level established in March 2020. For the three months ended June 30, 2020, the decrease in yield on interest-earning deposits with other banks led to a $213,000 decline in interest income. The $565,000 overall decrease in interest income was offset by a $1.0 million decrease in interest expense. For the six months ended June 30, 2020, the decrease in yield on interest-earning deposits with other banks led to a $320,000 decline in interest income. The $1.0 million overall decrease in interest income was offset by a $1.3 million decrease in interest expense.current levels.

Interest and dividend income. Interest and dividend income decreased ~~$565,000,~~$219,000, or ~~4.1%~~1.7%, for the three months ended June 30, ~~2020,~~2021, compared to the same period in the prior year. This is attributable to a decrease in interest and fees on loans of ~~$425,000.~~$396,000, and is partially offset by an increase in taxable interest on investment securities of $204,000. Interest and dividend income decreased ~~$1.0 million,~~$86,000, or ~~3.8%~~0.3%, for the six months ended June 30, ~~2020,~~2021, compared to the same period in the prior year. This is attributable to decreases in interest and fees on loans and tax-exempt interest on investment securities of $307,000 and $103,000, respectively. This decrease is partially offset by an increase in taxable interest on investment securities of $417,000.

Interest and fees earned on loans receivable decreased $396,000, or 3.2%, for the three months ended June 30, 2021, compared to the same period in the prior year. This is attributable to a decrease in ~~interest and fees on loans~~average loan balances of ~~$835,000.~~

$13.2 million, along with a 10 basis point decrease in the average yield to 4.43%. Interest and fees earned on loans receivable decreased ~~$425,000,~~$307,000, or ~~3.3%~~1.3%, for the ~~three~~six months ended June 30, ~~2020,~~2021, compared to the same period in the prior year. This is attributable to a 5628 basis point decrease in the average yield on loans receivable to ~~4.53%~~4.45%, partially offset by an increase in average loan balances of ~~$89.8~~$53.1 million. ~~Interest and fees earned on loans receivable decreased $835,000, or 3.3%,~~The increase in the average loan balance for the six months ended June 30, 2020, compared to the same period in the prior year. This is attributable to a 35 basis point decrease in the average yield to 4.73%, partially offset by an increase in average loan balances of $36.7 million. The increase in the average loan balance2021 is due in part to the issuance of PPP loans, ~~in 2020,~~from which the related gross deferred fee income ~~of which~~ was ~~$927,000 as of June 30, 2020.~~$2.3 million.

Net interest earned on securities increased by ~~$73,000~~$172,000 for the three months ended June 30, ~~2020~~2021 when compared to the same period in the prior year. The average balance of investment securities increased ~~$8.7~~$27.6 million, or ~~8.8%~~25.6%, while the ~~3.76%~~3.47% yield on the investment portfolio ~~increased~~decreased by 629 basis points, from ~~3.70%~~3.76%, for the same period in the prior year. Net interest earned on securities increased by ~~$115,000~~$314,000 for the six months ended June 30, ~~2020~~2021 when compared to the same period in the prior year. The average balance of investment securities increased ~~$8.6~~$19.1 million, or ~~8.7%~~17.9%, while the ~~3.69%~~3.60% yield on the investment portfolio decreased by 29 basis points, from ~~3.71%~~3.69%, for the same period in the prior year.

Interest expense. Interest expense decreased ~~$1.0~~$1.4 million, or ~~29.6%~~56.8%, for the three months ended June 30, ~~2020,~~2021, compared to the same period in the prior year. ~~The~~This decrease is attributable to a decrease in the average balance of certificates of deposits and short-term borrowings of ~~$40.7~~$116.4 million, or ~~10.4%~~33.22%, and $55.8 million, or 99.59%, respectively. This decrease is further attributable to decreases of ~~214, 48,~~81 and 47 ~~and 35~~ basis points in ~~short-term borrowings, savings,~~certificates of deposit and money market deposits, ~~and certificates of deposits cost. This decrease was partially offset by an increase in the average balance of short-term borrowings of $42.6 million, or 319.2%.~~respectively. Interest expense decreased ~~$1.3~~$3.1 million, or ~~19.4%~~57.6%, for the six months ended June 30, ~~2020,~~2021, compared to the same period in the prior year. ~~The~~This decrease is attributable to decreases in the average ~~balances~~balance of ~~money market~~certificates of deposits and ~~savings deposits~~short-term borrowings of ~~$15.8~~$110.4 million, or ~~8.9%~~30.48%, and ~~$10.6~~$35.2 million, or ~~5.3%~~99.52%, respectively. This decrease is further attributable to decreases ~~in costs~~ of ~~204, 90, 40, 33,~~82, 81, and 2170 basis points in ~~short-term borrowings,~~certificates of deposits, other borrowings, ~~savings,~~and money market deposits, ~~and certificates of deposits costs. This decrease was partially offset by an increase in the average balance of short-term borrowings of $11.0 million, or 45.2%.~~respectively.

