UNITED STATES

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, ~~2022~~2023

☐

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

For the transition period from ___________ to ___________

Commission File Number 001-36613

~~Middlefield Banc Corp.~~

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

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:

~~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 ☐

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 ~~5, 2022: 5,801,639~~14, 2023: 8,092,576

MIDDLEFIELD BANC CORP.

INDEX

Part I1 – Financial Information		3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheet		3
	~~Item 1.~~ Consolidated Statement of Income	~~Financial Statements (unaudited)~~	4

		~~Consolidated Balance Sheet as of June 30, 2022 and December 31, 2021~~	3

		~~Consolidated Statement of Income for the Three and Six Months ended June 30, 2022 and 2021~~	4

		Consolidated Statement of Comprehensive (Loss) Income ~~for the Three and Six Months ended June 30, 2022 and 2021~~	5

		Consolidated Statement of Changes in ~~Stockholders'~~Stockholders’ Equity ~~for the Three and Six Months ended June 30, 2022 and 2021~~	6

		Consolidated Statement of Cash Flows ~~for the Six Months ended June 30, 2022 and 2021~~	8

		Notes to Unaudited Consolidated Financial Statements	10

	Item 2.	~~Management's~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations	3338

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47 53

	Item 4.	Controls and Procedures	48 54

~~Part~~ PART II – Other Information			55
Item 1.	Legal Proceedings	55
Item 1a.	~~Item 1.~~ Risk Factors	~~Legal Proceedings~~	49 55

	~~Item 1a.~~	~~Risk Factors~~	49

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49 55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other information	55
Item 6.	Exhibits	56
Signatures		61
Exhibit 31.1
		~~Item 3.~~	~~Defaults by the Company on its Senior Securities~~	49
		Exhibit 31.2
		~~Item 4.~~	~~Mine Safety Disclosures~~	49

	~~Item 5.~~	~~Other Information~~	49

	~~Item 6.~~	~~Exhibits and Reports on Form 8-K~~	50

~~Signatures~~			55

~~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,
	2022			2021			June 30,			December 31,
							2023			2022
ASSETS
Cash and due from banks	$	60,114		$	97,172		$	49,422		$	51,404
Federal funds sold		19,039			22,322			9,654			2,405
Cash and cash equivalents		79,153			119,494			59,076			53,809
Equity securities, at fair value		779			818			711			915
Investment securities available for sale, at fair value		171,958			170,199			167,209			164,967
Loans held for sale		0			1,051			171			-
Loans:
Commercial real estate:
Owner occupied		120,771			111,470			187,919			191,748
Non-owner occupied		288,334			283,618			385,846			380,580
Multifamily		29,152			31,189			58,579			58,251
Residential real estate		246,453			240,089			312,196			296,308
Commercial and industrial		137,398			148,812			209,349			195,602
Home equity lines of credit		111,730			104,355			126,894			128,065
Construction and other		35,988			54,148			118,851			94,199
Consumer installment		8,171			8,010			9,801			8,119
Total loans		977,997			981,691			1,409,435			1,352,872
Less: allowance for loan and lease losses		14,550			14,342
Less: allowance for credit losses								20,591			14,438
Net loans		963,447			967,349			1,388,844			1,338,434
Premises and equipment, net		17,030			17,272			21,629			21,961
Goodwill		15,071			15,071			36,197			31,735
Core deposit intangibles		1,249			1,403			7,171			7,701
Bank-owned life insurance		17,274			17,060			34,235			33,811
Other real estate owned		6,792			6,992			5,792			5,821
Accrued interest receivable and other assets		20,624			14,297			30,472			28,528

TOTAL ASSETS	$	1,293,377		$	1,331,006		$	1,751,507		$	1,687,682

LIABILITIES
Deposits:
Noninterest-bearing demand	$	379,872		$	334,171		$	441,102		$	503,907
Interest-bearing demand		154,788			196,308			229,633			164,677
Money market		185,494			177,281			241,537			187,498
Savings		252,179			260,125			231,508			307,917
Time		174,833			198,725			287,861			238,020
Total deposits		1,147,166			1,166,610			1,431,641			1,402,019
Short-term borrowings:
Federal Home Loan Bank advances								100,000			65,000
Other borrowings		12,910			12,901			11,961			12,059
Accrued interest payable and other liabilities		5,081			6,160			10,678			10,913
TOTAL LIABILITIES		1,165,157			1,185,671			1,554,280			1,489,991

STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 7,347,526 and 7,330,548 shares issued; 5,810,351 and 5,888,737 shares outstanding		87,562			87,131
Common stock, no par value; 25,000,000 shares authorized, 9,924,245 and 9,916,466 shares issued; 8,088,793 and 8,245,235 shares outstanding								161,211			161,029
Retained earnings		89,900			83,971			96,500			94,154
Accumulated other comprehensive (loss) income		(17,591	)		3,462
Treasury stock, at cost; 1,537,175 and 1,441,811 shares		(31,651	)		(29,229	)
Accumulated other comprehensive loss								(20,630	)		(22,144	)
Treasury stock, at cost; 1,835,452 and 1,671,231 shares								(39,854	)		(35,348	)
TOTAL STOCKHOLDERS' EQUITY		128,220			145,335			197,227			197,691

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,293,377		$	1,331,006		$	1,751,507		$	1,687,682

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,
	2022			2021		2022			2021		2023			2022			2023			2022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	11,268		$	11,885	$	22,253		$	24,052	$	20,762		$	11,268		$	39,037		$	22,253
Interest-earning deposits in other institutions		74			12		98			30		369			74			620			98
Federal funds sold		46			1		49			1		158			46			411			49
Investment securities:
Taxable interest		442			410		885			780		479			442			937			885
Tax-exempt interest		955			602		1,739			1,160		978			955			1,958			1,739
Dividends on stock		33			26		57			55		91			33			179			57
Total interest and dividend income		12,818			12,936		25,081			26,078		22,837			12,818			43,142			25,081

INTEREST EXPENSE
Deposits		709			1,010		1,435			2,215		3,851			709			6,841			1,435
Short-term borrowings												1,462			-			2,114			-
Other borrowings		81			71		150			146		170			81			326			150
Total interest expense		790			1,081		1,585			2,361		5,483			790			9,281			1,585

NET INTEREST INCOME		12,028			11,855		23,496			23,717		17,354			12,028			33,861			23,496

Provision for loan losses		0			200		0			900
Provision for credit losses												814			-			1,321			-

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		12,028			11,655		23,496			22,817
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES												16,540			12,028			32,540			23,496

NONINTEREST INCOME
Service charges on deposit accounts		956			856		1,870			1,643		940			956			1,926			1,870
(Loss) gain on equity securities		(72	)		40		(39	)		121
Loss on equity securities												(67	)		(72	)		(205	)		(39	)
Gain on other real estate owned												-			-			2			-
Earnings on bank-owned life insurance		108			106		214			332		220			108			420			214
Gain on sale of loans		18			221		21			813		6			18			29			21
Revenue from investment services		153			212		294			339		174			153			359			294
Gross rental income												77			-			179			-
Other income		220			197		426			602		242			220			560			426
Total noninterest income		1,383			1,632		2,786			3,850		1,592			1,383			3,270			2,786

NONINTEREST EXPENSE
Salaries and employee benefits		3,785			4,321		8,171			8,575		6,019			3,785			11,871			8,171
Occupancy expense		583			517		1,088			1,081		659			583			1,355			1,088
Equipment expense		274			313		589			670		354			274			672			589
Data processing and information technology costs		822			759		1,665			1,602		1,137			822			2,207			1,665
Ohio state franchise tax		292			286		585			572		398			292			783			585
Federal deposit insurance expense		90			150		140			294		249			90			369			140
Professional fees		383			323		838			742		550			383			1,088			838
Net loss on other real estate owned		206			22		214			68
Other real estate owned writedowns												-			206			-			214
Advertising expense		229			221		457			442		415			229			901			457
Software amortization expense		40			74		88			154		23			40			49			88
Core deposit intangible amortization		77			80		154			160		265			77			529			154
Gross other real estate owned expenses												63			-			195			-
Merger-related costs		579			0		579			0		206			579			449			579
Other expense		1,175			828		2,233			1,851		1,716			1,175			3,378			2,233
Total noninterest expense		8,535			7,894		16,801			16,211		12,054			8,535			23,846			16,801

Income before income taxes		4,876			5,393		9,481			10,456		6,078			4,876			11,964			9,481
Income taxes		787			968		1,559			1,864		986			787			1,975			1,559

NET INCOME	$	4,089		$	4,425	$	7,922		$	8,592	$	5,092		$	4,089		$	9,989		$	7,922

EARNINGS PER SHARE
Basic	$	0.70		$	0.70	$	1.35		$	1.36	$	0.63		$	0.70		$	1.23		$	1.35
Diluted	$	0.70		$	0.70	$	1.35		$	1.35	$	0.63		$	0.70		$	1.23		$	1.35

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) 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,
	2022			2021			2022			2021			2023			2022			2023			2022

Net income	$	4,089		$	4,425		$	7,922		$	8,592		$	5,092		$	4,089		$	9,989		$	7,922

Other comprehensive (loss) income :
Other comprehensive (loss) income:
Net unrealized holding (loss) gain on available-for-sale investment securities		(13,819	)		1,235			(26,650	)		(495	)		(1,743	)		(13,819	)		1,916			(26,650	)
Tax effect		2,902			(259	)		5,597			104			366			2,902			(402	)		5,597

Total other comprehensive (loss) income		(10,917	)		976			(21,053	)		(391	)
Total other comprehensive (loss) income:														(1,377	)		(10,917	)		1,514			(21,053	)

Comprehensive (loss) income	$	(6,828	)	$	5,401		$	(13,131	)	$	8,201
Comprehensive income (loss):													$	3,715		$	(6,828	)	$	11,503		$	(13,131	)

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

Loss

Stock

Equity

Balance, March 31, 2022
7,347,526 $ 87,562 $ 86,804 $ (6,674 ) $ (30,048 ) $ 137,644

Net income
4,089 4,089
Other comprehensive loss
0 0 (10,917 ) 0 (10,917 )
Treasury shares acquired (63,214)
(1,603 ) (1,603 )
Cash dividends ($0.17 per share)
(993 ) (993 )

Balance, June 30, 2022
7,347,526 $ 87,562 $ 89,900 $ (17,591 ) $ (31,651 ) $ 128,220

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

Balance, March 31, 2023		9,924,245	$	161,248		$	93,024		$	(19,253	)	$	(39,854	)	$	195,165

Net income							5,092									5,092
Other comprehensive (loss):										(1,377	)					(1,377	)
Authorization of additional common shares				(37	)											(37	)
Cash dividends ($0.20 per share)							(1,616	)								(1,616	)

Balance, June 30, 2023		9,924,245	$	161,211		$	96,500		$	(20,630	)	$	(39,854	)	$	197,227

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
0 0 976 0 976
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			(Loss)			Stock			Equity

Balance, March 31, 2022		7,347,526	$	87,562	$	86,804		$	(6,674	)	$	(30,048	)	$	137,644

Net income						4,089									4,089
Other comprehensive (loss):									(10,917	)					(10,917	)
Treasury shares acquired (63,214)												(1,603	)		(1,603	)
Cash dividends ($0.17 per share)						(993	)								(993	)

Balance, June 30, 2022		7,347,526	$	87,562	$	89,900		$	(17,591	)	$	(31,651	)	$	128,220

~~(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)~~(Unaudited)

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Loss

Stock

Equity

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

Net income
7,922 7,922
Other comprehensive loss
0 0 (21,053 ) 0 (21,053 )
Stock-based compensation, net
16,978 431 431
Treasury shares acquired (95,364)
(2,422 ) (2,422 )
Cash dividends ($0.34 per share)
(1,993 ) (1,993 )

Balance, June 30, 2022
7,347,526 $ 87,562 $ 89,900 $ (17,591 ) $ (31,651 ) $ 128,220

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

Balance, December 31, 2022		9,916,466	$	161,029		$	94,154		$	(22,144	)	$	(35,348	)	$	197,691

Net income							9,989									9,989
Other comprehensive income:										1,514						1,514
Cumulative impact of ASC 326 adoption (CECL)							(4,421	)								(4,421	)
Authorization of additional common shares				(37	)											(37	)
Stock-based compensation, net		7,779		219												219
Treasury shares acquired (164,221)													(4,506	)		(4,506	)
Cash dividends ($0.40 per share)							(3,222	)								(3,222	)

Balance, June 30, 2023		9,924,245	$	161,211		$	96,500		$	(20,630	)	$	(39,854	)	$	197,227

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 income
0 0 (391 ) 0 (391 )
Stock options exercised
10,650 94 0 0 0 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			(Loss) Income			Stock			Equity

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

Net income						7,922									7,922
Other comprehensive (loss):									(21,053	)					(21,053	)
Stock-based compensation, net		16,978		431											431
Treasury shares acquired (95,364)												(2,422	)		(2,422	)
Cash dividends ($0.34 per share)						(1,993	)								(1,993	)

Balance, June 30, 2022		7,347,526	$	87,562	$	89,900		$	(17,591	)	$	(31,651	)	$	128,220

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Six Months Ended						For the Six Months Ended
	June 30,						June 30,
	2022			2021			2023			2022
OPERATING ACTIVITIES
Net income	$	7,922		$	8,592		$	9,989		$	7,922
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		0			900
Loss (gain) on equity securities		39			(121	)
Provision for credit losses								1,321			-
Loss on equity securities								205			39
Depreciation and amortization of premises and equipment, net		651			723			761			651
Software amortization expense		88			154			49			88
Financing lease amortization expense		70			157			124			70
Amortization of premium and discount on investment securities, net		321			221			306			321
Accretion of deferred loan fees, net		(1,551	)		(2,327	)		(524	)		(1,551	)
Amortization of core deposit intangibles		154			160			529			154
Stock-based compensation income, net		(44	)		(21	)
Stock-based compensation income (expense), net								64			(44	)
Origination of loans held for sale		(1,118	)		(21,476	)		(2,577	)		(1,118	)
Proceeds from sale of loans		1,406			22,377			2,435			1,406
Gain on sale of loans		(21	)		(813	)		(29	)		(21	)
Earnings on bank-owned life insurance		(214	)		(332	)		(420	)		(214	)
Deferred income tax		(310	)		162			3			(310	)
Loss (gain) on other real estate owned		0			28
Other real estate owned writedowns		200			0
Decrease (increase) in accrued interest receivable		163			844
Decrease in accrued interest payable		(11	)		(236	)
Other real estate owned (gains) losses								(2	)		200
(Increase) decrease in accrued interest receivable								(452	)		163
Increase (decrease) in accrued interest payable								679			(11	)
Expense related to stock options								(37	)		-
Other, net		(1,264	)		(2,519	)		(599	)		(1,264	)
Net cash provided by operating activities		6,481			6,473			11,825			6,481

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		3,310			8,436			1,368			3,310
Purchases		(32,040	)		(45,642	)		(2,000	)		(32,040	)
Decrease in loans, net		6,237			49,895
(Increase) decrease in loans, net								(60,930	)		6,237
Proceeds from the sale of other real estate owned		0			332			31			-
Proceeds from bank-owned life insurance		0			424
Purchase of premises and equipment		(340	)		(160	)
Net purchase of premises and equipment								(553	)		(340	)
Purchase of restricted stock								(3,923	)		-
Redemption of restricted stock		0			401			2,653			-
Net cash (used in) provided by investing activities		(22,833	)		13,686
Net cash used in investing activities								(63,354	)		(22,833	)

FINANCING ACTIVITIES
Net decrease in deposits		(19,444	)		(29,915	)
Net increase (decrease) in deposits								29,622			(19,444	)
Net increase in short-term borrowings, net								35,000			-
Repayment of other borrowings		(130	)		(4,074	)		(98	)		(130	)
Stock options exercised		0			94
Repurchase of treasury shares		(2,422	)		(4,192	)		(4,506	)		(2,422	)
Cash dividends		(1,993	)		(2,020	)		(3,222	)		(1,993	)
Net cash used in by financing activities		(23,989	)		(40,107	)
Net cash provided by (used in) financing activities								56,796			(23,989	)

Decrease in cash and cash equivalents		(40,341	)		(19,948	)
Increase (decrease) in cash and cash equivalents								5,267			(40,341	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		119,494			112,417			53,809			119,494

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	79,153		$	92,469		$	59,076		$	79,153

See accompanying notes to unaudited consolidated financial statements.

	Six Months Ended						For the Six Months Ended
	June 30,						June 30,
	2022			2021			2023		2022
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	1,596		$	2,529		$	8,602	$	1,596
Income taxes		1,852			2,854			2,605		1,852

Noncash investing transactions:
Transfers from loans held for sale to loans held for investment		784			0		$	-	$	784
Transfers from loans to other real estate owned	$	0		$	63
Finance lease assets added to premises and equipment		(139	)		(67	)
Increase in finance lease assets included in premises and equipment								-		(139	)
Loan fair value adjustment								4,462		-
Noncash financing transactions:
Finance lease liabilities added to other borrowings funds	$	139		$	67
Increase in finance lease liabilities included in other borrowings							$	-	$	139

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 subsidiaries, Middlefield Investments, Inc. ~~(MI)~~(“MI”) and ~~Middlefield~~MB Insurance ~~Services.~~Services (“MIS”). All significant inter-company items have been eliminated.