The decreases in costs were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the targeted federal funds rate in March 2020. The COVID-19 pandemic could result in lower levels of deposits in future periods, which could decrease our average interest-bearing deposits for the remainder of 2020. Also, as a result of the reductions in the targeted federal funds interest rate, as well as ~~the impact~~other continuing effects of the COVID-19 ~~pandemic, we expect that our net interest income and net interest margin could decrease in future periods.~~pandemic.

Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan and lease losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter, management performs a review of estimated probable incurred credit losses in the loan portfolio. Based on this review, a provision for loan losses of ~~$1.0 million~~$200,000 was recorded for the quarter ended June 30, ~~2020, an increase~~2021, a decrease of ~~$890,000~~$800,000 from the quarter ended June 30, ~~2019.~~2020. A provision for loan losses of ~~$3.7 million~~$900,000 was recorded for the six-month period ended June 30, ~~2020, an increase~~2021, a decrease of ~~$3.4~~$2.8 million from the same period in ~~2019.~~2020. The Company remains confident in ~~the~~its conservative and disciplined approach to credit and risk management. ~~However, the economic challenges caused by the COVID-19 crisis has an immediate impact on credit quality.~~

At June 30, 2020, we considered the effect of the economic shutdown to combat COVID-19 on our borrowers and local economy. Although stimulus and mitigation efforts are expected to reduce the impact, we believe a 20 basis point increase to the economic qualitative factor was warranted. Most of the increased provision is the result of increases to the current economic condition’s qualitative factors. The impact of those increases for the six months ended June 30, 2020 is (in thousands):

Commercial real estate:

Owner occupied
$ 191
Non-owner occupied
542
Multifamily
63
Residential real estate
458
Commercial and industrial
646
Home equity lines of credit
228
Construction and other
112
Consumer installment
8
Total
$ 2,248

Nonperforming loans were ~~$9.8~~$7.8 million, or ~~.88%~~0.73%, of total loans at June 30, ~~2020~~2021 compared with ~~$10.7~~$9.8 million, or ~~1.07%~~0.88%, at June 30, ~~2019.~~2020. For the three months ended June 30, ~~2020,~~2021, net loan charge-offs totaled ~~$34,000,~~$122,000, or ~~0.01%~~0.05% of average loans, compared to net charge-offs of ~~$12,000,~~$34,000, or 0.01% of average loans, for the second quarter of ~~2019.~~2020. For the six months ended June 30, ~~2020,~~2021, net loan charge-offs totaled ~~$298,000,~~$159,000, or ~~0.06%~~0.03% of average loans, compared to net charge-offs of ~~$474,000,~~$298,000, or ~~0.10%~~0.06% of average loans, for the ~~same period~~second quarter of 2020.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively participated in ~~2019.~~assisting its customers with applications for resources through the program. At June 30, 2021, the Company carried $90.2 million 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. ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans. Although the loans are fully guaranteed by the U.S. government and absent any specific loss information about any of our PPP loans, the Company does provide a $361,000 qualitative provision for loan losses on its PPP loans at June 30, 2021.

Noninterest income. Noninterest income increased ~~$196,000,~~$137,000, or ~~15.1%~~9.2%, for the three months ended June 30, ~~2020~~2021 over the comparable ~~2019~~2020 period. This increase was the result of an increase in ~~gains~~service charges on deposit accounts of $290,000, or 51.2%, which is due to increased charges incurred including cash management fees relating to cannabis-related business. This increase is net of a decrease in gain on sale of loans of ~~$283,000,~~$160,000, or ~~288.8%~~42.0%, ~~partially offset by~~which is due to a decrease in ~~investment securities gains~~refinancing of mortgages in the second quarter of 2021. Noninterest income increased $1.3 million, or 49.9%, during the six months ended June 30, 2021 over the comparable 2020 period. This increase was the result of increases in service charges on deposit accounts, and gain on sale ~~net,~~ of ~~$190,000.~~loans of $524,000, or 46.8%, and $318,000, or 64.2%, respectively. There was also an increase in gain on equity securities of $250,000. The increase in ~~gains~~service charges on deposit accounts is due to increased charges incurred including cash management fees relating to cannabis-related business and the increase in gain on sale of loans is due to an increase in refinancing of mortgages due to a decrease in rates. Noninterest income increased $138,000, or 5.7%, during the six months ended June 30, 2020 over the comparable 2019 period. This increase was the result of an increase in gains on sale of loans of $338,000, or 215.3%, partially offset by decreases in investment securities gains on sale, net, and gains on equity securities (Note 7) of $190,000, and $173,000, respectively. The increase in gains on sale of loans is due to an increase in saleable loans being sold during this time period. The decrease in investment securities gains on sale is due to no available-for-sale securities being sold during the second quarter of 2020.