On March 13, 2019, MBC established MI as an operating subsidiary to hold and manage an investment portfolio. On June 30, 2023, MI’s assets consist of a cash account, investments, and related accrued interest accounts. MI may only hold and manage investments and may not engage in any other activity without prior approval of the Ohio Division of Financial Institutions. In the first quarter of 2022, MBC established ~~a wholly owned subsidiary named Middlefield Insurance Services (MIS), headquartered in Middlefield, Ohio. This~~MIS as an operating subsidiary ~~exists~~ to offer retail and business customers ~~a variety of~~various insurance services, including home, renters, automobile, pet, identity theft, travel, and professional liability insurance. AtOn June 30, ~~2022,~~2023, MIS’s assets consist of a cash account, a prepaid asset, and an accounts receivable. As a result of the bank merger of Liberty National Bank and MBC on December 1, 2022, Middlefield Banc Corp. acquired a 100% ownership interest in LBSI Insurance, LLC (“LBSI”), a wholly-owned financial subsidiary of Liberty National Bank. LBSI is no longer in operation following the merger, and MBC intends to merge it with and into its insurance subsidiary. All significant ~~inter-company~~intercompany items have been eliminated between MBC and ~~this subsidiary.~~these subsidiaries.

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

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, 2022. ~~31,~~~~2021.~~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.

Summary of Significant Accounting Policies

The Company’s significant accounting policies involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of June 30, 2023, have remained unchanged from December 31, 2022. However, the Company has identified accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses, for the investment, loan portfolios, and unfunded commitments.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Investment securities classified as available for sale are those securities that the Bank intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Bank’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Unrealized gains or losses are reported as increases or decreases in other comprehensive income (loss), net of the deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Investment securities classified as held to maturity are those securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost, adjusted for the amortization of premium and accretion of discount, and computed by a method that approximates the interest method over the terms of the securities. As of June 30, 2023, the Company did not hold any held-to-maturity securities.

Equity securities are measured at fair value with changes in fair value recognized in net income.

Allowance for Credit Losses – Available for Sale Securities

The Bank measures expected credit losses on available-for-sale debt securities when the Bank intends to sell, or when it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Bank considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Economic forecast data is used to calculate the present value of expected cash flows. The Bank obtains its forecast data through a subscription to a widely recognized and relied-upon company that publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario and uses a single scenario in the model. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

The allowance for credit losses on available-for-sale debt securities is included within investment securities available for sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Bank believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities totaled $1.7 million on June 30, 2023, and is included within accrued interest receivable and other assets on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.

Credit Losses on Investment Securities – Prior to adopting ASU 2016-13

The Bank adopted ASU No.2016-13 effective January 1, 2023. Financial statement amounts related to investment securities recorded as of December 31, 2022, and for the periods ending December 31, 2022, are presented in accordance with the accounting policies described in the following sections. The following sections were carried forward from the Annual Report on Form 10-K for the year ended December 31, 2022

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

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

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses, and any deferred fees or costs. Accrued interest receivable totaled $4.7 million on June 30, 2023, and was included within accrued interest receivable and other assets on the consolidated balance sheet and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loans’ yield (interest income). The Bank is amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial construction, commercial and industrial loans, and commercial real estate loans. Consumer loans consist of the following classes: residential real estate loans, home equity loans, and consumer loans.

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well-secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against the principal or reported as interest income on a cash basis, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past-due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Purchased Credit Deteriorated (PCD) Loans

The Bank has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. The Bank reviews many factors to make the determination, including reviewing whether the loan is performing, delinquency status, and changes in risk rating to determine if the loan exhibits more than insignificant credit deterioration. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through credit loss expense.

Allowance for Credit Losses (ACL) – Loans

The allowance for credit losses is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period.

Management uses a discounted cash flow (DCF) model to calculate the present value of the expected cash flows for pools of loans and leases that share similar risk characteristics and compares the results of this calculation to the amortized cost basis to determine its allowance for credit loss balance.

The contractual term used in projecting the cash flows of a loan is based on the maturity date of a loan, and is adjusted for prepayment or curtailment assumptions which may shorten that contractual time period. Options to extend are considered by management in determining the contractual term.

The key inputs to the DCF model are (1) probability of default, (2) loss given default, (3) prepayment and curtailment rates, (4) reasonable and supportable economic forecasts, (5) forecast reversion period, (6) expected recoveries on charged off loans, and (7) discount rate.

Probability of Default (PD)

In order to incorporate economic factors into forecasting within the DCF model, management elected to use the Loss Driver method to generate the PD rate inputs. The Loss Driver method analyzes how one or more economic factors change the default rate using statistical regression analysis. Management selected economic factors that had strong correlations to historical default rates.

Loss Given Default (LGD)

Management elected to use the Frye Jacobs parameter for determining the LGD input, which is an estimation technique that derives an LGD input from segment-specific risk curves that correlates LGD with PD.

Prepayment and Curtailment rates

Prepayment Rates: Loan-level transaction data is used to calculate a semi-annual prepayment rate. Those semi-annual rates are annualized and the average of the annualized rates is used in the DCF calculation for fixed payment or term loans. Rates are calculated for each pool.

Curtailment Rates: Loan-level transaction data is used to calculate annual curtailment rates using any available historical loan-level data. The average of the historical rates is used in the DCF model for interest-only payment or line-of-credit type loans. Rates are calculated for each pool.

Reasonable and Supportable Forecasts

The forecast data used in the DCF model is obtained via a subscription to a widely recognized and relied-upon company that publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario.

Forecast Reversion Period

Management uses forecasts to predict how economic factors will perform and has determined to use a four-quarter forecast period as well as an eight-quarter straight-line reversion period to historical averages (also commonly referred to as the mean reversion period).

Expected Recoveries on Charged-off Loans

Management performs an analysis to estimate recoveries that could be reasonably expected based on historical experience in order to account for expected recoveries on loans that have already been fully charged off and are not included in the ACL calculation.

Discount Rate

The effective interest rate of the underlying loans and leases of the Corporation serves as the discount rate applied to the expected periodic cash flows. Management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Individual Evaluation

Management evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. Instruments will not be included in both collective and individual analyses. Individual analysis will establish a specific reserve for instruments in scope.

Management considers a financial asset as collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral, based on management's assessment as of the reporting date.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. 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 to finance the activities of commercial real estate owners and operators and certain agricultural loans. The residential real estate and HELOC loan segments consist of loans made to finance the activities of residential homeowners. The C&I loan segment consists of loans made to finance the activities of commercial customers and certain agricultural loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for credit loss for the C&I, RRE, and HELOC portfolios were partially offset by a decrease in the allowance for the CRE, Construction, and Consumer Installment portfolios.

Historical credit loss experience is the basis for the estimation of expected credit losses. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. The qualitative adjustments for current conditions are based upon 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, the value of underlying collateral, concentrations of credit from a loan type, industry, and/or geographic standpoint. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve.

The Bank has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against interest income.

The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans greater than $150,000 that meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful, and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral-dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual residential real estate loans, home equity loans, and consumer loans for impairment disclosures.

Allowance for Loan Losses – Prior to adopting ASU 2016-13

Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Bank calculated our ALL using an incurred loan loss methodology. The following policy is related to the ALL in prior periods.

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

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. Management has identified several additional qualitative factors to supplement the historical charge-off factor. These factors likely cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are:

●

national and local economic trends and conditions;

●

levels of and trends in delinquency rates and nonaccrual loans;

●

trends in volumes and terms of loans;

●

effects of changes in lending policies;

●

experience, ability, and depth of lending staff;

●

value of underlying collateral;

●

and concentrations of credit from a loan type, industry, and/or geographic standpoint.

A majority of the Bank’s loan assets are loans to business owners of many types. The Bank makes commercial loans for real estate development and other business purposes required by the customer base.

The Bank’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable, and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets. Commercial real estate loans include long-term loans financing commercial properties. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans typically require a loan-to-value ratio of not greater than 80 percent and vary in terms.

Residential mortgages and home equity loans are secured by the borrower’s residential real estate in either a first or second-lien position. Residential mortgages and home equity loans have varying loan rates depending on the financial condition of the borrower and the loan-to-value ratio. Residential mortgages have amortizations up to 30 years and home equity loans have maturities up to 20 years.

Consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are unsecured.

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

The Bank originates commercial and residential construction loans to developers and builders and, in some cases, to other commercial borrowers for approved construction projects. These loans are typically structured on a non-revolving basis and the draw of funds is dependent on successfully completed and verified progress of the project. These loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Sources of repayment for these types of loans may be from conversion to permanent loans extended by the Bank, sales of developed property, or permanent financing obtained elsewhere. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans because their ultimate collateral value and repayment are sensitive to various factors affecting the successful completion of the project.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

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

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual residential real estate loans, home equity loans, and consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement or unless such loans are in the process of foreclosure or are being evaluated for foreclosure.

Loans whose terms are modified are classified as troubled debt restructurings if the Bank grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects. Loans classified as substandard have well-defined weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, federal regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

~~Recently Issued~~ Accounting Pronouncements Adopted in 2023

In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This ~~Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and~~standard, along with several other ~~financial instruments held by financial institutions and other organizations. The underlying premise of~~subsequent codification updates, replaces the ~~Update is~~incurred loss impairment methodology in the current GAAP with a methodology that ~~financial assets measured at amortized cost should be presented at the net amount~~reflects 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.~~asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ~~income statement will~~amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be ~~affected by~~presented at the ~~measurement of credit losses for newly recognized financial assets, as well as the~~net amount expected ~~increases or decreases of~~to be collected. The new current expected credit losses that have taken place during the period. With certain exceptions, the transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the ~~first~~ reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after ~~December 15, 2022,~~ ~~including interim periods within those fiscal years. We expect to recognize a~~ ~~one~~~~-time cumulative-effect adjustment~~model (“CECL”) applies to the allowance for loan losses, asavailable-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration, and certain off-balance sheet credit exposures. On January 1, 2023, Middlefield adopted CECL. Upon adoption, the reserve for credit losses on loans and leases increased by $5.3 million, and the reserve for credit losses for unfunded commitments increased by $683,000. This resulted in an after-tax retained earnings adjustment of ~~the beginning of~~$4.4 million. During the ~~first~~six ~~reporting period in which~~ months that ended June 30, 2023, the ~~new standard is effective but cannot yet determine the magnitude~~Corporation recorded CECL-related charges of ~~any such~~ ~~one~~~~-time adjustment or the overall impact~~$1.3 million, including a provision for credit losses on unfunded commitments of ~~the new guidance on the consolidated financial statements. Management will continue to monitor model output throughout the deferral period.~~$874,000 and a reserve for unfunded commitments of $447,000.

~~Current Expected Credit Loss (CECL) Adoption~~The ~~Company continues to monitor~~Bank adopted this guidance, and subsequent related updates, using the ~~opportunity to early adopt ASC Topic~~ ~~326,~~ ~~which replaces the current incurred loss~~modified retrospective approach for ~~measuring credit losses with an expected loss model. CECL applies to~~all financial assets ~~subject to credit losses and~~ measured at amortized cost, including loans, available-for-sale debt securities and ~~certain off-balance-sheet~~unfunded commitments. On January 1, 2023, the Bank recorded a cumulative effect decrease to retained earnings of $3.9 million related to loans and $491,000 related to unfunded commitments.

The Bank adopted the provisions of ASC 326 related to financial assets purchased with credit ~~exposures, which include, but are~~deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30 using the prospective transition approach. In accordance with the standard, management did not ~~limited~~reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets were adjusted to ~~loans, leases, held-to-maturity~~reflect the addition of $121,000 of the allowance for credit losses (ACL).

The Bank adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities ~~loan commitments, and financial guarantees. Expected results~~prior to January 1, 2023 using the prospective transition approach, though no such charges had been recorded on the securities held by the Bank as of ~~adoption are challenging to forecast due to~~ the ~~evolving macroeconomic landscape. Early~~date of adoption.

The following table illustrates the pre-tax impact of the adoption of this ASU:

	January 1, 2023
	Allowance for Credit Losses

	Pre-adoption		Adoption Impact			As Reported
ACL on loans
Commercial real estate:
Owner occupied	$	2,203	$	811		$	3,014
Non-owner occupied		5,597		(1,206	)		4,391
Multifamily		662		591			1,253
Residential real estate		2,047		2,744			4,791
Commercial and industrial		1,483		2,320			3,803
Home equity lines of credit		1,753		(1,031	)		722
Construction and other		609		956			1,565
Consumer installment		84		197			281
Total	$	14,438	$	5,382		$	19,820

ACL on unfunded commitments	$	-	$	(683	)	$	(683	)

In March 2022, the FASB issued ASU No.2022-02,"Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL ~~is unlikely.~~and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investment in leases in the existing vintage disclosures. This ASU became effective on January 1, 2023 for the Corporation. The adoption of this ASU resulted in updated disclosures within our financial statements but otherwise did not have a material impact on the Corporation's financial statements.

Recent Accounting Pronouncements

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

1017

In ~~November 2019,~~ ~~the FASB issued ASU~~ ~~2019~~-~~11,~~~~Codification Improvements to Topic~~ ~~326,~~ ~~Financial Instruments~~ – ~~Credit Losses~~~~, to clarify its new credit impairment guidance in ASC~~ ~~326,~~ based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have ~~not~~ ~~yet adopted ASU~~ ~~2016~~-13 ~~as of~~ ~~November 26, 2019,~~ ~~the effective dates for ASU~~ ~~2019~~-11 ~~are the same as the effective dates and transition requirements in ASU~~ ~~2016~~-~~13.~~ ~~For entities that have adopted ASU~~ ~~2016~~-~~13,~~ ~~ASU~~ ~~2019~~-11 ~~is effective for fiscal years beginning after~~ ~~December 15, 2019,~~ ~~including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does~~ ~~not~~ ~~expect to early adopt these ASUs.~~

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

InOn March 15, 2022, President Biden signed into law the “Adjustable Interest Rate (LIBOR) Act,” as part of the Consolidated Appropriations Act, 2022, which provides for a statutory transition to a replacement rate selected by the Federal Reserve based on the SOFR for contracts referencing LIBOR that contain no fallback provisions or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute. On December 16, 2022, the ~~FASB issued ASU~~ ~~2022~~-~~02,~~~~Financial Instruments~~—~~Credit Losses (Topic~~ ~~326~~~~) - Troubled Debt Restructurings (TDR) and Vintage Disclosures~~ ~~to update~~Federal Reserve adopted a final rule implementing the ~~TDR guidance and required vintage disclosures in ASC~~ ~~326,~~Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on ~~implementation issues raised by stakeholders. The amendments~~SOFR that will replace LIBOR in ~~this Update eliminate the accounting guidance for TDRs by creditors in Subtopic~~ ~~310~~-~~40,~~ ~~Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for~~ certain ~~loan refinancings and restructurings by creditors when a borrower is experiencing~~ financial ~~difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs~~ ~~310~~-20-35-9 ~~through~~ 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic ~~326~~-~~20,~~ ~~Financial Instruments—Credit Losses—Measured at Amortized Cost. The amendments in this ASU are effective for all entities upon adoption of ASU~~ ~~2016~~-~~13.~~

Incontracts after June ~~2022,~~ ~~the FASB issued ASU~~ ~~2022~~-~~03,~~~~Fair Value Measurement (Topic~~ ~~820~~~~): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions~~~~. These amendments clarify that a contractual restriction on the sale of an equity security is~~ ~~not~~ ~~considered part of the unit of account of the equity security and, therefore, is~~ ~~not~~ ~~considered in measuring fair value. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years beginning after~~ ~~December 15.~~30, 2023. ~~Early adoption ls permitted. The~~As of June 30, 2023, the Company has ~~assessed ASU~~ ~~2022~~-03 ~~and does~~ ~~not~~ ~~expect it~~transitioned substantially all of its financial instruments to ~~have a material impact on its accounting and disclosures.~~

an alternative benchmark rate.

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

Following ASC Topic 606, Revenue from Contracts with Customers (Topic 606), management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains (losses), gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise ~~90.0%~~93.5% 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 canceled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized monthly as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific customer requests or activities that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, which is the completion of the requested service/transaction.