Noninterest expense. Noninterest expense of ~~$7.7~~$7.9 million for the second quarter ~~2020~~2021 was ~~2.8%~~3.1%, or ~~$207,000,~~$237,000, higher than the second quarter of ~~2019. Data~~2020. Salaries and employee benefits, federal deposit insurance expense, and occupancy expense increased $185,000, or 4.5%, $76,000, or 102.7%, and $66,000, or 13.7%, respectively. These increases were partially offset by a decrease in other expense of $125,000, or 12.3%. The salary increase is mostly due to annual pay adjustments, an increase in profit sharing expense, and a decrease in restricted stock activity. The increase in federal deposit insurance expense is due to an increase in premiums, and the increase in occupancy expense is due to an increase in building maintenance services. The decrease in other expense is due to decreases in promotional, miscellaneous loan, software, postage, and corporate expenses. Noninterest expense of $16.3 million for the six-month period ended June 30, 2021 was 9.0%, or $1.3 million, higher than the same period in 2020. Salaries and employee benefits, data processing costs, and ~~other expenses~~occupancy expense increased ~~$135,000,~~$855,000, or ~~24.6%~~11.1%, $134,000, or 9.9%, and ~~$70,000,~~$116,000, or ~~7.2%~~11.2%, respectively. These increases were partially offset by a decrease in software amortization expense of $61,000, or 28.4%. The salary increase is mostly due to annual pay adjustments, an increase in profit sharing expense, and restricted stock activity. The increase in data processing costs is due to new and increased costs of processing ~~agreements. The~~services, and the increase in ~~other~~occupancy expense is due to ~~increases~~an increase in directors' fees, miscellaneous loan expenses, sundry gains and losses, and pandemic response-related expenses. Noninterest expense of $14.9 million for the six-month period ended June 30, 2020 was 0.3%, or $41,000, lower than the same period in 2019. Data processing costs and other expense increased $336,000, or 33.1%, and $264,000, or 14.3%, respectively. These increases were offset by abuilding maintenance services. The decrease in ~~salaries and employee benefits of $602,000, or 7.3%. The increase in data processing costs is due to new and increased costs of processing agreements, and the increase in other~~software amortization expense is due to ~~increases in miscellaneous loan expenses, postage, sundry gains and losses, and fewer offsetting gains on sales~~extending the life of ~~OREO properties. The decrease in salary expense is due to the valuation adjustment for share-based compensation liability (see Note 3), as well as a decrease in profit sharing expense recorded.~~certain software assets.

Provision for income taxes. The Company recognized ~~$565,000~~$968,000 in income tax expense, which reflected an effective tax rate of ~~16.0%~~17.9% for the three months ended June 30, ~~2020,~~2021, as compared to ~~$686,000~~$565,000 with an effective tax rate of ~~17.3%~~16.0% for the comparable ~~2019~~2020 period. The Company recognized ~~$639,000~~$1.9 million in income tax expense, which reflected an effective tax rate of ~~13.8%~~17.8% for the six months ended June 30, ~~2020,~~2021, as compared to ~~$1.3 million~~$639,000 with an effective tax rate of ~~17.1%~~13.8% for the comparable ~~2019~~2020 period. The ~~decrease~~increase in the effective tax rate is due to the ~~reduction~~increase of ~~net~~taxable income.