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

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

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

The following table depicts the disaggregation of revenue derived from contracts with customers to 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, 2023						For the Six Months Ended June 30, 2023
Noninterest Income	2022			2021		2022			2021		2023			2022			2023			2022
(Dollar amounts in thousands)

Service charges on deposit accounts:
Overdraft fees	$	223		$	163	$	424		$	331	$	229		$	223		$	476		$	424
ATM banking fees		359			360		668			672		491			359			963			668
Service charges and other fees		374			333		778			640		220			374			487			778
(Loss) gain on equity securities ^(a)		(72	)		40		(39	)		121
Earnings on bank-owned life insurance^(a)		108			106		214			332
Gain on sale of loans ^(a)		18			221		21			813
Loss on equity securities ⁽ª⁾												(67	)		(72	)		(205	)		(39	)
Gain on other real estate owned												-			-			2			-
Earnings on bank-owned life insurance ⁽ª⁾												220			108			420			214
Gain on sale of loans ⁽ª⁾												6			18			29			21
Revenue from investment services		153			212		294			339		174			153			359			294
Miscellaneous Fee income		76			63		139			125		97			76			185			139
Gross rental income												77			-			179			-
Other income		144			134		287			477		145			144			375			287
Total noninterest income	$	1,383		$	1,632	$	2,786		$	3,850	$	1,592		$	1,383		$	3,270		$	2,786

Net loss on other real estate owned	$	206		$	22	$	214		$	68

(a) Not within scope of ASC 606

NOTE 3 - STOCK-BASED COMPENSATION

The Company had no ~~nonvested~~ non-vested stock options outstanding as of June 30, ~~2022~~2023 and ~~2021.~~2022.

There was no stock option activity during the three or six months ended June 30, ~~2022.~~2023.

The following table presents the activity during the six months ended June 30, ~~2022,~~2023, related to awards of restricted stock:

				Weighted-					Weighted-
				average					average
				Grant Date Fair					Grant Date Fair
	Units			Value Per Unit		Units			Value Per Unit

Nonvested at January 1, 2022		76,933		$	23.01
Nonvested at January 1, 2023							63,646		$	24.34
Granted		25,414			24.80		29,781			27.40
Vested		(25,263	)		20.95		(8,003	)		26.09
Forfeited		(13,438	)		0		(15,205	)		26.09
Nonvested at June 30, 2022		63,646		$	24.34
Nonvested at June 30, 2023							70,219		$	25.29

Expected to vest as of June 30, 2022		52,068		$	24.19
Expected to vest as of June 30, 2023							48,074		$	24.91

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

Share-based compensation expense (recovery) ~~expense~~ of $34,000 and ($162,000) ~~and $97,000~~ was recognized for the three-month periods ended June 30, ~~2022,~~2023, and ~~2021,~~2022, respectively. Share-based compensation expense (recovery) ~~expense~~ of $79,000 and ($44,000) ~~and $97,000~~ was recognized for the six-month periods ended June 30, ~~2022,~~2023, and ~~2021,~~2022, respectively. Expense recovery is the result of a decrease in the market valuation of the plans. Vesting of shares under the plan is contingent on a combination of service period and a market condition tied to the total shareholder return on the Company’s stock. A change in market conditions leads to adjustments to the probability of the market condition achievement, which results in changes in the liability and the 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 ~~$340,000~~$556,000 and ~~$594,000~~$340,000 on June 30, ~~2022,~~2023, and ~~2021,~~2022, 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~~non-vested, share-based compensation on restricted stock as of June 30, ~~2022~~2023, totals ~~$543,000,~~$746,000, of which ~~$147,000~~$219,000 is estimated for the rest of ~~2022,~~ ~~$250,000 for~~ 2023, ~~$129,000~~$305,000 for 2024, ~~and $17,000~~$190,000 for ~~2025.~~2025, and $32,000 for 2026.

1319

NOTE 4 - EARNINGS PER SHARE

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

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings-per-share computation.

	For the 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,
	2022			2021			2022			2021			2023			2022			2023			2022

Weighted-average common shares issued		7,347,526			7,324,475			7,342,930			7,320,989			9,924,245			7,347,526			9,922,895			7,342,930

Average treasury stock shares		(1,496,104	)		(1,027,404	)		(1,477,783	)		(989,633	)		(1,835,452	)		(1,496,104	)		(1,809,250	)		(1,477,783	)

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		5,851,422			6,297,071			5,865,147			6,331,356			8,088,793			5,851,422			8,113,645			5,865,147

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		8,676			15,159			8,676			16,989			13,191			8,676			13,191			8,676

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		5,860,098			6,312,230			5,873,823			6,348,345			8,101,984			5,860,098			8,126,836			5,873,823

Outstanding on June 30, 2023, were 70,219 shares of restricted stock, 57,028 shares of which were anti-dilutive.

Outstanding on June 30, 2022, were 63,646 shares of restricted stock, 54,970 shares of which were anti-dilutive. ~~There were 0 options to purchase shares of common stock outstanding as of~~ ~~June 30, 2022.~~

~~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.~~

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, ~~2022,~~2023, the Company held ~~1,537,175~~1,835,452 of the Company’s shares, which is an increase of ~~95,364~~164,221 from the ~~1,441,811~~1,671,231 shares held as of December 31, ~~2021.~~2022.

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, 2022								June 30, 2023
(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	$	0	$	21,478	$	9,830	$	31,308	$	-	$	21,568	$	9,886	$	31,454
Obligations of states and political subdivisions		0		132,308		0		132,308		-		129,048		-		129,048
Mortgage-backed securities in government-sponsored entities		0		8,342		0		8,342		-		6,707		-		6,707
Total debt securities		0		162,128		9,830		171,958		-		157,323		9,886		167,209
Equity securities in financial institutions		779		0		0		779		711		-		-		711
Total	$	779	$	162,128	$	9,830	$	172,737	$	711	$	157,323	$	9,886	$	167,920

			December 31, 2021								December 31, 2022
(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	$	0	$	20,337	$	12,200	$	32,537	$	-	$	21,427	$	8,737	$	30,164
Obligations of states and political subdivisions		0		127,345		0		127,345		-		127,334		-		127,334
Mortgage-backed securities in government-sponsored entities		0		10,317		0		10,317		-		7,469		-		7,469
Total debt securities		0		157,999		12,200		170,199		-		156,230		8,737		164,967
Equity securities in financial institutions		818		0		0		818		915		-		-		915
Total	$	818	$	157,999	$	12,200	$	171,017	$	915	$	156,230	$	8,737	$	165,882

Investment Securities Available for Sale - An independent pricing service provides the Company fair values, which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, ~~LIBOR~~benchmarked yield curve, credit spreads and prices from market makers and live trading systems (Level II). Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments that are valued based on the discounted cash flow approach assuming a yield curve of similarly structured instruments.

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

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.

1521

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

(Dollar amounts in thousands)

Subordinated debt

Balance as of January 1, 2022
$ 12,200
Transfers out of Level III ⁽¹⁾
(2,250 )
Net unrealized holding gain on available-for-sale investment securities
(120 )
Balance as of June 30, 2022
$ 9,830

(Dollar amounts in thousands)	Subordinated debt
Balance as of January 1, 2023	$	8,737
Purchases, sales, settlements		-
Transfers into Level III ⁽¹⁾		1,000
Net change in unrealized loss on available-for-sale investment securities		149
Balance as of June 30, 2023	$	9,886

(1)

Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level II criteria. The level designation of each financial instrument is reassessed at the end of each period.

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent ~~impaired~~individually analyzed 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 after the initial measurement.

			June 30, 2022								June 30, 2023
(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	$	0	$	0	$	1,106	$	1,106
Other real estate owned		0		0		6,792		6,792
Individually analyzed loans held for investment									$	-	$	-	$	668	$	668

			December 31, 2021								December 31, 2022
(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	$	0	$	0	$	4,162	$	4,162
Individually analyzed loans held for investment									$	-	$	-	$	1,143	$	1,143
Other real estate owned										-		-		5,792		5,792

Individually analyzed Loans – The Company has measured impairment on collateral-dependent individually analyzed loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based on independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management 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 credit 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 $559,000 as of June 30, 2023.

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~~usually determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions or observable deterioration of the property since the appraisal was completed. Additionally, management 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 ~~$376,000 and $901,000~~$688,000 as of ~~June 30, 2022,~~ ~~and~~ December 31, ~~2021,~~ 2022.~~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 after foreclosure are included in net expenses from OREO.

1622

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

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)
Fair Value Estimate
Valuation Techniques Unobservable Input
Range (Weighted
Average)

June 30, 2022

Impaired loans
$ 1,106
Appraisal of collateral (1)
Appraisal adjustments (2)
32.5% to 76.6% (51.3%)

Other real estate owned
$ 6,792
Appraisal of collateral (1)
Appraisal adjustments (2)
14.2%

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
June 30, 2023
Individually analyzed loans held for investment	$	668	Appraisal of collateral (1)	Appraisal adjustments (2)		13.5%

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2021

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2022

Impaired loans

4,162

Appraisal of collateral (1)

Appraisal adjustments (2)

25.0%

72.2%

(36.6%)

1,143

Appraisal of collateral (1)

Appraisal adjustments (2)

12.0%

Other real estate owned

5,792

Appraisal of collateral (1)

Appraisal adjustments (2)

8.4%

(1)

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

(2)

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

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

	June 30, 2022										June 30, 2023
	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:
Loans held for sale		0		0		0		0		0	$	171	$	-	$	171	$	-	$	171
Net loans	$	963,447		0		0	$	940,261		940,261		1,388,844		-		-		1,362,023		1,362,023

Financial liabilities:
Deposits	$	1,147,166	$	972,333	$	0	$	171,863	$	1,144,196	$	1,431,641	$	1,143,780	$	-	$	1,238,379	$	2,382,159
Other borrowings		12,910		0		0		12,910		12,910		11,961		-		-		11,961		11,961

	December 31, 2021										December 31, 2022
	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:
Loans held for sale	$	1,051		0	$	1,051	$	0	$	1,051
Net loans		967,349		0		0		961,645		961,645	$	1,338,434	$	-	$	-	$	1,298,814	$	1,298,814

Financial liabilities:
Deposits	$	1,166,610	$	967,885	$	0	$	199,503	$	1,167,388	$	1,402,019	$	1,163,999	$	-	$	231,218	$	1,395,217
Other borrowings		12,901		0		0		12,901		12,901		12,059		-		-		12,059		12,059

Included within other borrowings is an $8.2 million note payable, which matures in December 2037. These borrowings were used to form a special purpose entity ~~(“Entity”)~~ to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to ~~LIBOR~~SOFR plus 1.67%. The borrowing is a floating rate instrument, and any difference between the cost and fair value is insignificant.

In addition to the financial instruments included in the ~~preceding~~above tables, cash and cash equivalents, bank-owned life insurance, Federal Home Loan Bank (the “FHLB”) stock, accrued interest receivable, short-term borrowings, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax, for the three and six months ended June 30, ~~2022,~~2023, and ~~2021,~~2022, respectively:

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

Balance as of March 31, 2022
$ (6,674 )
Other comprehensive loss
(10,917 )
Balance at June 30, 2022
$ (17,591 )

Balance as of December 31, 2021
$ 3,462
Other comprehensive loss
(21,053 )
Balance at June 30, 2022
$ (17,591 )

(Dollars in thousands)	Unrealized (losses)/gains on available-for-sale securities (a)
Balance as of March 31, 2023	$	(19,253	)
Other comprehensive loss		(1,377	)
Balance at June 30, 2023	$	(20,630	)

Balance as of December 31, 2022	$	(22,144	)
Other comprehensive gain		1,514
Balance at June 30, 2023	$	(20,630	)

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

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 (losses)/gains on available-for-sale securities (a)
Balance as of March 31, 2022	$	(6,674	)
Other comprehensive loss		(10,917	)
Balance at June 30, 2022	$	(17,591	)

Balance as of December 31, 2021	$	3,462
Other comprehensive loss		(21,053	)
Balance as of June 30, 2022	$	(17,591	)

(a)

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

There were 0no other reclassifications of amounts from accumulated other comprehensive income for the three and six months ended June 30, ~~2022,~~2023, and ~~2021.~~2022.

NOTE 7 – INVESTMENT AND EQUITY SECURITIES

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

	June 30, 2022									June 30, 2023
			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	$	32,300	$	32	$	(1,024	)	$	31,308	$	34,300	$	96	$	(2,942	)	$	31,454
Obligations of states and political subdivisions:
Taxable		500		1		0			501		500		-		(1	)		499
Tax-exempt		152,436		105		(20,734	)		131,807		151,052		40		(22,543	)		128,549
Mortgage-backed securities in government-sponsored entities		8,990		2		(650	)		8,342		7,472		-		(765	)		6,707
Total	$	194,226	$	140	$	(22,408	)	$	171,958	$	193,324	$	136	$	(26,251	)	$	167,209

December 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

(Dollar amounts in thousands)

Cost

Gains

Losses

Value

Subordinated debt
$ 32,300 $ 356 $ (119 ) $ 32,537
Obligations of states and political subdivisions:

Taxable
500 2 0 502
Tax-exempt
122,877 4,307 (341 ) 126,843
Mortgage-backed securities in government-sponsored entities
10,140 257 (80 ) 10,317
Total
$ 165,817 $ 4,922 $ (540 ) $ 170,199

	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value

Subordinated debt	$	32,300	$	3	$	(2,139	)	$	30,164
Obligations of states and political subdivisions:
Taxable		500		-		-			500
Tax-exempt		151,896		49		(25,111	)		126,834
Mortgage-backed securities in government-sponsored entities		8,302		-		(833	)		7,469
Total	$	192,998	$	52	$	(28,083	)	$	164,967

Equity securities totaled ~~$779,000~~$711,000 and ~~$818,000~~$915,000 at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

The Company recognized a net loss on equity investments of $67,000 and $205,000 for the three and six months ended June 30, 2023. The Company recognized a net loss on equity investments of $72,000 and $39,000, respectively, for the three and six months ended June 30, 2022.~~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.~~ No net gains on sold equity securities were realized from sales during these periods.

The amortized cost and fair value of debt securities at June 30, ~~2022,~~2023, 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		Amortized		Fair
(Dollar amounts in thousands)	Cost		Value		Cost		Value

Due in one year or less	$	556	$	562	$	1,114	$	1,112
Due after one year through five years		2,606		2,606		2,311		2,221
Due after five years through ten years		44,620		43,316		52,720		49,416
Due after ten years		146,444		125,474		137,179		114,460
Total	$	194,226	$	171,958	$	193,324	$	167,209

There were 0no securities sold during the three and six months ended June 30, ~~2022,~~2023, and ~~2021,~~2022, respectively.

Investment securities with an approximate carrying value of ~~$78.9~~$116.1 million and ~~$77.1~~$89.9 million on June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, 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.

	June 30, 2022															June 30, 2023
	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	$	27,483	$	(917	)	$	1,493	$	(107	)	$	28,976	$	(1,024	)	$	3,950	$	(350	)	$	25,909	$	(2,592	)	$	29,859	$	(2,942	)
Obligations of states and political subdivisions:
Taxable																	499		(1	)		-		-			499		(1	)
Tax-exempt		118,890		(20,259	)		1,847		(475	)		120,737		(20,734	)		16,181		(225	)		100,600		(22,318	)		116,781		(22,543	)
Mortgage-backed securities in government-sponsored entities		6,487		(345	)		1,678		(305	)		8,165		(650	)		504		(13	)		6,184		(752	)		6,688		(765	)
Total	$	152,860	$	(21,521	)	$	5,018	$	(887	)	$	157,878	$	(22,408	)	$	21,134	$	(589	)	$	132,693	$	(25,662	)	$	153,827	$	(26,251	)

December 31, 2021

Less than Twelve Months

Twelve Months or Greater

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollar amounts in thousands)

Value

Losses

Value

Losses

Value

Losses

Subordinated debt
$ 9,150 $ (100 ) $ 731 $ (19 ) $ 9,881 $ (119 )
Obligations of states and political subdivisions:

Tax-exempt
24,273 (341 ) 0 0 24,273 (341 )
Mortgage-backed securities in government-sponsored entities
0 0 1,980 (80 ) 1,980 (80 )
Total
$ 33,423 $ (441 ) $ 2,711 $ (99 ) $ 36,134 $ (540 )

	December 31, 2022
	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	$	12,638	$	(1,129	)	$	8,790	$	(1,010	)	$	21,428	$	(2,139	)
Obligations of states and political subdivisions:
Tax-exempt		75,343		(10,488	)		41,138		(14,623	)		116,481		(25,111	)
Mortgage-backed securities in government-sponsored entities		6,153		(480	)		1,316		(353	)		7,469		(833	)
Total	$	94,134	$	(12,097	)	$	51,244	$	(15,986	)	$	145,378	$	(28,083	)

Every quarter, the Company evaluates securities with unrealized losses to determine if the decline in fair value has resulted from credit losses or other factors. There were ~~182~~39 securities in an unrealized loss position for less than twelve months and ~~eight~~153 securities in an unrealized loss position for twelve months or greater on June 30, ~~2022.~~2023.

~~Every quarter, the Company assesses whether there~~Unrealized losses on available-for-sale securities have notbeen 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~~into income because we do not intend to sell ~~the debt security or~~and it is more likely than not that itwe willnot be required to sell any of the ~~debt security~~securities in an unrealized loss position before recovery of ~~its~~their amortized ~~cost basis. However, even if the Company does~~cost. The unrealized losses on debt securities were attributable to changes in interest rates and not ~~expect~~related 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~~quality 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 before recovery.~~

~~Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 82% of the total available-for-sale portfolio as~~these issuers. As of June 30, ~~2022,~~2023, ~~and~~ no ~~credit losses are expected, given~~ACL was required on available-for-sale securities. Prior to the ~~explicit and implicit guarantees provided by the U.S. federal government and the lack~~adoption 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~~ASU ~~three~~2016 ~~and~~ -~~six~~ ~~months ended~~ ~~June 30, 2022,~~ ~~and~~ ~~2021,~~13 there were ~~0 available-for-sale~~no available for sale debt securities with an unrealized loss that suffered ~~OTTI. Management does~~ ~~not~~ ~~believe any individual unrealized loss as of~~ ~~June 30, 2022,~~ orother than temporary impairment (OTTI) during the year ended December 31, ~~2021,~~ 2022.~~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~~CREDIT 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 and western Ohio market with offices in Ada, Bellefontaine, Dublin, Kenton, Marysville, 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~~credit 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 the 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, 2022
Impairment Evaluation
	Individually		Collectively		Total Loans		June 30,			December 31,
Loans:
							2023			2022

Commercial real estate:
Owner occupied	$	701	$	120,070	$	120,771	$	187,919		$	191,748
Non-owner occupied		5,133		283,201		288,334		385,846			380,580
Multifamily		0		29,152		29,152		58,579			58,251
Residential real estate		975		245,478		246,453		312,196			296,308
Commercial and industrial		1,848		135,550		137,398		209,349			195,602
Home equity lines of credit		247		111,483		111,730		126,894			128,065
Construction and other		0		35,988		35,988
Construction and Other								118,851			94,199
Consumer installment		0		8,171		8,171		9,801			8,119
Total	$	8,904	$	969,093	$	977,997
Total loans								1,409,435			1,352,872
Less: Allowance for credit losses								(20,591	)		(14,438	)
Net loans							$	1,388,844		$	1,338,434

December 31, 2021

Impairment Evaluation

Individually

Collectively

Total Loans

Loans:

Commercial real estate:

Owner occupied
$ 731 $ 110,739 $ 111,470
Non-owner occupied
5,297 278,321 283,618
Multifamily
0 31,189 31,189
Residential real estate
1,104 238,985 240,089
Commercial and industrial
587 148,225 148,812
Home equity lines of credit
250 104,105 104,355
Construction and other
0 54,148 54,148
Consumer installment
0 8,010 8,010
Total
$ 7,969 $ 973,722 $ 981,691

~~The amounts above include net deferred loan origination fees of $2.0 million and $3.6 million on~~ ~~June 30, 2022,~~ ~~and~~ ~~December 31, 2021,~~ ~~respectively. The net deferred loan origination fees at~~ ~~June 30, 2022,~~ ~~and~~ ~~December 31, 2021,~~ ~~include $38,000 and $1.3 million, respectively, of unearned deferred fees from PPP loans.~~

June 30, 2022

Ending Allowance Balance by Impairment Evaluation:

Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Allocation

Loans:

Commercial real estate:

Owner occupied
$ 9 $ 1,794 $ 1,803
Non-owner occupied
621 6,726 7,347
Multifamily
0 416 416
Residential real estate
13 1,840 1,853
Commercial and industrial
212 1,001 1,213
Home equity lines of credit
1 1,494 1,495
Construction and other
0 399 399
Consumer installment
0 24 24
Total
$ 856 $ 13,694 $ 14,550

December 31, 2021

Ending Allowance Balance by Impairment Evaluation:

Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Allocation

Loans:

Commercial real estate:

Owner occupied
$ 10 $ 1,826 $ 1,836
Non-owner occupied
655 6,776 7,431
Multifamily
0 454 454
Residential real estate
17 1,723 1,740
Commercial and industrial
42 840 882
Home equity lines of credit
16 1,436 1,452
Construction and other
0 533 533
Consumer installment
0 14 14
Total
$ 740 $ 13,602 $ 14,342

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”),~~CRE, which is further segmented into Owner ~~Occupied (“~~CRE ~~OO”), Non-owner Occupied (“~~OO, CRE ~~NOO”),~~NOO, and Multifamily Residential, ~~Residential Real Estate (“RRE”), Commercial and Industrial (“~~RRE, C~~&I”), Home Equity Lines of Credit (“HELOC”),~~&I, HELOC, Construction, ~~and Other (“Construction”),~~ and Consumer Installment Loans. The commercial real estate loan segments consist of loans made to finance the activities of commercial real estate owners and ~~operators.~~operators and certain agricultural loans. The residential real estate and HELOC loan segments consist of loans made to finance the activities of residential homeowners. The C&I loan segment consists of loans made to finance the activities of commercial customers. 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 loanscustomers and ~~throughout the lives of the loans and was~~ ~~not~~ ~~entered into separately and apart from the~~certain agricultural 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~~credit loss for the C&I, RRE, and HELOC ~~and Consumer Installment~~portfolios were partially offset by a decrease in the allowance for the CRE, Construction, and ~~Construction~~Consumer Installment portfolios.

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

Once the determination has been made that a loan is ~~impaired,~~going to be individually analyzed, 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 quarterly. The Company’s policy for recognizing interest income on ~~impaired~~individually analyzed 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, 2022

Impaired Loans

Unpaid

Recorded
Principal
Related

Investment
Balance
Allowance

With no related allowance recorded:

Commercial real estate:

Non-owner occupied
$ 841 $ 965 $ -
Residential real estate
697 757 -
Commercial and industrial
265 373 -
Home equity lines of credit
240 240 -
Total
$ 2,043 $ 2,335 $ -

With an allowance recorded:

Commercial real estate:

Owner occupied
$ 701 $ 701 $ 9
Non-owner occupied
4,292 4,902 621
Residential real estate
278 278 13
Commercial and industrial
1,583 1,583 212
Home equity lines of credit
7 7 1
Total
$ 6,861 $ 7,471 $ 856

Total:

Commercial real estate:

Owner occupied
$ 701 $ 701 $ 9
Non-owner occupied
5,133 5,867 621
Residential real estate
975 1,035 13
Commercial and industrial
1,848 1,956 212
Home equity lines of credit
247 247 1
Total
$ 8,904 $ 9,806 $ 856

December 31, 2021

Impaired Loans

Unpaid

Recorded
Principal
Related

Investment
Balance
Allowance

With no related allowance recorded:

Commercial real estate:

Non-owner occupied
$ 1,547 $ 1,802 $ -
Residential real estate
820 874 -
Commercial and industrial
370 538 -
Home equity lines of credit
7 7 -
Total
$ 2,744 $ 3,221 $ -

With an allowance recorded:

Commercial real estate:

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

Total:

Commercial real estate:

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

~~The tables above include troubled debt restructuring totaling $3.6 million and $2.6 million as of~~ ~~June 30, 2022,~~ ~~and~~ ~~December 31, 2021,~~ ~~respectively. The amounts allocated within the allowance for losses for these troubled debt restructurings were $335,000 and $150,000 on~~ ~~June 30, 2022,~~ ~~and~~ ~~December 31, 2021,~~ ~~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, 2022

For the Six Months Ended
June 30, 2022

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Commercial real estate:

Owner occupied
$ 709 $ 12 $ 716 $ 23
Non-owner occupied
5,173 57 5,214 115
Residential real estate
986 13 1,025 25
Commercial and industrial
1,239 51 1,022 65
Home equity lines of credit
248 2 249 5
Total
$ 8,355 $ 135 $ 8,226 $ 233

For the Three Months Ended
June 30, 2021

For the Six Months Ended
June 30, 2021

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Commercial real estate:

Owner occupied
$ 1,489 $ 15 $ 1,514 $ 31
Non-owner occupied
4,776 23 4,558 67
Residential real estate
1,227 13 1,257 24
Commercial and industrial
864 6 854 13
Home equity lines of credit
239 1 241 3
Total
$ 8,595 $ 58 $ 8,424 $ 138

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 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 loss. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $750,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews a sample of 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 following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable and current period gross charge-offs by year of origination under ASC 326 as of June 30, 2023:

June 30, 2023
Term Loans Amortized Cost Basis by Origination Year														Revolving
(Dollar amounts in thousands)	2023		2022		2021		2020		2019		Prior			Amortized Cost		Total
Commercial real estate:
Owner occupied
Pass	$	10,850	$	39,973	$	42,655	$	25,824	$	12,336	$	41,858		$	3,693	$	177,189
Special Mention		-		-		-		-		694		428			-		1,122
Substandard		-		-		-		1,579		-		8,029			-		9,608
Total Owner occupied	$	10,850	$	39,973	$	42,655	$	27,403	$	13,030	$	50,315		$	3,693	$	187,919
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	46		$	-	$	46
Non-owner occupied
Pass	$	21,201	$	70,716	$	49,421	$	23,189	$	35,041	$	131,402		$	1,072	$	332,042
Special Mention		-		2,507		-		-		-		3,787			-		6,294
Substandard		-		-		-		-		3,650		39,140			-		42,790
Doubtful		-		-		674		-		4,046		-			-		4,720
Total Non-owner occupied	$	21,201	$	73,223	$	50,095	$	23,189	$	42,737	$	174,329		$	1,072	$	385,846
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Multifamily
Pass	$	4,380	$	25,941	$	4,346	$	10,644	$	1,413	$	11,765		$	90	$	58,579
Total Multifamily	$	4,380	$	25,941	$	4,346	$	10,644	$	1,413	$	11,765		$	90	$	58,579
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Residential real estate
Pass	$	24,878	$	54,709	$	81,498	$	40,720	$	20,836	$	87,159		$	673	$	310,473
Substandard		-		-		334		-		27		1,362			-		1,723
Total Residential real estate	$	24,878	$	54,709	$	81,832	$	40,720	$	20,863	$	88,521		$	673	$	312,196
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	108		$	-	$	108
Commercial and industrial
Pass	$	26,618	$	47,057	$	21,360	$	28,956	$	3,561	$	8,627		$	70,436	$	206,615
Special Mention		-		-		-		-		-		372			184		556
Substandard		14		17		-		370		143		1,017			621		2,182
Loss		-		-		-		-		-		(4	)		-		(4	)
Total Commercial and industrial	$	26,632	$	47,074	$	21,360	$	29,326	$	3,704	$	10,012		$	71,241	$	209,349
Current-period gross charge-offs	$	-	$	-	$	50	$	-	$	6	$	4		$	-	$	60
Home equity lines of credit
Pass	$	-	$	120	$	-	$	21	$	66	$	2,079		$	123,290	$	125,576
Substandard		-		-		-		24		30		593			671		1,318
Total Home equity lines of credit	$	-	$	120	$	-	$	45	$	96	$	2,672		$	123,961	$	126,894
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Construction and other
Pass	$	26,915	$	49,301	$	27,432	$	2,190	$	3,401	$	1,849		$	3,747	$	114,835
Special Mention		-		-		-		-		287		-			-		287
Substandard		-		-		420		-		2,034		-			1,275		3,729
Total Construction and other	$	26,915	$	49,301	$	27,852	$	2,190	$	5,722	$	1,849		$	5,022	$	118,851
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Consumer installment
Pass	$	1,308	$	1,433	$	565	$	142	$	93	$	6,260		$	-	$	9,801
Total Consumer installment	$	1,308	$	1,433	$	565	$	142	$	93	$	6,260		$	-	$	9,801
Current-period gross charge-offs	$	-	$	23	$	-	$	-	$	-	$	38		$	-	$	61

Total Loans	$	116,164	$	291,774	$	228,705	$	133,659	$	87,658	$	345,723		$	205,752	$	1,409,435

The following table presents 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
December 31, 2022	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	176,400	$	6,873	$	8,475	$	-	$	191,748
Non-owner occupied		331,584		6,387		42,609		-		380,580
Multifamily		58,251		-		-		-		58,251
Residential real estate		294,254		-		2,054		-		296,308
Commercial and industrial		185,674		7,936		1,992		-		195,602
Home equity lines of credit		127,080		-		985		-		128,065
Construction and other		90,728		308		3,163		-		94,199
Consumer installment		8,117		-		2		-		8,119
Total	$	1,272,088	$	21,504	$	59,280	$	-	$	1,352,872

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.

The following table presents collateral-dependent loans by classes of loan type as of June 30, 2023 (in thousands):

	June 30, 2023
	Type of Collateral
(Dollar amounts in thousands)	Real Estate		Blanket Lien		Investment/Cash		Other		Total
Commercial real estate:
Owner occupied	$	3,728	$	1,579	$	-	$	829	$	6,136
Non-owner occupied		18,970		-		-		674		19,644
Commercial and industrial		-		200		-		-		200
Construction and other		1,971		-		-		1,695		3,666
Total	$	24,669	$	1,779	$	-	$	3,198	$	29,646

The following table presents information related to impaired loans by class of loans under ASC 310 as of December 31, 2022 (in thousands):

December 31, 2022
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	4,141	$	4,141	$	-
Non-owner occupied		1,042		1,042		-
Residential real estate		706		770		-
Commercial and industrial		450		547		-
Home equity lines of credit		112		112		-
Total	$	6,451	$	6,612	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	1,509	$	1,509	$	407
Non-owner occupied		12,528		12,528		167
Residential real estate		317		317		28
Commercial and industrial		1,378		1,378		39
Home equity lines of credit		132		132		48
Total	$	15,864	$	15,864	$	689

Total:
Commercial real estate:
Owner occupied	$	5,650	$	5,650	$	407
Non-owner occupied		13,570		13,570		167
Residential real estate		1,023		1,087		28
Commercial and industrial		1,828		1,925		39
Home equity lines of credit		244		244		48
Total	$	22,315	$	22,476	$	689

The table above includes troubled debt restructuring totaling $3.3 million as of December 31, 2022. The amount allocated within the allowance for losses for these troubled debt restructurings was $72,000 as of December 31, 2022.

The following table presents the average recorded investment in impaired loans by class and interest income recognized by loan, under ASC 310, for the three month period ended June 30, 2022 (in thousands):

	For the Three Months Ended June 30, 2022				For the Six Months Ended June 30, 2022
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	709	$	12	$	716	$	23
Non-owner occupied		5,173		57		5,214		115
Residential real estate		986		13		1,025		25
Commercial and industrial		1,239		51		1,022		65
Home equity lines of credit		248		2		249		5
Total	$	8,355	$	135	$	8,226	$	233

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

(In Thousands)	December 01, 2022		December 31, 2022
Outstanding balance	$	7,919	$	7,998
Carrying amount	$	6,019	$	6,068

The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business, ~~that~~which 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 real-estate 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 the 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, 2022

Pass

Mention

Substandard

Doubtful

Loans

Commercial real estate:

Owner occupied
$ 110,901 $ 1,179 $ 8,691 $ 0 $ 120,771
Non-owner occupied
230,002 232 58,100 0 288,334
Multifamily
29,152 0 0 0 29,152
Residential real estate
244,075 0 2,378 0 246,453
Commercial and industrial
130,986 3,416 2,996 0 137,398
Home equity lines of credit
110,607 0 1,123 0 111,730
Construction and other
35,659 329 0 0 35,988
Consumer installment
8,167 0 4 0 8,171
Total
$ 899,549 $ 5,156 $ 73,292 $ 0 $ 977,997

Special

Total

December 31, 2021

Pass

Mention

Substandard

Doubtful

Loans

Commercial real estate:

Owner occupied
$ 104,217 $ 2,400 $ 4,853 $ 0 $ 111,470
Non-owner occupied
230,672 3,038 49,908 0 283,618
Multifamily
31,189 0 0 0 31,189
Residential real estate
237,132 0 2,957 0 240,089
Commercial and industrial
143,911 2,748 2,153 0 148,812
Home equity lines of credit
103,296 0 1,059 0 104,355
Construction and other
53,807 341 0 0 54,148
Consumer installment
8,005 0 5 0 8,010
Total
$ 912,229 $ 8,527 $ 60,935 $ 0 $ 981,691

~~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 the 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, 2022	Current		Past Due		Past Due		Past Due		Past Due		Loans
June 30, 2023													Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	120,236	$	0	$	535	$	0	$	535	$	120,771	$	187,270	$	586	$	18	$	45	$	649	$	187,919
Non-owner occupied		287,961		0		0		373		373		288,334		378,350		2,776		-		4,720		7,496		385,846
Multifamily		29,152		0		0		0		0		29,152		58,455		124		-		-		124		58,579
Residential real estate		245,687		676		88		2		766		246,453		310,419		1,183		383		211		1,777		312,196
Commercial and industrial		137,278		96		5		19		120		137,398		208,991		308		25		25		358		209,349
Home equity lines of credit		111,402		129		100		99		328		111,730		125,362		1,380		56		96		1,532		126,894
Construction and other		35,988		0		0		0		0		35,988		118,322		529		-		-		529		118,851
Consumer installment		8,171		0		0		0		0		8,171		9,783		18		-		-		18		9,801
Total	$	975,875	$	901	$	728	$	493	$	2,122	$	977,997	$	1,396,952	$	6,904	$	482	$	5,097	$	12,483	$	1,409,435