3940

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

	For the Three Months Ended June 30,														For the Three Months Ended June 30,
	2020							2019							2021							2020

	Average				Average			Average				Average			Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽³⁾	$	1,092,095	$	12,281		4.53	%	$	1,002,346	$	12,706		5.09	%	$	1,078,866	$	11,885		4.43	%	$	1,092,095	$	12,281		4.53	%
Investment securities ⁽³⁾		107,765		840		3.76	%		99,022		767		3.70	%		135,338		1,012		3.47	%		107,765		840		3.76	%
Interest-earning deposits with other banks ⁽⁴⁾		58,541		34		0.23	%		44,747		247		2.21	%		85,245		39		0.18	%		58,541		34		0.23	%
Total interest-earning assets		1,258,401		13,155		4.27	%		1,146,115		13,720		4.86	%		1,299,449		12,936		4.05	%		1,258,401		13,155		4.27	%
Noninterest-earning assets		62,976							61,267							70,692							62,976
Total assets	$	1,321,377						$	1,207,382						$	1,370,141						$	1,321,377
Interest-bearing liabilities:
Interest-bearing demand deposits	$	129,917	$	112		0.35	%	$	98,929	$	88		0.36	%	$	207,080	$	64		0.12	%	$	129,917	$	112		0.35	%
Money market deposits		164,434		381		0.93	%		159,705		558		1.40	%		185,728		212		0.46	%		164,434		381		0.93	%
Savings deposits		198,967		104		0.21	%		195,451		336		0.69	%		253,612		38		0.06	%		198,967		104		0.21	%
Certificates of deposit		350,298		1,739		2.00	%		390,997		2,295		2.35	%		233,930		696		1.19	%		350,298		1,739		2.00	%
Short-term borrowings		55,973		32		0.23	%		13,354		79		2.37	%		227		-		0.00	%		55,973		32		0.23	%
Other borrowings		15,615		62		1.60	%		12,489		95		3.05	%		13,062		39		1.20	%		15,615		62		1.60	%
Total interest-bearing liabilities		915,204		2,430		1.07	%		870,925		3,451		1.59	%		893,639		1,049		0.47	%		915,204		2,430		1.07	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		262,575							198,234							323,590							262,575
Other liabilities		4,311							3,387							6,193							4,311
Stockholders' equity		139,287							134,836							146,719							139,287
Total liabilities and stockholders' equity	$	1,321,377						$	1,207,382						$	1,370,141						$	1,321,377
Net interest income			$	10,725						$	10,269						$	11,887						$	10,725
Interest rate spread ⁽¹⁾						3.20	%						3.27	%						3.58	%						3.20	%
Net interest margin ⁽²⁾						3.49	%						3.65	%						3.72	%						3.49	%
Ratio of average interest-earning assets to average interest-bearing liabilities						137.50	%						131.60	%						145.41	%						137.50	%

(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 $179 and $190 for the three months ended June 30, 2021 and 2020, respectively. (4) Includes dividends received on restricted stock.
~~(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 $190 and $168 for the three months ended June 30, 2020 and 2019, respectively.~~
~~(4) Includes dividends received on restricted stock.~~

4041

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three-month periods ended June 30, ~~2020~~2021 and ~~2019,~~2020, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.

	2020 versus 2019									2021 versus 2020

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

Interest-earning assets:
Loans receivable	$	1,136		$	(1,561	)	$	(425	)	$	(149	)	$	(247	)	$	(396	)
Investment securities		80			(7	)		73			258			(86	)		172
Interest-earning deposits with other banks		76			(289	)		(213	)		15			(10	)		5
Total interest-earning assets		1,292			(1,857	)		(565	)		124			(343	)		(219	)


Interest-bearing liabilities:
Interest-bearing demand deposits		28			(4	)		24			67			(115	)		(48	)
Money market deposits		16			(193	)		(177	)		49			(218	)		(169	)
Savings deposits		6			(238	)		(232	)		29			(95	)		(66	)
Certificates of deposit		(238	)		(318	)		(556	)		(580	)		(463	)		(1,043	)
Short-term borrowings		251			(298	)		(47	)		(32	)		-			(32	)
Other borrowings		24			(57	)		(33	)		(10	)		(13	)		(23	)
Total interest-bearing liabilities		87			(1,108	)		(1,021	)		(477	)		(904	)		(1,381	)