			30-59 Days		60-89 Days		90 Days+		Total		Total												Purchase
December 31, 2021	Current		Past Due		Past Due		Past Due		Past Due		Loans
															30-59 Days		60-89 Days		90 Days+		Total		Credit		Total
December 31, 2022													Current		Past Due		Past Due		Past Due		Past Due		Impaired Loans		Loans

Commercial real estate:
Owner occupied	$	111,257	$	81	$	132	$	0	$	213	$	111,470	$	191,748	$	-	$	-	$	-	$	-	$	-	$	191,748
Non-owner occupied		282,365		880		0		373		1,253		283,618		380,467		113		-		-		113		2,992		380,580
Multifamily		31,189		0		0		0		0		31,189		58,251		-		-		-		-		-		58,251
Residential real estate		238,483		1,187		0		419		1,606		240,089		293,698		2,093		111		406		2,610		24		296,308
Commercial and industrial		148,437		112		0		263		375		148,812		195,532		62		4		4		70		-		195,602
Home equity lines of credit		104,316		0		39		0		39		104,355		127,494		415		145		11		571		-		128,065
Construction and other		54,148		0		0		0		0		54,148		93,997		202		-		-		202		3,052		94,199
Consumer installment		7,799		16		19		176		211		8,010		8,096		23		-		-		23		-		8,119
Total	$	977,994	$	2,276	$	190	$	1,231	$	3,697	$	981,691	$	1,349,283	$	2,908	$	260	$	421	$	3,589	$	6,068	$	1,352,872

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):

June 30, 2022	Nonaccrual		90+ Days Past Due and Accruing
					June 30, 2023
					Nonaccrual		Nonaccrual				Loans Past
(Dollar amounts in thousands)					with no		with		Total		Due Over 90 Days		Total
					ACL		ACL		Nonaccrual		Still Accruing		Nonperforming
Commercial real estate:
Owner occupied	$	74	$	0	$	-	$	108	$	108	$	-	$	108
Non-owner occupied		2,338		0		4,720		-		4,720		-		4,720
Multifamily		0		0
Residential real estate		1,602		0		-		1,141		1,141		-		1,141
Commercial and industrial		242		0		-		270		270		-		270
Home equity lines of credit		247		0		-		655		655		-		655
Construction and other		0		0		-		64		64		-		64
Consumer installment		167		0		158		-		158		-		158
Total	$	4,670	$	0	$	4,878	$	2,238	$	7,116	$	-	$	7,116

December 31, 2021

Nonaccrual
90+ Days Past Due and Accruing

Commercial real estate:

Owner occupied
$ 81 $ 0
Non-owner occupied
2,442 0
Residential real estate
1,577 0
Commercial and industrial
456 0
Home equity lines of credit
121 0
Consumer installment
182 0
Total
$ 4,859 $ 0

December 31, 2022	Nonaccrual		90+ Days Past Due and Accruing

Commercial real estate:
Owner occupied	$	69	$	-
Residential real estate		1,431		-
Commercial and industrial		186		-
Home equity lines of credit		191		-
Construction and other		68		-
Consumer installment		166		-
Total	$	2,111	$	-

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $88,000 and $203,000 for the three and six months ended June 30, 2023, respectively. Interest income that would have been recorded had these loans not been placed on nonaccrual status was $40,000 and $103,000 for the three and six months ended June 30, 2022, respectively. ~~Interest income that would have been recorded had these loans~~ ~~not~~ ~~been placed on nonaccrual status was $124,000 and $183,000 for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2021,~~ ~~respectively.~~

AnOn January 1, 2023, the Company adopted CECL. This methodology for calculating the allowance for credit losses considers the possibility of loss over the life of the loan. It also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and ~~lease losses (“ALLL”)~~similar credit risk elements. An ACL is maintained to absorb losses from the loan portfolio. The ~~ALLL~~ACL 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~~Prior to January 1, 2023 the Company’s methodology for determining the ~~ALLL is~~allowance for loan losses (ALLL) was 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~~represented the Company’s ALLL. Management also ~~performs~~performed impairment analyses on TDRs, which ~~may~~ ~~result~~could have resulted 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 several 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; the value of underlying collateral; and concentrations of credit from a loan type, industry, and geographic standpoint.

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

2932

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

	For the six months ended June 30, 2022												For the six months ended June 30, 2023
	Allowance for Loan and Lease Losses												Allowance for Credit Losses
	Balance										Balance		Balance		CECL											Balance
	December 31, 2021		Charge-offs			Recoveries		Provision			June 30, 2022		December 31, 2022		Adoption			Charge-offs			Recoveries		Provision			June 30, 2023
Loans:
Commercial real estate:
Owner occupied	$	1,836	$	0		$	3	$	(36	)	$	1,803	$	2,203	$	811		$	(46	)	$	3	$	442		$	3,413
Non-owner occupied		7,431		0			0		(84	)		7,347		5,597		(1,206	)		-			-		(545	)		3,846
Multifamily		454		0			0		(38	)		416		662		591			-			-		26			1,279
Residential real estate		1,740		0			27		86			1,853		2,047		2,744			(108	)		-		431			5,114
Commercial and industrial		882		(30	)		208		153			1,213		1,483		2,320			(60	)		20		341			4,104
Home equity lines of credit		1,452		(25	)		0		68			1,495		1,753		(1,031	)		-			70		(69	)		723
Construction and other		533		0			0		(134	)		399		609		956			-			-		319			1,884
Consumer installment		14		(46	)		71		(15	)		24		84		197			(61	)		79		(71	)		228
Total	$	14,342	$	(101	)	$	309	$	0		$	14,550	$	14,438	$	5,382		$	(275	)	$	172	$	874		$	20,591

	For the six months ended June 30, 2021												For the six months ended June 30, 2022
	Allowance for Loan and Lease Losses												Allowance for Loan and Lease Losses
	Balance										Balance		Balance										Balance
	December 31, 2020		Charge-offs			Recoveries		Provision			June 30, 2021		December 31, 2021		Charge-offs			Recoveries		Provision			June 30, 2022
Loans:
Commercial real estate:
Owner occupied	$	1,342	$	0		$	43	$	140		$	1,525	$	1,836	$	-		$	3	$	(36	)	$	1,803
Non-owner occupied		6,817		(263	)		0		1,070			7,624		7,431		-			-		(84	)		7,347
Multifamily		461		0			0		(12	)		449		454		-			-		(38	)		416
Residential real estate		1,683		(27	)		3		133			1,792		1,740		-			27		86			1,853
Commercial and industrial		1,353		0			51		(281	)		1,123		882		(30	)		208		153			1,213
Home equity lines of credit		1,405		0			52		(196	)		1,261		1,452		(25	)		-		68			1,495
Construction and other		378		0			28		2			408		533		-			-		(134	)		399
Consumer installment		20		(102	)		56		44			18		14		(46	)		71		(15	)		24
Total	$	13,459	$	(392	)	$	233	$	900		$	14,200	$	14,342	$	(101	)	$	309	$	-		$	14,550

	For the three months ended June 30, 2022												For the three months ended June 30, 2023
	Allowance for Loan and Lease Losses												Allowance for Credit Losses
	Balance										Balance		Balance		CECL										Balance
	March 31, 2022		Charge-offs			Recoveries		Provision			June 30, 2022		March 31, 2023		Adoption		Charge-offs			Recoveries		Provision			June 30, 2023
Loans:
Commercial real estate:
Owner occupied	$	1,765	$	0		$	2	$	36		$	1,803	$	2,678	$	-	$	(46	)	$	1	$	780		$	3,413
Non-owner occupied		7,672		0			0		(325	)		7,347		4,712		-		-			-		(866	)		3,846
Multifamily		419		0			0		(3	)		416		1,371		-		-			-		(92	)		1,279
Residential real estate		1,801		0			0		52			1,853		4,967		-		(108	)		-		255			5,114
Commercial and industrial		904		0			59		250			1,213		3,819		-		(6	)		9		282			4,104
Home equity lines of credit		1,355		0			0		140			1,495		809		-		-			-		(86	)		723
Construction and other		558		0			0		(159	)		399		1,553		-		-			-		331			1,884
Consumer installment		18		(40	)		37		9			24		253		-		(3	)		42		(64	)		228
Total	$	14,492	$	(40	)	$	98	$	0		$	14,550	$	20,162	$	-	$	(163	)	$	52	$	540		$	20,591

	For the three months ended June 30, 2022
	Allowance for Credit Losses
	Balance										Balance
	Mar 31, 2022		Charge-offs			Recoveries		Provision			June 30, 2022
Loans:
Commercial real estate:
Owner occupied	$	1,765	$	-		$	2	$	36		$	1,803
Non-owner occupied		7,672		-			-		(325	)		7,347
Multifamily		419		-			-		(3	)		416
Residential real estate		1,801		-			-		52			1,853
Commercial and industrial		904		-			59		250			1,213
Home equity lines of credit		1,355		-			-		140			1,495
Construction and other		558		-			-		(159	)		399
Consumer installment		18		(40	)		37		9			24
Total	$	14,492	$	(40	)	$	98	$	-		$	14,550

3033

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

The increase in the ACL in 2022 was primarily related to higher expected probable losses inherent in the loan portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment and overall growth in the loan portfolio.

The provision fluctuations during the six months ended June 30, 2023, allocated to:

	●	residential, C&I and construction loans are due to increases in outstanding balances.
	●	owner occupied CRE are due to an increase in criticized assets.
	●	non-owner occupied CRE are due to a decrease in reserves allocated using the individual allocation method to a historically problematic credit.
	●	multifamily fluctuation was driven by increases in the reserve because of an increase in adjusted historical loss rate.

The provision fluctuations during the three months ended June 30, 2023, allocated to:

	●	residential, C&I, and construction loans are due to increases in outstanding balances.
	●	owner occupied CRE are due to an increase in criticized assets
	●	non-owner occupied CRE are due to a decrease in reserves allocated using the individual allocation method to two historically problematic credits and a decrease in pooled loans reserve due to a decrease in outstanding balances.
	●	multifamily are based entirely on a decrease in the pooled loans reserve because of a moderate decline in outstanding loan balances

The provision fluctuations during the six months ended June 30, 2022, allocated to:

●

residential loans and home equity lines of credit are due to an increase in outstanding balances.

●

commercial and industrial loans are due to an increase in the specific reserve on impaired loans.

●

construction and other loans are due to a decrease in outstanding balances.

The provision fluctuations during the three months ended June 30, 2022, allocated to:

●

residential loans and home equity lines of credit are due to an increase in outstanding balances.

●

commercial and industrial loans are due to an increase in the specific reserve on impaired loans.

●

non-owner occupied commercial real estate loans are due to a decrease in outstanding balances.

●

home equity lines of credit are due to an increase in outstanding balances.

●

construction and other loans are due to a decrease in outstanding balances.

Modifications to Borrowers Experiencing Financial Difficulty

The ~~provision fluctuations~~Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The table below details the amortized cost of gross loans held for investment made to borrowers experiencing financial difficulty that were modified during the three and six months ended June 30, ~~2021,~~ 2023:~~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.~~

	For the three months ended June 30, 2023
	Modifications
					Payment		Interest Rate				Percentage of
					Deferral		Reduction				Total Loans
	Payment		Term		and Term		and Term				Held for
	Deferral		Extension		Extension		Past Due		Total		Investment

Commercial real estate:
Non-owner occupied	$	-	$	14,924	$	2,507	$	-	$	17,431		1.24	%
Commercial and industrial		-		86		-		-		86		0.01	%
Total	$	-	$	15,010	$	2,507	$	-	$	17,517		1.24	%

	For the six months ended June 30, 2023
	Modifications
					Payment		Interest Rate				Percentage of
					Deferral		Reduction				Total Loans
	Payment		Term		and Term		and Term				Held for
	Deferral		Extension		Extension		Past Due		Total		Investment

Commercial real estate:
Owner occupied	$	-	$	134	$	-	$	-	$	134		0.01	%
Non-owner occupied		-		19,074		2,507		-		21,581		1.53	%
Commercial and industrial		-		100		-		-		100		0.01	%
Consumer installment		-		8		-		-		8		0.00	%
Total	$	-	$	19,316	$	2,507	$	-	$	21,823		1.55	%

As of June 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first half of 2023 that subsequently defaulted. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.

Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022-02

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.

The following tables ~~present~~summarize troubled debt restructurings that did not meet the ~~number of loan modifications by class, the corresponding recorded investment, and the subsequently defaulted modifications~~exemption criteria above (in thousands) ~~for the years ended:~~:

For the Three Months Ended

June 30, 2022

Number of Contracts

Pre-Modification

Post-Modification

Number of Contracts

Pre-Modification

Post-Modification

Term

Outstanding Recorded

Troubled Debt Restructurings

Term

Modification

Other

Total

Outstanding Recorded Investment

Modification

Other

Total

Investment

Commercial and industrial

1,200

For the Six Months Ended

June 30, 2022

Number of Contracts

Pre-Modification

Post-Modification

Troubled Debt Restructurings
Term
Modification

Other

Total

Outstanding Recorded
Investment

Outstanding Recorded
Investment

Commercial and industrial
2 0 2 $ 1,225 $ 1,225

For the Six Months Ended

June 30, 2022

June 30, 2021

Number of Contracts

Pre-Modification

Post-Modification

Number of Contracts

Pre-Modification

Post-Modification

Term

Outstanding Recorded

Troubled Debt Restructurings

Term

Modification

Other

Total

Outstanding Recorded

Investment

Outstanding Recorded

Investment

Modification

Other

Total

Investment

Commercial and industrial

1,225

There were no ~~troubled debt restructurings during the~~ ~~three~~~~-month period ended~~ ~~June 30, 2021.~~

~~There were 0~~ subsequent defaults of troubled debt restructurings for the three and six-month periods ended June 30, 2022.

NOTE 9 – 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.~~businesses. 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 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 deposit services relationship if a change occurs with the Federal government’s position and that the termination may come with little or no notice.

NOTE 10 – ~~PROPOSED ACQUISITION OF LIBERTY BANCSHARES~~BUSINESS COMBINATION

OnAs described in Note ~~May 26,~~1, on December 1, 2022, ~~Middlefield Banc Corp. (the “Company”),~~the Company completed its merger with Liberty Bancshares, Inc. (“~~Liberty”), and MBCN Merger Subsidiary, LLC, a wholly owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”~~Liberty’), pursuant to ~~which~~a previously announced definitive merger agreement. The Company accounted for the Liberty acquisition using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with purchase accounting. The Company relied on the income approach to estimate the value of the loans. The loans’ underlying characteristics (account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures and remaining balance) were considered. Various assumptions were applied regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. Due to the timing of the merger, the estimated fair value measurements remain preliminary. Management will ~~merge with~~continue to review the estimated fair values and ~~into Merger Sub (the “Merger”), with Merger Sub as~~expects to finalize its analysis of the ~~surviving entity~~acquired assets and assumed liabilities in the ~~Merger. Promptly following the consummation~~transaction within one year of the ~~Merger, it is expected that Merger Sub~~merger. As the Company finalizes its analysis of these assets, there may be adjustments to the recorded carrying values. Any adjustments to carrying values will be ~~dissolved and liquidated and Liberty National Bank (“Liberty Bank”), the banking subsidiary~~recorded in goodwill. The calculation of ~~Liberty, will merge with and into The Middlefield Banking Company (“Middlefield Bank”), the banking subsidiary~~goodwill is subject to change for up to one year after closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available.

The Company ~~(the “Bank Merger”). Middlefield Bank will be~~also recorded an identifiable intangible asset representing the ~~surviving bank~~core deposit base of Liberty. The discounted cash flow method was used in valuing this intangible. This method is based upon the principle of future benefits; economic value is based on anticipated future benefits as measured by cash flows expected to occur in the ~~Bank Merger (the “Surviving Bank”).~~future. The estimated future cash flows are converted to a value indicator by determining the present value of the cash flows using a discount rate. The discount rate is based on the nature of the business, the level of risk, and the expected stability of the estimated future cash flows. The higher the risk, the higher the discount rate, and the lower the value indicator.

~~Under~~Time deposit fair values were estimated using an income approach. The methodology entailed discounting the ~~terms~~contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates. Interest and ~~subject~~principal payments were projected for each category of CDs over the period from the valuation date to the ~~conditions~~maturity date. These payments represent future cash flows to be paid to depositors until maturity. Using appropriate market interest rates for each category of CDs, the ~~Merger Agreement,~~future cash flows were discounted to their present value equivalents.

Loan fair value, at the ~~effective~~ time of the ~~Merger (the “Effective Time”), each share~~merger, used the income approach to estimate the fair value of the ~~voting common stock, $1.25 par value per share, and each share~~loans. The Bank’s loans are valued on an individual basis. As of ~~non-voting common stock, 0 par~~June 30, 2023, the Bank utilized a discounted cash flow model to estimate the fair value of ~~Liberty (the “Liberty Common Stock”) issued~~the Loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and ~~outstanding immediately prior to~~estimates of prevailing discount rates. The discounted cash flow approach models the ~~Effective Time, will be converted,~~credit losses directly in ~~accordance~~the projected cash flows.