Net interest income	$	1,205		$	(749	)	$	456		$	601		$	561		$	1,162

															For the Six Months Ended June 30,
	For the Six Months Ended June 30,														2021							2020
	2020							2019
	Average				Average			Average				Average			Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽³⁾	$	1,038,064	$	24,359		4.73	%	$	1,001,344	$	25,194		5.08	%	$	1,091,119	$	24,052		4.45	%	$	1,038,064	$	24,359		4.73	%
Investment securities ⁽³⁾		106,829		1,626		3.69	%		98,253		1,511		3.71	%		125,924		1,940		3.60	%		106,829		1,626		3.69	%
Interest-earning deposits with other banks ⁽⁴⁾		50,129		179		0.72	%		45,015		499		2.24	%		89,477		86		0.19	%		50,129		179		0.72	%
Total interest-earning assets		1,195,022		26,164		4.47	%		1,144,612		27,204		4.85	%		1,306,520		26,078		4.08	%		1,195,022		26,164		4.47	%
Noninterest-earning assets		63,990							60,912							70,850							63,990
Total assets	$	1,259,012						$	1,205,524						$	1,377,370						$	1,259,012
Interest-bearing liabilities:
Interest-bearing demand deposits	$	121,804		229		0.38	%	$	96,594	$	160		0.33	%	$	205,063		141		0.14	%	$	121,804	$	229		0.38	%
Money market deposits		161,221		934		1.17	%		176,970		1,313		1.50	%		190,502		441		0.47	%		161,221		934		1.17	%
Savings deposits		191,052		331		0.35	%		201,650		753		0.75	%		254,882		85		0.07	%		191,052		331		0.35	%
Certificates of deposit		362,082		3,707		2.06	%		355,620		3,996		2.27	%		251,711		1,548		1.24	%		362,082		3,707		2.06	%
Short-term borrowings		35,390		67		0.38	%		24,372		292		2.42	%		169		-		-			35,390		67		0.38	%
Other borrowings		14,159		138		1.96	%		13,473		191		2.86	%		13,660		78		1.15	%		14,159		138		1.96	%
Total interest-bearing liabilities		885,708		5,406		1.23	%		868,679		6,705		1.56	%		915,987		2,293		0.50	%		885,708		5,406		1.23	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		228,993							199,332							309,395							228,993
Other liabilities		5,024							4,870							6,096							5,024
Stockholders' equity		139,287							132,643							145,892							139,287
Total liabilities and stockholders' equity	$	1,259,012						$	1,205,524						$	1,377,370						$	1,259,012
Net interest income			$	20,758						$	20,499						$	23,785						$	20,758
Interest rate spread ⁽¹⁾						3.24	%						3.29	%						3.58	%						3.24	%
Net interest margin ⁽²⁾						3.56	%						3.67	%						3.72	%						3.56	%
Ratio of average interest-earning assets to average interest-bearing liabilities						134.92	%						131.76	%						142.64	%						134.92	%

(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 $347 and $379 for the six months ended June 30, 2021 and 2020, respectively. (4) Includes dividends received on restricted stock.
~~(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 $379 and $338 for the six months ended June 30, 2020 and 2019, respectively.~~
~~(4) Includes dividends received on restricted stock.~~

4243

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the six-month periods ended June 30, ~~2020~~2021 and ~~2019,~~2020, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.

	2020 versus 2019									2021 versus 2020

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

Interest-earning assets:
Loans receivable	$	928		$	(1,763	)	$	(835	)	$	1,244		$	(1,551	)	$	(307	)
Investment securities		158			(43	)		115			349			(35	)		314
Interest-earning deposits with other banks		57			(377	)		(320	)		140			(233	)		(93	)
Total interest-earning assets		1,143			(2,183	)		(1,040	)		1,733			(1,819	)		(86	)


Interest-bearing liabilities:
Interest-bearing demand deposits		41			28			69			157			(245	)		(88	)
Money market deposits		(117	)		(262	)		(379	)		170			(663	)		(493	)
Savings deposits		(40	)		(382	)		(422	)		111			(357	)		(246	)
Certificates of deposit		73			(362	)		(289	)		(1,127	)		(1,032	)		(2,159	)
Short-term borrowings		133			(358	)		(225	)		(66	)		(1	)		(67	)
Other borrowings		10			(63	)		(53	)		(5	)		(55	)		(60	)
Total interest-bearing liabilities		100			(1,399	)		(1,299	)		(760	)		(2,353	)		(3,113	)


Net interest income	$	1,043		$	(784	)	$	259		$	2,493		$	534		$	3,027

~~LIQUI~~~~DITY~~LIQUIDITY

Management's objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. The Company offers a line of retail deposit products created to ~~more closely~~ align with customer expectations while expanding the Company’s core funding base. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that 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 and a borrowing agreement with the ~~Federal Home Loan Bank of Cincinnati (the “FHLB”),~~FHLB, and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