Middlefield recorded goodwill and intangibles associated with the ~~procedures set forth~~purchase of Liberty totaling $16.7 million. Goodwill is not amortized, but is periodically evaluated for impairment. Middlefield Bank did not recognize any impairment during the quarter ended June 30, 2023.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the year ended December 31, 2022, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized over the estimated useful life of 10 years. The gross carrying amount of the core deposit intangible acquired in the ~~Merger Agreement, into~~Liberty merger that closed in 2022 was $6.2 million at June 30, 2023 with $444,000 accumulated amortization as of that date.

The following table summarizes the ~~right to receive, without interest, 2.752 shares (the “Exchange Ratio” and such shares,~~purchase of Liberty as of December 1, 2022:

(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Middlefield Banc Corp. shares issued		2,561,513
Value assigned to Middlefield Banc Corp. common shares	$	28.60
Purchase price assigned to Liberty common shares exchanged for					73,259
Purchase Price Consideration in Cash
Cash paid in lieu of fractional shares					6
Total Purchase Price					73,265
Net Assets Acquired:
Liberty shareholders equity	$	49,041
Adjustments to reflect assets acquired at fair value:
Loans
Allowance for credit loss		4,497
Loans - interest rate		(4,583	)
Loans - general credit		(3,852	)
Core deposit intangible		6,669
Investments		(1,461	)
Mortgage servicing rights		830
Other		94
Adjustments to reflect liabilities acquired at fair value:
Time deposits		(228	)
Deferred taxes		1,132
Total net assets acquired					52,139
Goodwill resulting from merger				$	21,126

The following condensed statement reflects the ~~“Merger Consideration”)~~amounts recognized as of the ~~common stock, 0 par value per share,~~acquisition date for each major class of asset acquired and liability assumed, at fair value:

(In Thousands)
Total purchase price			$	73,265
Assets (liabilities) acquired:
Net assets acquired:
Cash	18,406
Loans and loans held for sale	306,970
Investments	57,907
Premises and equipment, net	6,087
Accrued interest receivable	1,563
Bank-owned life insurance	16,290
Core deposit intangible	6,670
Mortgage servicing rights	1,680
Other assets	3,111
Time deposits	(69,278	)
Non-time deposits	(294,684	)
Accrued interest payable	(246	)
Other liabilities	(2,337	)
Total net assets acquired				52,139
Goodwill resulting from the Liberty merger			$	21,126

As of June 30, 2023, the current year and estimated future amortization expense for the core deposit intangible associated with this merger is as follows:

(In Thousands)
Remaining 2023	$	382
2024		750
2025		734
2026		714
2027		691
Thereafter		2,954
	$	6,225

The following table presents supplemental pro forma information as if the acquisition had occurred on January 1, 2022. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma information is not necessarily indicative of the ~~Company (the “Company Common Stock”). The Merger Agreement provides~~results of operations that an outstanding and unexercised warrant issued to Castle Creek Partners VI, LP (“Castle Creek”) to purchase shares of Liberty convertible perpetual preferred stock, Series A shall be canceled and converted intowould have occurred had the ~~right to receive~~transactions been effected on the ~~Merger Consideration.~~ assumed date.

	Pro Formas
	For the three months ended June 30,
	2022
	(in thousands, except per share data)

Net interest income	$	16,329
Noninterest income		1,535
Net income	$	5,253
Pro forma earnings per share:
Basic	$	0.63
Diluted	$	0.63

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

~~The information contained or incorporated by reference in this report on~~This Form 10-Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including ~~certain plans, expectations, goals,~~future economic, competitive, cybersecurity, and ~~projections,~~financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are ~~subject~~difficult to ~~numerous~~predict and many of which are beyond the Company's control. Although the Company believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. The inclusion of forward-looking information does not constitute a representation by the Company or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.

These forward-looking statements may involve significant risks and uncertainties. ~~Actual~~Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results ~~could~~may differ materially from ~~those contained or implied by such statements for a variety of factors, including changes~~the results 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 impact of the COVID-19 pandemic. The Company could experience further adverse effects on its business, financial condition, results of operations, and cash flows.

~~All~~these 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, ~~2022,~~2023, as compared with December 31, ~~2021,~~2022, and operating results for the three and ~~six-month periods~~six month period ended June 30, ~~2022,~~2023, and ~~2021.~~2022. 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 under 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 under 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.

~~2022 Six-Month~~2023 First Half Financial Highlights Include (on a year-over-year basis unless noted):

●

~~Returned $4.4~~Net income increased 26.1% to a record $10.0 million ~~of capital to shareholders through dividends and the repurchase of 95,364 shares at an average price of $25.39 per share~~

●

~~Net income was $7.9 million, or $1.35~~Earnings were $1.23 per diluted share compared to ~~$8.6 million, or~~ $1.35 per diluted share, reflecting a 38.4% increase in the average diluted shares outstanding related to the Liberty Bancshares, Inc. merger

●

~~First-half pre-tax~~Pre-tax, pre-provision net income ~~benefited from $1.2~~increased 40.1% to a record $13.3 million ~~of accelerated net fees associated with the Paycheck Protection Program (“PPP”), compared to $1.9 million in the 2021 first half~~

●

~~Net income during the second quarter was negatively impacted by $579,000 of one-time expenses associated with the proposed Liberty Bancshares, Inc. merger~~

●

Net interest margin improved by 2039 basis points to ~~3.91%~~4.30%, compared to ~~3.71%~~3.91%, and reflects five consecutive quarters of a net interest margin above 4%

●

Total loans were ~~$978.0 million,~~a record $1.41 billion, compared to ~~$981.7 million~~$1.35 billion at December 31, ~~2021~~2022

●

Total ~~loans increased by $27.8 million, or 6.1% annualized from~~deposits were a record $1.43 billion, compared to $1.40 billion at December 31, ~~2021, without the impact of PPP loan forgiveness~~2022

●

Uninsured deposits to total assets remained relatively unchanged as 20.5% compared to December 31, 2022

●

Uninsured deposits to total deposits were approximately 25.1%, compared to 24.7% at December 31, 2022

●

Return on average assets was ~~1.21%~~1.16%, compared to ~~1.26%~~1.21%

●

Return on average equity was ~~11.49%~~9.64%, compared to ~~11.88%~~11.49%

●

Return on average tangible common equity⁽¹⁾ was ~~13.03%~~11.92%, compared to ~~13.41%~~13.03%

●

Strong asset quality with nonperforming ~~loans~~assets to total ~~loans~~assets of ~~0.48%~~0.74%, compared to ~~0.73%~~0.89%

●

Allowance for ~~loan~~credit losses was ~~1.49%~~1.46% of total loans, compared to ~~1.34%~~1.49%

●

~~Merger with Liberty Bancshares, Inc. on schedule~~Equity to ~~close during the 2022 fourth quarter~~assets increased to 11.26% from 9.91%

(1)

See reconciliation of non-GAAP measures in the 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,

2022

2022

2021

2021

2021

2022

2021

Per common share data

Net income per common share - basic
$ 0.70 $ 0.65 $ 0.81 $ 0.85 $ 0.70 $ 1.35 $ 1.36
Net income per common share - diluted
$ 0.70 $ 0.65 $ 0.81 $ 0.85 $ 0.70 $ 1.35 $ 1.35
Dividends declared per share
$ 0.17 $ 0.17 $ 0.21 $ 0.16 $ 0.16 $ 0.34 $ 0.32
Book value per share (period end)
$ 22.07 $ 23.43 $ 24.68 $ 24.13 $ 23.50 $ 22.07 $ 23.50
Tangible book value per share (period end) ^{(2) (3)}
$ 19.26 $ 20.64 $ 21.88 $ 21.39 $ 20.82 $ 19.26 $ 20.82
Dividends declared
$ 993 $ 1,000 $ 1,242 $ 978 $ 1,004 $ 1,993 $ 1,920
Dividend yield
2.71 % 2.78 % 3.37 % 2.66 % 2.72 % 2.72 % 2.73 %
Dividend payout ratio
24.28 % 26.09 % 25.68 % 18.79 % 22.69 % 25.16 % 22.35 %
Average shares outstanding - basic
5,851,422 5,879,025 5,951,838 6,136,648 6,297,071 5,865,147 6,331,356
Average shares outstanding - diluted
5,860,098 5,889,836 5,975,333 6,157,181 6,312,230 5,873,823 6,348,345
Period ending shares outstanding
5,810,351 5,873,565 5,888,737 6,054,083 6,215,511 5,810,351 6,215,511

Selected ratios

Return on average assets
1.25 % 1.17 % 1.41 % 1.51 % 1.30 % 1.21 % 1.26 %
Return on average equity
12.30 % 10.75 % 13.17 % 13.95 % 12.10 % 11.49 % 11.88 %
Return on average tangible common equity ^{(2) (4)}
14.02 % 12.13 % 14.85 % 15.71 % 13.65 % 13.03 % 13.41 %
Efficiency ⁽¹⁾
61.83 % 62.54 % 56.56 % 54.04 % 57.18 % 62.18 % 57.50 %
Equity to assets at period end
9.91 % 10.40 % 10.92 % 10.69 % 10.74 % 9.91 % 10.74 %
Noninterest expense to average assets
0.65 % 0.62 % 0.58 % 0.58 % 0.58 % 1.27 % 1.18 %

(Dollar amounts in thousands, except per share and share amounts, unaudited)
	For the Three Months Ended															For the Six Months Ended
	Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,			Jun 30,			Jun 30,
	2023			2023			2022			2022			2022			2023			2022
Per common share data
Net income per common share - basic	$	0.63		$	0.60		$	0.53		$	0.73		$	0.70		$	1.23		$	1.35
Net income per common share - diluted	$	0.63		$	0.60		$	0.53		$	0.73		$	0.70		$	1.23		$	1.35
Dividends declared per share	$	0.20		$	0.20		$	0.30		$	0.17		$	0.17		$	0.40		$	0.34
Book value per share (period end)	$	24.38		$	24.13		$	23.98		$	21.30		$	22.07		$	24.38		$	22.07
Tangible book value per share (period end) ^{(2) (3)}	$	19.02		$	19.29		$	19.19		$	18.48		$	19.26		$	19.02		$	19.26
Dividends declared	$	1,616		$	1,605		$	2,514		$	983		$	993		$	3,223		$	1,993
Dividend yield		2.99	%		2.89	%		4.34	%		2.49	%		2.71	%		3.01	%		2.72	%
Dividend payout ratio		31.74	%		32.78	%		71.79	%		23.13	%		24.28	%		32.27	%		25.16	%
Average shares outstanding - basic		8,088,793			8,138,771			6,593,616			5,792,773			5,851,422			8,113,645			5,865,147
Average shares outstanding - diluted		8,101,984			8,152,629			6,610,907			5,805,799			5,860,098			8,126,836			5,873,823
Period ending shares outstanding		8,088,793			8,088,793			8,245,235			5,767,803			5,810,351			8,088,793			5,810,351

Selected ratios
Return on average assets		1.17	%		1.16	%		0.97	%		1.32	%		1.25	%		1.16	%		1.21	%
Return on average equity		9.54	%		10.19	%		9.35	%		12.94	%		12.30	%		9.64	%		11.49	%
Return on average tangible common equity ^{(2) (4)}		11.76	%		12.77	%		11.13	%		14.79	%		14.02	%		11.92	%		13.03	%
Efficiency ⁽¹⁾		61.27	%		62.44	%		72.75	%		61.07	%		61.83	%		62.73	%		62.17	%
Equity to assets at period end		11.26	%		11.30	%		11.71	%		9.09	%		9.91	%		11.26	%		9.91	%
Noninterest expense to average assets		0.69	%		0.69	%		0.86	%		0.69	%		0.65	%		1.38	%		1.27	%

(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~~on the following page
(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						For the Three Months Ended															For the Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,			Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,			Jun 30,			Jun 30,
Yields	2022			2022			2021			2021			2021			2022			2021			2023			2023			2022			2022			2022			2023			2022
Interest-earning assets:
Loans receivable ⁽²⁾		4.66	%		4.53	%		4.61	%		4.74	%		4.43	%		4.60	%		4.45	%		5.96	%		5.45	%		5.11	%		4.78	%		4.66	%		5.71	%		4.60	%
Investment securities ⁽²⁾		3.76	%		3.41	%		3.30	%		3.37	%		3.47	%		3.59	%		3.60	%		4.08	%		4.11	%		3.83	%		3.90	%		3.76	%		4.08	%		3.59	%
Interest-earning deposits with other banks		0.77	%		0.23	%		0.20	%		0.21	%		0.18	%		0.48	%		0.19	%		3.98	%		3.46	%		3.42	%		2.06	%		0.77	%		3.71	%		0.48	%
Total interest-earning assets		4.28	%		4.06	%		4.07	%		4.20	%		4.05	%		4.17	%		4.08	%		5.69	%		5.22	%		4.88	%		4.55	%		4.28	%		5.46	%		4.17	%
Deposits:
Interest-bearing demand deposits		0.15	%		0.14	%		0.12	%		0.12	%		0.12	%		0.15	%		0.14	%		1.11	%		0.83	%		0.83	%		0.22	%		0.15	%		0.99	%		0.15	%
Money market deposits		0.49	%		0.47	%		0.47	%		0.46	%		0.46	%		0.48	%		0.47	%		2.21	%		1.52	%		1.00	%		0.46	%		0.49	%		1.89	%		0.48	%
Savings deposits		0.06	%		0.06	%		0.06	%		0.06	%		0.06	%		0.06	%		0.07	%		0.73	%		1.03	%		0.49	%		0.19	%		0.06	%		0.89	%		0.06	%
Certificates of deposit		0.83	%		0.87	%		0.90	%		1.08	%		1.19	%		0.85	%		1.24	%		2.35	%		1.71	%		1.30	%		0.96	%		0.83	%		2.04	%		0.85	%
Total interest-bearing deposits		0.36	%		0.37	%		0.36	%		0.41	%		0.46	%		0.36	%		0.50	%		1.60	%		1.28	%		0.87	%		0.43	%		0.36	%		1.44	%		0.36	%
Non-Deposit Funding:
Borrowings		2.51	%		2.16	%		2.09	%		2.11	%		2.18	%		2.34	%		2.16	%		5.26	%		4.78	%		4.25	%		2.94	%		2.51	%		5.10	%		2.34	%
Total interest-bearing liabilities		0.39	%		0.39	%		0.37	%		0.42	%		0.47	%		0.39	%		0.50	%		2.02	%		1.52	%		1.02	%		0.50	%		0.39	%		1.78	%		0.39	%
Cost of deposits		0.24	%		0.25	%		0.26	%		0.30	%		0.34	%		0.25	%		0.37	%		1.09	%		0.84	%		0.57	%		0.29	%		0.24	%		0.97	%		0.25	%
Cost of funds		0.27	%		0.27	%		0.27	%		0.31	%		0.35	%		0.27	%		0.38	%		1.43	%		1.02	%		0.68	%		0.34	%		0.27	%		1.23	%		0.27	%
Net interest margin ⁽¹⁾		4.02	%		3.80	%		3.82	%		3.91	%		3.72	%		3.91	%		3.71	%		4.34	%		4.26	%		4.23	%		4.23	%		4.02	%		4.30	%		3.91	%

(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%.