At June 30, ~~2020,~~2021, additional borrowing capacity at the FHLB was ~~$383.3~~$416.4 million, as compared to ~~$273.4~~$401.7 million at December 31, 2020. This increase was the result of collateralizing ~~additional~~more assets. For the six months ended June 30, ~~2020,~~2021, wholesale funding decreased ~~$52.2~~$51.6 million. The Company also has the option of borrowing from the Federal Reserve discount window with any assets not currently pledged elsewhere. Management believes that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided Middlefield Bank with strong liquidity as of June 30, ~~2020. Management plans~~2021. Although the Company currently exhibits strong liquidity, management will continue to ~~continually~~ monitor liquidity in future periods to look for signs of stress resulting from the COVID-19 pandemic.

For the ~~six~~three months ended June 30, ~~2020,~~2021, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and software, the provision for loan losses, net amortization of securities, earnings on bank-owned life insurance, accretion of net deferred loan fees, and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Condensed Consolidated Statements of Cash Flows.

INFLATION

Substantially all of the Company's assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other, but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.

REGULATORY MATTERS

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank subsidiary is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions.

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

REGULATORY CAPITAL REQUIREMENTS

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank and thrift holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. In order to avoid limitations on capital distributions, including dividend payments, Middlefield Bank and the Company must each hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The implementation of the capital ratio buffer began January 1, 2016 at the 0.625% level and has been fully phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). Within the tabular presentation that follows is the adequately capitalized ratio plus a 2.50% capital conservation ~~buffer that includes the fully phased-in 2.50%~~ buffer.

Middlefield Bank and the Company met each of the well-capitalized ratio guidelines at June 30, ~~2020.~~2021. The following table indicates the capital ratios for Middlefield Bank and the Company at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

	As of June 30, 2020												As of June 30, 2021
				Tier 1 Risk			Common			Total Risk						Tier 1 Risk			Common			Total Risk
	Leverage			Based			Equity Tier 1			Based			Leverage			Based			Equity Tier 1			Based
The Middlefield Banking Company		9.64	%		11.13	%		11.13	%		12.04	%		9.56	%		11.65	%		11.65	%		12.90	%
Middlefield Banc Corp.		10.28	%		11.34	%		10.63	%		12.24	%		9.84	%		12.03	%		11.31	%		13.28	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%		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	%		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%		5.00	%		8.00	%		6.50	%		10.00	%

As of December 31, 2019

Tier 1 Risk

Common

Total Risk

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

While we believe that Middlefield Bank is well prepared to weather the COVID-19 global pandemic, Middlefield Bank’s regulatory capital ratios could be adversely affected by credit losses and other adverse consequences associated with the pandemic.

	As of December 31, 2020
				Tier 1 Risk			Common			Total Risk
	Leverage			Based			Equity Tier 1			Based
The Middlefield Banking Company		9.45	%		11.47	%		11.47	%		12.68	%
Middlefield Banc Corp.		9.63	%		11.68	%		10.96	%		12.88	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

ASSET AND LIABILITY MANAGEMENT

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets and the re-pricing or maturity of interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in a strong asset/liability management process in order to insulate the Company from material and prolonged increases in interest rates.

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies.

Interest Rate Sensitivity Simulation Analysis

The Company engages an external consultant to facilitate income simulation modeling on a quarterly basis. 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 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 taking certain long-term shock rates into consideration. 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 June 30, ~~2020~~2021 and December 31, ~~2019~~2020 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the June 30, ~~2020~~2021 and December 31, ~~2019~~2020 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 June 30, ~~2020~~2021 and December 31, ~~2019~~2020 for portfolio equity:

	June 30, 2020						December 31, 2019						June 30, 2021						December 31, 2020
Change in Rates	% Change in NII			% Change in EVE			% Change in NII			% Change in EVE			% Change in NII			% Change in EVE			% Change in NII			% Change in EVE
+200bp		(0.30	)%		4.90	%		0.20	%		6.20	%		1.60	%		3.00	%		1.70	%		9.10	%
-100bp		0.20	%		(17.50	)%		(0.60	)%		(9.40	)%		(0.90	)%		(14.50	)%		(0.70	)%		(19.90	)%

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of June 30, ~~2020,~~2021, have remained unchanged from December 31, ~~2019.~~2020.