3440

Reconciliation of Common Stockholders' Equity to Tangible Common Equity	For the Period Ended										For the Period Ended
(Dollar amounts in thousands, unaudited)	June 30,		March 31,		December 31,		September 30,		June 30,		Jun 30,		Mar 31,		Dec 31,		Sep 30,		Jun 30,
	2022		2022		2021		2021		2021		2023		2023		2022		2022		2022

Stockholders' Equity (GAAP)	$	128,220	$	137,644	$	145,335	$	146,055	$	146,044	$	197,227	$	195,165	$	197,691	$	122,855	$	128,220
Less Goodwill and other intangibles		16,320		16,397		16,474		16,555		16,635		43,368		39,171		39,436		16,242		16,320
Tangible Common Equity (Non-GAAP)	$	111,900	$	121,247	$	128,861	$	129,500	$	129,409	$	153,859	$	155,994	$	158,255	$	106,613	$	111,900

Shares outstanding		5,810,351		5,873,565		5,888,737		6,054,083		6,215,511		8,088,793		8,088,793		8,245,235		5,767,803		5,810,351
Tangible book value per share (Non-GAAP)	$	19.26	$	20.64	$	21.88	$	21.39	$	20.82	$	19.02	$	19.29	$	19.19	$	18.48	$	19.26

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

	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,			Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,			Jun 30,			Jun 30,
	2022			2022			2021			2021			2021			2022			2021			2023			2023			2022			2022			2022			2023			2022

Average Stockholders' Equity (GAAP)	$	133,377		$	144,630		$	145,716		$	148,048		$	146,719		$	139,003		$	145,892		$	214,161		$	194,814		$	148,616		$	130,263		$	133,377		$	208,930		$	139,003
Less Average Goodwill and other intangibles		16,357			16,435			16,513			16,594			16,674			16,396			16,714			40,522			39,300			23,731			16,280			16,357			39,911			16,396
Average Tangible Common Equity (Non-GAAP)	$	117,020		$	128,195		$	129,203		$	131,454		$	130,045		$	122,607		$	129,178		$	173,639		$	155,514		$	124,885		$	113,983		$	117,020		$	169,019		$	122,607

Net income	$	4,089		$	3,833		$	4,837		$	5,204		$	4,425		$	7,922		$	8,592		$	5,092		$	4,897		$	4,896		$	3,502		$	4,249		$	9,989		$	7,922
Return on average tangible common equity (annualized) (Non-GAAP)		14.02	%		12.13	%		14.85	%		15.71	%		13.65	%		13.03	%		13.41	%		11.76	%		12.77	%		11.13	%		14.79	%		14.02	%		11.92	%		13.03	%

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

	June 30,		March 31,		December 31,			September 30,		June 30,		June 30,		June 30,		Jun 30,		Mar 31,		Dec 31,		Sep 30,		Jun 30,		Jun 30,		Jun 30,
	2022		2022		2021			2021		2021		2022		2021		2023		2023		2022		2022		2022		2023		2022

Net income	$	4,089	$	3,833	$	4,837		$	5,204	$	4,425	$	7,922	$	8,592	$	5,092	$	4,897	$	3,502	$	4,249	$	4,089	$	9,989	$	7,922
Add Income Taxes		787		772		1,027			1,174		968		1,559		1,864		986		989		651		1,010		787		1,975		1,559
Add Provision for loan losses		-		-		(200	)		-		200		-		900
Add Provision for credit losses																	814		507		-		-		-		1,321		-
PTPP	$	4,876	$	4,605	$	5,664		$	6,378	$	5,593	$	9,481	$	11,356	$	6,892	$	6,393	$	4,153	$	5,259	$	4,876	$	13,285	$	9,481

General. The Company’s total assets on June 30, ~~2022~~2023 were ~~$1.29~~$1.75 billion, ~~a decrease~~an increase of ~~$37.6~~$63.8 million from December 31, ~~2021.~~2022. For the same period, net loans increased by $50.4 million, cash and cash equivalents ~~decreased~~increased by ~~$40.3~~$5.3 million, and ~~net loans decreased~~investment securities increased by ~~$3.9~~$2.2 million. ~~These decreases were partially offset by an increase of $6.3 million in other assets due to an increase in deferred tax assets.~~ Stockholders’ equity decreased by ~~$17.1 million,~~$464,000, or ~~11.8%,~~0.2% primarily as a ~~result of a decrease in accumulated other comprehensive income. This was the~~ result of an increase in ~~the unrealized loss on the available-for-sale investment portfolio during the six-month period.~~treasury stock. Excluding the ~~decrease~~increase in ~~accumulated other comprehensive income,~~treasury stock, total stockholders’ equity increased by ~~$3.9~~$4.0 million.

Cash and cash equivalents. Cash and cash equivalents ~~decreased $40.3~~increased $5.3 million to ~~$79.2~~$59.1 million on June 30, ~~2022,~~2023, from ~~$119.5~~$53.8 million on December 31, ~~2021.~~2022. The ~~decrease~~increase in cash and cash equivalents is primarily ~~a result of security purchases~~due to an increase in deposits and ~~a decrease in deposits,~~borrowings, and partially offset by ~~the forgiveness of PPP~~an increase in loans. 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, and repayments of borrowed and brokered funds. ~~Although cash decreased during the six-month period, cash still remains elevated.~~

Investment securities. Management's objective in structuring the portfolio is to maintain liquidity while providing an acceptable rate of return without sacrificing asset quality. Available-for-sale and equity investment securities on June 30, ~~2022,~~2023, totaled ~~$172.0~~$167.9 million, an increase of ~~$1.8~~$2.0 million, or ~~1.0%~~1.2%, from ~~$170.2~~$165.9 million on December 31, ~~2021.~~2022. Securities purchased were ~~$32.0~~$2.0 million, and there were no sales of securities for the six months ended June 30, ~~2022.~~2023. During this period, the Company recorded repayments, calls, and maturities of ~~$3.3~~$1.4 million and a decrease in the net unrealized holding loss through AOCI of ~~$21.1~~$1.5 million. The Company recorded ~~$39,000~~$205,000 in losses on equity securities during the six months ended June 30, ~~2022,~~2023, on the Company’s Consolidated Statement of Income and Consolidated Statement of Cash Flows. The loss on equity securities is the result of fair value marks of the equity securities held during these six months.

On June 30, ~~2022,~~2023, the Company held ~~$31.3~~$31.5 million at fair value of subordinated debt in other banks, as compared to ~~$32.5~~$30.2 million on December 31, ~~2021.~~2022. The average yield on this portfolio was ~~4.83%~~5.00% on June 30, ~~2022,~~2023, as compared to ~~4.86%~~4.79% on December 31, ~~2021.~~2022.

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 incidences 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 ~~77%~~81% of the overall portfolio. These investments have historically proven to have extremely low credit ~~risk.~~risk

Loans receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers’ businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well dispersed geographically. Net loans receivable ~~decreased $3.9~~increased $50.4 million, or ~~0.4%~~3.77%, to ~~$963.4 million~~$1.39 billion as of June 30, ~~2022.~~2023. The following table summarizes fluctuation within the primary segments of the loan portfolio (in thousands):

June 30,

December 31,

2022

2021

$ change

% change

% of loans

Commercial real estate:

Owner occupied
$ 120,771 $ 111,470 9,301 8.3 % 12.3 %
Non-owner occupied
288,334 283,618 4,716 1.7 % 29.5 %
Multifamily
29,152 31,189 (2,037 ) -6.5 % 3.0 %
Residential real estate
246,453 240,089 6,364 2.7 % 25.2 %
Commercial and industrial
137,398 148,812 (11,414 ) -7.7 % 14.0 %
Home equity lines of credit
111,730 104,355 7,375 7.1 % 11.4 %
Construction and Other
35,988 54,148 (18,160 ) -33.5 % 3.7 %
Consumer installment
8,171 8,010 161 2.0 % 0.9 %
Total loans
977,997 981,691 (3,694 ) -0.4 % 100.0 %
Less: Allowance for loan and lease losses
(14,550 ) (14,342 ) 208 1.5 %

Net loans
$ 963,447 $ 967,349 (3,902 ) -0.4 %

The decrease in the commercial and industrial portfolio includes the forgiveness of PPP loans of $31.5 million during the six months ended June 30, 2022. Excluding the impact of PPP forgiveness, total loans increased by $27.8 million or 6.1% annualized from December 31, 2021.

	June 30,			December 31,
	2023			2022			$ change			% change			% of loans

Commercial real estate:
Owner occupied	$	187,919		$	191,748		$	(3,829	)		-2.0	%		13.3	%
Non-owner occupied		385,846			380,580			5,266			1.4	%		27.4	%
Multifamily		58,579			58,251			328			0.6	%		4.2	%
Residential real estate		312,196			296,308			15,888			5.4	%		22.2	%
Commercial and industrial		209,349			195,602			13,747			7.0	%		14.9	%
Home equity lines of credit		126,894			128,065			(1,171	)		-0.9	%		9.0	%
Construction and Other		118,851			94,199			24,652			26.2	%		8.4	%
Consumer installment		9,801			8,119			1,682			20.7	%		0.7	%
Total loans		1,409,435			1,352,872			56,563			4.2	%		100.0	%
Less: Allowance for credit losses		(20,591	)		(14,438	)		6,153			42.6	%

Net loans	$	1,388,844		$	1,338,434		$	50,410			3.8	%

The Company’s Mortgage Banking operation generates loans for sale to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). and the FHLB. There were no$171,000 in loans held for sale on June 30, ~~2022, a decrease of $1.1 million from~~2023, and no loans held for sale at December 31, ~~2021. This decrease is the result of decreased demand due to fewer refinance opportunities and increased holdings of residential real estate loans for investment.~~2022. The Company recorded proceeds from the sale of ~~$1.4~~$2.4 million of these loans for ~~$21,000~~$29,000 in ~~gains~~gain on the sale of loans as of June 30, ~~2022,~~2023, 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. According to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions that have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions that are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management concerning their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans. On June 30, ~~2022,~~2023, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent ~~244.0%~~286.8% of total risk-based capital. Construction, land, and land development loans represent ~~24.8%~~60.7% 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 for its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows due to interest rate increases and declines in net operating income. The primary risk elements with respect to our commercial loans are the financial condition of the borrower, sufficiency of collateral and timeliness of scheduled payments. We have a policy of reviewing periodic financial statements from commercial loan customers and have a disciplined and formalized review of the existence of collateral and its value. 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, in which the Board of Directors has established internal minimum targets for regulatory capital ratios that are more than well-capitalized ratios.

The Company opted not to phase in, over three years, the effects of the initial CECL entry to equity for the implementation of ACS 326, recorded on January 1, 2023. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of June 30, 2023.

The Company monitors daily fluctuations in unused commitments as a means of identifying ~~potentially~~potential material drawdowns on existing lines of credit. On June 30, ~~2022,~~2023, unused line of credit commitments ~~decreased~~increased by ~~$2.8~~$12.8 million, or ~~1.0%~~2.88%, from December 31, ~~2021.~~2022. The commercial unused line of credit commitments was $316.7 million as of June 30, 2023, compared to $309.7 million on December 31, 2022.

Allowance for ~~Loan and Lease~~Credit Losses and Asset Quality. The ~~ALLL~~ACL increased by ~~$208,000,~~$6.2 million, or ~~1.5%~~42.62%, to ~~$14.6~~$20.6 million on June 30, ~~2022,~~2023, from ~~$14.3~~$14.4 million on December 31, ~~2021.~~2022. The increase was primarily due to the adoption of CECL. On January 1, 2023, the reserve for credit losses increased by $5.4 million. For the ~~three~~six months ended June 30, ~~2022,~~2023, net loan recoveries totaled ~~$58,000,~~$103,000, or ~~(0.02)%~~7.46% of average loans, annualized, compared to ~~net charge-offs (recoveries) of $122,000,~~$208,000 or ~~0.05%~~(0.02%) of average loans, annualized, for the same period in ~~2021. No~~2022. The on balance sheet allocation for provision was needed during the three or six months ended June 30, 2022, to maintain the allowance for loan and lease losses. For the six months ended June 30, 2022, loan net recoveries totaled $208,000, or (0.04)% loans, annualized, compared to net charge-offs of $159,000, or 0.03% of average loans, annualized, for the same period in 2021.$540,000. The ratio of the allowance for ~~loan and lease~~credit losses to nonperforming loans was ~~311.56%~~289.4% as of June 30, ~~2022,~~2023, compared to ~~182.99%~~311.6% for the same period in the prior year. The allowance for ~~loan and lease~~credit losses to total loans ratio ~~increased~~decreased from ~~1.46% as of December 31, 2021, to~~ 1.49% as of June 30, ~~2022. The increase in the ALLL~~2022, to ~~loans ratio resulted from a decrease in loan balances period over period. While the prior period provision was primarily attributable to the pandemic, the lack~~1.46% as of ~~provision for this year was impacted by credit quality and loan balance decreases.~~June 30, 2023.

Management analyzes the adequacy of the allowance for ~~loan and lease~~credit 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~~credit losses is a significant estimate that is particularly susceptible to changes in the near term. Risks that may impact our loan portfolio include the weakened economic outlook exacerbated by the current hostilities in Ukraine and the resulting increased uncertainty characterized by persistent inflation. The direct impacts of the pandemic and related economic disruptions which previously dominated our risk analysis have lessened. Geopolitical events and persistently high inflation with weakening growth prospects raise the potential for adverse impacts on the U.S. economy. Increasing interest rates could potentially impact the valuations of assets that collateralize our loans. Recent market liquidity events have added uncertainty and the Company is concerned about the impact of tighter credit conditions on the economy and the effect that may have on future economic growth. Management’s analysis includes a review of all loans designated as ~~impaired,~~individually analyzed, 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~~credit losses. Future additions or reductions to the allowance for ~~loan and lease~~credit 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~~credit losses allocated to these types of loans. Management believes the allowance for ~~loan and lease~~credit losses is appropriately stated on June 30, ~~2022.~~2023. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for ~~loan and lease~~credit losses is considered a critical accounting policy.

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

	For the three months ended June 30,																For the three months ended June 30,
	2022								2021										2023								2022
	Average Loan Balance		Net charge-offs (recoveries)			Net charge-offs (recoveries) to average loans			Average Loan Balance		Net charge-offs (recoveries)			Net charge-offs (recoveries) to average loans			Average Loan Balance		Net charge- offs (recoveries)			Net charge- offs (recoveries) to average loans			Average Loan Balance		Net charge- offs (recoveries)			Net charge- offs (recoveries) to average loans
(Dollars in Thousands)
Type of Loans:
Commercial real estate:
Owner occupied	$	116,337	$	(2	)		(0.01	%)	$	106,941	$	(41	)		(0.15	%)	$	187,316	$	45			0.10	%	$	116,337	$	(2	)		(0.01	)%
Non-owner occupied		288,945		-			0.00			304,084		263			0.35			391,187		-			0.00	%		288,945		-			0.00	%
Multifamily		29,058		-			0.00			36,923		-			0.00			61,408		-			0.00	%		29,058		-			0.00	%
Residential real estate		243,832		-			0.00			227,785		(1	)		(0.00	)		310,058		108			0.14	%		243,832		-			0.00	%
Commercial and industrial		133,572		(59	)		(0.18	)		221,321		(32	)		(0.06	)		202,756		(3	)		(0.01	)%		133,572		(59	)		(0.18	)%
Home equity lines of credit		108,230		-			0.00			109,439		(44	)		(0.16	)		127,081		-			0.00	%		108,230		-			0.00	%
Construction and other		42,760		-			0.00			63,513		(23	)		(0.14	)		111,433		-			0.00	%		42,760		-			0.00	%
Consumer installment		8,086		3			0.15			8,859		-			0.00			8,833		(39	)		(1.77	)%		8,086		3			0.15	%

Total	$	970,820	$	(58	)		(0.02	%)	$	1,078,866	$	122			0.05	%	$	1,400,074	$	111			0.03	%	$	970,820	$	(58	)		(0.02	)%

3743

	For the six months ended June 30,																For the six months ended June 30,
	2022								2021								2023								2022
	Average Loan Balance		Net charge-offs (recoveries)			Net charge-offs (recoveries) to average loans			Average Loan Balance		Net charge-offs (recoveries)			Net charge-offs (recoveries) to average loans			Average Loan Balance		Net charge-offs (recoveries)			Net charge-offs (recoveries) to average loans			Average Loan Balance		Net charge-offs			Net charge-offs (recoveries) to average loans
(Dollars in Thousands)
Type of Loans:
Commercial real estate:
Owner occupied	$	115,823	$	(3	)		(0.01	%)	$	107,526	$	(43	)		(0.08	%)	$	184,693	$	43			0.05	%	$	115,823	$	(3	)		(0.01	)%
Non-owner occupied		285,244		-			0.00			309,979		263			0.17			385,710		-			0.00			285,244		-			0.00
Multifamily		30,093		-			0.00			37,621		-			0.00			60,548		-			0.00			30,093		-			0.00
Residential real estate		242,648		(27	)		(0.02	)		233,386		24			0.02			305,717		108			0.07			242,648		(27	)		(0.02	)
Commercial and industrial		142,739		(178	)		(0.25	)		218,489		(51	)		(0.05	)		199,917		40			0.04			142,739		(178	)		(0.25	)
Home equity lines of credit		107,766		25			0.05			111,228		(52	)		(0.09	)		125,302		(70	)		(0.11	)		107,766		25			0.05
Construction and other		44,953		-			0.00			63,537		(28	)		(0.09	)		109,873		-			0.00			44,953		-			0.00
Consumer installment		8,070		(25	)		(0.62	)		9,352		46			0.98			8,710		(18	)		(0.42	)		8,070		(25	)		(0.62	)

Total	$	977,336	$	(208	)		(0.04	%)	$	1,091,119	$	159			0.03	%	$	1,380,470	$	103			0.02	%	$	977,336	$	(208	)		(0.04	)%

Goodwill. The carrying value of goodwill was ~~$15.1~~$36.2 million at June 30, ~~2022,~~2023, and $31.7 million December 31, ~~2021.~~2022. The Company performs a periodic quantitative analysis of goodwill using multiple approaches. The primary methodology is the discounted cash flow approach, while also considering a market approach of comparing multiples of similar public companies as well as market price with control premiums.

Each of the valuation methods used by the Company requires significant assumptions. Depending on the specific method, assumptions are made regarding growth rates, discount rates for cash flows, control premiums, and selected multiples. Changes to any of the assumptions could result in significantly different results. ~~Based on~~Middlefield Bank did not recognize any impairment during the most recent analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired. The company also completed a qualitative assessment of goodwill as of September 30, 2021, with no resulting goodwill impairment. There have been no triggering events since the goodwill analysis as of September 30, 2021, and therefore, management has determined there is no goodwill impairment as ofthree or six month periods ended June 30, ~~2022.~~2023.