Item 4. Controls and Procedures

Controls and Procedures Disclosure

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect the Company’s internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), 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 of performing their assigned functions.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company and MBC may be involved in litigation relating to claims arising out of their normal course of business. Currently, the Company and MBC are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to their financial condition or results of operations.

Item 1a. Risk Factors

~~In addition to~~There have been no material changes in the ~~other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the~~Company’s risk factors ~~previously~~from those disclosed in ~~our~~the Company’s Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, 2019 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

~~The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and results of operations.~~

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 32 million people have filed claims for unemployment. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies have encouraged lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies encouraged financial institutions to prudently work with affected borrowers and issued guidance providing relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

●

~~demand for our products and services may decline, making it difficult to increase our assets and income;~~

●

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, nonperforming assets, and foreclosures may increase, resulting in increased loan charge-offs and additions to loan loss reserves and reduced income;

●

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

●

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

●

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

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

●

~~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;~~

●

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

●

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

~~Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.~~2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None~~Details of repurchases of Company common stock during the second quarter of 2021 are included in the following table:

					Total shares purchased as		Maximum number of shares
2021 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 (a)		under the program

April 1-30		11,176	$	22.59		60,644		239,356
May 1-31		59,027	$	23.26		119,671		180,329
June 1-30		61,374	$	23.73		181,045		118,955
Total		131,577	$	23.42

(a)

On November 13, 2020, the Company announced that the Board of Directors approved a resumption and increase of the Company’s stock repurchase program (the “Program”). The Program commenced April 19, 2019 but repurchases under the program were temporarily suspended in March 2020 due to the COVID-19 pandemic. At the time the Program was suspended, the Company had repurchased 157,032 shares from the 300,000 share authorization under the Program. On November 9, 2020, the Board authorized an increase to the Program to 457,032 shares, resulting in 300,000 shares being available for repurchase. The Program may be modified, suspended or terminated by the Company at any time.

Item 3. Defaults by the Company on its Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

Item 5. Other information

None

Item 6. Exhibits

Exhibit list for Middlefield Banc Corp.’s’s Form 10-Q Quarterly Report for the Period Ended June 30, 2021~~, 2020~~

Exhibit Number	Description	Location
3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended	Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006

3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

4	Specimen stock certificate	Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

4.1	Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees	Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

4.2	Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

4.3	Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

10.1.0*	2017 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2017 Annual Meeting of Shareholders, Appendix A, filed on April 4, 2017

10.1.1*	2007 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008

10.2*	Change in Control Agreement between Middlefield Banc Corp. and Thomas G. Caldwell	Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.3*	Change in Control Agreement between Middlefield Banc Corp. and James R. Heslop, II	Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4		Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000	Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

10.4.1*		Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008	Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.4.2*		Change in Control Agreement between Middlefield Banc Corp. and Charles O. Moore	Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4.3*		Change in Control Agreement between Middlefield Banc Corp. and Donald L. Stacy	Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4.4*		Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson, Jr., dated January 7, 2008	Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.4.5*		Change in Control Agreement between Middlefield Banc Corp. and Michael L. Allen	Incorporated by reference to Exhibit 10.4.5 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on November 5, 2019

10.4.6*		Change in Control Agreement between Middlefield Banc Corp. and John D. Lane	Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on November 5, 2019

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

10.5		[reserved]


10.6*		Amended Director Retirement Agreement with Richard T. Coyne	Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.7*		Amended Director Retirement Agreement with Frances H. Frank	Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.8		[reserved]

10.9		[reserved]

10.10
~~10.1~~	[reserved]


10.14*	Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy	Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.15*	DBO Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.16*	DBO Agreement with Alfred F. Thompson, Jr.	Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.17*	DBO Agreement with Teresa M. Hetrick	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.18 *	Executive Deferred Compensation Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012
10.19	[reserved]

10.20*	DBO Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.21*	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.22*	Annual Incentive Plan	Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.22.1	[reserved]

10.23**

Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell

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


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

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

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

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

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

10.29*	Form of conditional stock award under the 2007 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 4, 2016

10.29.1	Form of conditional stock award under the 2017 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 24, 2017

10.30**	Executive Deferred Compensation Agreement with Michael L. Allen	Incorporated by reference to Exhibit 10.30 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019

10.31**	Executive Deferred Compensation Agreement with John D. Lane	Incorporated by reference to Exhibit 10.31 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019

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

31.1	Rule 13a-14(a) certification of Chief Executive Officer	filed herewith

31.2	Rule 13a-14(a) certification of Chief Financial Officer	filed herewith

32	Rule 13a-14(b) certification	filed herewith

99.1	Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company	Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001


101.INS***		Inline XBRL Instance		~~furnished herewith~~

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

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

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

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

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

~~104~~ 101.SCH***		Inline XBRL Taxonomy Extension Schema		furnished herewith

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

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

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

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

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

* management contract or compensatory plan or arrangement

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

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

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.

		MIDDLEFIELD BANC CORP.



~~Date: August 4, 2020~~	~~By: /s/Thomas G. Caldwell~~

Date: August 5, 2021		By: /s/Thomas G. Caldwell


		Thomas G. Caldwell

	~~Thomas G. Caldwell~~

	President and Chief Executive Officer

Date: August ~~4, 2020~~5, 2021		By: /s/Donald L. Stacy


		Donald L. Stacy


	~~Donald L. Stacy~~

	Principal Financial and Accounting Officer

(Dollars in thousands)	Unrealized gains/(losses) on available-for-sale securities (a)
Balance as of March 31, 2019	$	641
Other comprehensive income		886
Amount reclassified from accumulated other comprehensive income		(150	)
Period change		736
Balance at June 30, 2019	$	1,377

Balance as of December 31, 2018	$	(154	)
Other comprehensive income		1,681
Amount reclassified from accumulated other comprehensive income		(150	)
Period change		1,531
Balance at June 30, 2019	$	1,377

	Amounts Reclassified from Accumulated Other					Affected Line Item in
	Comprehensive Income					the Statement Where
(Dollars in thousands)	For the Three and Six Months Ended					Net Income is
Details about other comprehensive income	June 30, 2020		June 30, 2019			Presented
Unrealized gains on available-for-sale securities (a)
	$	-	$	190		Investment securities gains on sale, net
		-		(40	)	Income taxes
	$	-	$	150

(Dollars amounts in thousands)	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2020		2019			2020		2019
Proceeds from sales	$	-	$	11,807		$	-	$	11,807
Gross realized gains		-		223			-		223
Gross realized losses		-		(33	)		-		(33	)

June 30, 2020
Ending Allowance Balance Attributable to Loans:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,028	$	1,038
Non-owner occupied		1,874		3,285		5,159
Multifamily		-		291		291
Residential real estate		22		1,145		1,167
Commercial and industrial		43		1,062		1,105
Home equity lines of credit		27		1,176		1,203
Construction and other		-		236		236
Consumer installment		-		11		11
Total	$	1,976	$	8,234	$	10,210

	For the three months ended		For the six months ended
	June 30, 2019		June 30, 2019
Restated net income per common share - basic	$	0.51	$	0.97
Restated net income per common share - diluted	$	0.50	$	0.97
Restated weighted-average common shares issued		7,286,542		7,278,620
Restated average treasury stock shares		784,034		778,214
Restated average shares outstanding - basic		6,502,508		6,500,406
Restated stock options and restricted stock		12,438		12,644
Restated average shares outstanding - diluted		6,514,946		6,513,050
Restated period ending shares outstanding		6,485,170		6,485,170
Restated treasury shares outstanding		807,824		807,824

At Risk Loans at June 30, 2020
Loan Type	Number of Loans		Balance (in thousands)		% of Total Loans
Retail		270	$	195,550		17.6	%
Multifamily & Residential NOO		354		120,697		10.9	%
Ambulatory Care, Nursing/Rehabilitation and Social Assistance		218		81,491		7.3	%
Hospitality and tourism		58		44,923		4.1	%
Restaurant/food service/bar		136		24,938		2.2	%
Other		219		20,208		1.8	%
Total		1,255	$	487,807		43.9	%

Type	Number of Loans		Balance (in thousands)		% of Total Loans
Retail		58	$	89,438		8.1	%
Hospitality and tourism		23		35,700		3.2	%
Ambulatory Care, Nursing/Rehabilitation and Social Assistance		10		22,456		2.0	%
Multifamily & Residential NOO		16		7,628		0.7	%
Restaurant/food service/bar		10		5,216		0.5	%
Other		245		54,379		4.9	%
Total		362	$	214,817		19.4	%

	Number of Loans		Loan Balance (in thousands)
> $2 million		6	$	14,774
$350,000 - $2 million		92		69,361
$150,000 - $350,000		96		20,768
< $150,000		1,108		36,397
Total		1,302	$	141,300

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

Director Retirement Agreement with Martin S. Paul

Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002

[reserved]

[reserved]