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 the 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 until doubt about collectability ceases.

	Asset Quality History						Asset Quality History

(Dollar amounts in thousands)	June 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022

Nonperforming loans	$	4,670		$	4,859		$	7,116		$	2,111
Other real estate owned		6,792			6,992			5,792			5,821

Nonperforming assets	$	11,462		$	11,851		$	12,908		$	7,932

Allowance for loan and lease losses		14,550			14,342
Allowance for credit losses							$	20,591		$	14,438

Ratios:
Nonperforming loans to total loans		0.48	%		0.49	%		0.50	%		0.16	%
Nonperforming assets to total assets		0.89	%		0.89	%		0.74	%		0.47	%
Allowance for loan and lease losses to total loans		1.49	%		1.46	%
Allowance for loan and lease losses to nonperforming loans		311.56	%		295.16	%
Allowance for credit losses to total loans								1.46	%		1.07	%
Allowance for credit losses to nonperforming loans								289.36	%		683.94	%


Total loans		977,997			981,691		$	1,409,435		$	1,352,872
Total assets		1,293,377			1,331,006		$	1,751,507		$	1,687,682

(a)

The allowance for credit losses under CECL method is used for the period ended June 30, 2023 while periods use the incurred loss methodology

Nonperforming loans exclude TDRs that are performing under their terms over a prescribed period. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 23 TDRs accruing interest with a balance of $2.8 million as of June 30, 2022. 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 comply 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 ~~$4.2~~$6.6 million and $2.1 million as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

A major factor in determining the appropriateness of the allowance for ~~loan and lease~~credit losses is the type of collateral that secures the loans. Of the total nonperforming loans on June 30, ~~2022, 91.2%~~2023, 93.1% 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 objective of the Company is to minimize ~~the~~ future loss exposure.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling ~~$1.17~~$1.43 billion or ~~98.9%~~93.0% of the Company’s total average funding sources at June 30, ~~2022.~~2023. Total deposits ~~decreased $19.4~~increased $29.6 million on June 30, ~~2022,~~2023, from ~~$1.17~~$1.40 billion on December 31, ~~2021.~~2022. The following table summarizes fluctuation within the primary segments of the deposit portfolio (in thousands):

	June 30,		December 31,								June 30,		December 31,
	2022		2021		$ change			% change			2023		2022		$ change			% change

Noninterest-bearing demand	$	379,872	$	334,171	$	45,701			13.7	%	$	441,102	$	503,907	$	(62,805	)		-12.5	%
Interest-bearing demand		154,788		196,308		(41,520	)		-21.2	%		229,633		164,677		64,956			39.4	%
Money market		185,494		177,281		8,213			4.6	%		241,537		187,498		54,039			28.8	%
Savings		252,179		260,125		(7,946	)		-3.1	%		231,508		307,917		(76,409	)		-24.8	%
Time		174,833		198,725		(23,892	)		-12.0	%		287,861		238,020		49,841			20.9	%
Total deposits	$	1,147,166	$	1,166,610	$	(19,444	)		-1.7	%	$	1,431,641	$	1,402,019	$	29,622			2.1	%

The Company uses specific non-core funding instruments to grow the balance sheet and maintain liquidity. These deposits, either from a broker or a listing service, were ~~$5.1~~$53.5 million on June 30, ~~2022~~2023 and ~~$15.1~~$5.0 million on December 31, ~~2021.~~2022.

Deposit balances in excess of the $250,000 FDIC insured limit totaled approximately $359.2 million, or 25.1% of total deposits, at June 30, 2023 and approximately $346.8 million, or 24.7% of total deposits, at December 31, 2022.

States and political subdivisions in the U.S. deposits (“Public funds”) compared to total deposits were $156.1 million, or 10.9% at June 30, 2023 and $169.5 million, or 12.1% at December 31, 2022.

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 advances from the ~~Federal Home Loan Bank of Cincinnati (the “FHLB”),~~FHLB, subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings increased to $100.0 million as of June 30, 2023. Other borrowings were relatively unchanged at ~~$12.9~~$12.0 million as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Stockholders’ equity. Stockholders’ equity decreased ~~$17.1 million,~~$464,000, or ~~11.8%~~0.2%, to ~~$128.2~~$197.2 million at June 30, ~~2022~~2023 from ~~$145.3~~$197.7 million at December 31, ~~2021.~~2022. This decrease was ~~mostly~~primarily the result of ~~the $21.1 million decrease in accumulated other comprehensive income due to fair value adjustments of available-for-sale securities, and the $2.4~~a $4.5 million increase in treasury stock due to the Company repurchasing ~~95,364~~164,221 of its outstanding shares during the six months ended June 30, ~~2022.~~2023, and $3.2 million decrease due to cash dividends paid. These changes were partially offset by ~~an increase~~$10.0 million in ~~retained earnings of $5.9 million due to the year-to-date~~ net income and ~~dividends paid.~~$1.5 million in accumulated other comprehensive income.

The Company's tangible book value per share, which is a non-GAAP financial measure, was $19.02 at June 30, 2023 compared to 19.26 at June 30, 2022 and 19.19 at December 31, 2022. Tangible equity has been impacted by the unrealized losses of the Company’s available-for-sale investment securities portfolio. The market value decline was a result of tightening of monetary policy by the Federal Reserve Board beginning in March of 2022. Net unrealized losses from available-for-sale investment securities were $26.1 million as of June 30, 2023, compared to net unrealized losses of $22.3 million at June 30, 2022, and net unrealized losses of $28.0 million at December 31, 2022.

RESULTS OF OPERATIONS

General.Net income for the three months ended June 30, ~~2022,~~2023, was ~~$4.1~~$5.1 million, a ~~$336,000,~~$1.0 million, or ~~7.6%~~24.5%, ~~decrease~~increase from the amount earned during the same period in ~~2021.~~2022. Diluted earnings per share for the quarter was ~~unchanged at $0.70~~$0.63 for the three months ended June 30, ~~2022~~2023 and $0.70 for the same period in ~~2021.~~2022. Net income for the six months ended June 30, ~~2022,~~2023, was ~~$7.9~~$10.0 million, a ~~$670,000,~~$2.1 million, or ~~7.8%~~26.1%, ~~decrease~~increase from the amount earned during the same period in ~~2021.~~2022. Diluted earnings per share ~~were unchanged at $1.35~~ for ~~these~~the quarter was $1.23 for the six months ended June 30, ~~2022~~2023 and ~~the same period in 2021.~~

~~The Company’s annualized return on average assets (“ROA”) and return on average equity (“ROE”) for the quarter were 1.25% and 12.30%, respectively, compared with 1.30% and 12.10%~~$1.35 for the same period in ~~2021. The Company’s ROA and ROE for the six months were 1.21% and 11.49%, respectively, compared with 1.26% and 11.88% for the same period in 2021.~~2022.

3945

Net interest ~~income.~~ 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, 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, ~~2022,~~2023, totaled ~~$12.0~~$17.4 million, an increase of ~~1.5%~~44.3% from that reported in the comparable period of ~~2021.~~2022. The net interest margin was ~~4.02%~~4.34% for the ~~second quarter of 2022,~~three months ended June 30, 2023, an increase ~~from the 3.72% reported~~of 32 basis points for the same ~~quarter~~period of ~~2021.~~2022. The increase in the net interest margin is attributable to a decrease in the average balance of certificates of deposit of $49.2 million, coupled with a 36 basis point decrease in the rate paid on those deposits. Further contributing to the improvement in net interest margin was an increase in the average balance of ~~investments~~loans of ~~$40.8~~$429.3 million, coupled with a 29130 basis point increase in the yield earned on those ~~investments. These fluctuations were~~loans. This was partially offset by a ~~$108.0~~$174.5 million ~~decrease~~increase in the average balance of ~~loans, partially offset by~~interest-bearing deposits, coupled with a 23487 basis point increase in the ~~yield earned~~rate paid on those ~~loans due to PPP forgiveness.~~deposits.

Net interest income for the six months ended June 30, ~~2022,~~2023, totaled ~~$23.5~~$33.9 million, ~~a decrease~~an increase of ~~0.9%~~44.1% from that reported in the comparable period of ~~2021.~~2022. The net interest margin was ~~3.91%~~4.30% for the first six months ~~ended June 30, 2022,~~of 2023, an increase ~~from the 3.71% reported~~of 39 basis points for the same period of ~~2021.~~2022. The increase in the net interest margin is attributable to a decrease in the average balance of certificates of deposit of $62.5 million, coupled with a 39 basis point decrease in the rate paid on those deposits. Further contributing to the improvement in net interest margin was an increase in the average balance of ~~investments~~loans of ~~$47.6 million. These fluctuations were partially offset by~~$403.1 million, coupled with a ~~$113.8 million decrease in the average balance of loans, partially offset by a 15~~111 basis point increase in the yield earned on those ~~loans due to PPP forgiveness.~~loans. This was partially offset by a $156.8 million increase in the average balance of interest-bearing deposits, coupled with a 427 basis point increase in the rate paid on those deposits.

The Company is in an asset-sensitive position. A rising interest rate environment should lead to an expansion of net interest margin as the Company’s interest-earning assets reprice faster than its interest-bearing liabilities. Much of the Company’s asset sensitivity is due to commercial loans that have variable interest rates. As part of the Company’s strategy, floor rates are used to protect the Company’s net interest margin in a declining interest rate environment. As of June 30,^th, 2023, nearly all loan contracts with floor rates exceed their contractual floor rates and are repricing accordingly with rising interest rates. Although the Company ~~expects to benefit~~has seen benefits from athe rising interest rate environment, deposit pricing is expected to increase in order to maintain liquidity. Please refer to Item 3, Quantitative and Qualitative Disclosures about MarketRisk,, for further discussion on asset and liability management and interest rate sensitivity.

Interest and dividend income.Interest and dividend income ~~decreased $118,000,~~increased $10.0 million or ~~0.9%~~78.2%, for the three months ended June 30, ~~2022,~~2023, compared to the same period in the prior year. This is attributable to a ~~decrease~~$9.5 million increase in interest and fees on loans, ~~of $617,000 and is partially offset by~~$295,000 increase in interest-earning deposits as well as an increase of $112,000 in ~~tax-exempt~~ interest on ~~investment securities of $353,000.~~federal funds sold. The average balance of investment securities ~~increased~~decreased by ~~$40.8~~$7.2 million, or ~~30.2%~~4.11%, and the ~~3.76%~~4.08% yield on the investment portfolio increased by 2932 basis points, from ~~3.47%~~3.76%, for the same period in the prior year. ~~The decrease in the average loan balance for the three months ended June 30, 2022, is due in part to the forgiveness of PPP loans, from which the related gross deferred fee income was $509,000.~~

Interest and dividend income ~~decreased by $997,000,~~increased $18.1 million or ~~3.8%~~72.0%, for the six months ended June 30, ~~2022,~~2023, compared to the same period in the prior year. This is attributable to a ~~decrease~~$16.8 million increase in interest and fees on loans, ~~of $1.8 million, partially offset by~~$522,000 increase in interest-earning deposits as well as an increase of $362,000 in interest on ~~investment securities of $684,000.~~federal fund sold. The average balance of investment securities decreased by $4.7 million, or 2.74%, and the 4.08% yield on the investment portfolio increased by ~~$47.6 million, or 37.8%~~49 basis points, from 3.59%, ~~while the yield was relatively flat at 3.59% for the six months ended June 30, 2022 compared to 3.60%~~ for the same period ~~2021. The change~~ in the ~~average loan balance for the six months ended June 30, 2022, is due in part to the forgiveness of PPP loans, from which the related gross deferred fee income was $1.2 million.~~prior year.

Interest expense.Interest expense ~~decreased~~increased by ~~$291,000,~~$4.7 million, or ~~26.9%~~594.1%, for the three months ended June 30, ~~2022,~~2023, compared to the same period in the prior year. This ~~decrease~~ is attributable to an increase in deposit expense of $3.1 million and by a ~~decrease~~$1.6 million increase in short-term and other borrowings expenses. The increase in deposit expense is attributable to an increase in the average balance of ~~certificates of~~ deposits of ~~$49.2~~$250.3 million, or ~~21.0%~~21.5%. This ~~decrease~~increase is further attributable to ~~decreases~~an increase of 36152 basis points in the rates paid on certificates of deposits. The increase in short-term borrowing expenses is a result of the Bank taking on FHLB advances during the first quarter of 2023, while there were no short-term borrowing expenses during the same period in 2022.

Interest expense ~~decreased~~increased by ~~$776,000~~$7.7 million, or ~~32.9%~~485.6%, for the six months ended June 30, ~~2022,~~2023, compared to the same period in the prior year. This ~~decrease~~ is attributable to an increase in deposit expense of $5.4 million and by a ~~decrease~~$2.3 million increase in short-term and other borrowings expense. The increase in deposit expense is attributable to an increase in the average balance of ~~certificates of deposits and interest-bearing demand~~ deposits of ~~$62.5~~$156.8 million, ~~and $40.0 million, respectively.~~or 22.3%. This ~~decrease~~increase is further attributable to ~~decreases~~increases of 39119 basis points in the rates paid on certificates of deposits. The increase in short-term borrowings expense is a result of the Bank taking on FHLB advances during the six months ended June 30, 2023, while there were no short-term borrowing during the same period in 2022.

Provision for ~~loan losses.~~credit losses. The provision for ~~loan~~credit losses represents the charge to income necessary to adjust the allowance for ~~loan and lease~~credit losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter, management reviews estimated probable ~~incurred~~expected credit losses in the loan portfolio. Based on this review, ~~no provision~~$814,000 was recorded for the three ~~or six~~ months ended June 30, ~~2022,~~2023, including a ~~decrease~~provision for credit losses on loans of ~~$200,000 from the quarter ended June 30, 2021~~$540,000 and a ~~decrease~~reserve for unfunded commitments of ~~$900,000 from~~$274,000. There was no provision for the ~~six~~three months ended June 30, ~~2021. While the prior period provision was mostly attributable to the pandemic, the lack of~~2022. The provision for ~~this quarter~~credit losses for the three months ended June 30, 2023 was ~~impacted~~primarily driven by ~~credit quality~~loan growth and ~~low loan growth.~~ an increase in unfunded commitments.

The ~~ALLL~~ACL to total loans for the quarter ended June 30, ~~2022,~~2023, was ~~1.49%~~1.46%, compared to ~~1.34%~~1.49% during the same period in the prior year. ~~The increase in the ALLL to loans ratio resulted from a decrease in loan balances period over period.~~ The Company remains confident in its conservative and disciplined approach to credit and risk management.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively assisted its customers with applications for resources through the program. On June 30, 2022, the Company carried $1.4 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.

Noninterest income.Noninterest income ~~decreased~~increased by ~~$249,000,~~$209,000, or ~~15.3%~~15.1%, for the three months ended June 30, ~~2022,~~2023, over the comparable ~~2021~~2022 period. This ~~decrease~~increase was the result of a ~~$203,000 decrease~~$112,000 increase in ~~gains~~earnings on ~~sale of loans,~~bank-owned life insurance, a $77,000 increase in rental income from an OREO property, a $22,000 increase in other income, and a ~~$112,000 decrease~~$21,000 increase in ~~gain on equity securities,~~investment services revenue. These increases were partially offset by a ~~$100,000 increase~~$16,000 decrease in service charges on deposit accounts. The decrease in ~~gains on sale of loans resulted from the decline in demand for residential refinances. The decrease in gains~~losses on equity securities was the result of fair value marks of the equity securities held during these three months. The increase in service charges on deposit accounts was primarily due to an increase in checking account fees as a result of a new checking account program offered to customers and a slight increase in cash management fees relating to cannabis-related deposit business.

Noninterest income ~~decreased $1.1 million,~~increased by $484,000, or ~~27.6%~~17.4%, ~~during~~for the six months ended June 30, ~~2022,~~2023, over the comparable ~~2021~~2022 period. This ~~decrease~~$484,000 increase was the result of a ~~$792,000 decrease in gains on sale of loans, a $160,000 decrease in gain on equity securities, and a $118,000 decrease~~$206,000 increase in earnings on bank-owned life insurance, a $179,000 increase in rental income from an OREO property, a $134,000 increase in other income, and a $65,000 increase in investment services revenue. These increases were partially offset by a ~~$227,000 increase in service charges on deposit accounts. The~~$166,000 decrease in ~~gains~~loss on ~~sale of loans resulted from the decline in demand for residential refinances.~~equity securities. The decrease in gains on equity securities was the result of fair value marks of the equity securities held during these six months. The decrease in earnings on bank-owned life insurance is due to the prior year payout on a claim. The increase in service charges on deposit accounts was primarily due to an increase in checking account fees as a result of a new checking account program offered to customers and a slight increase in cash management fees relating to cannabis-related deposit business.

Noninterest expense. Noninterest expense of ~~$8.5~~$12.1 million for the second quarter of ~~2022~~2023 was ~~8.1%~~41.2%, or ~~$641,000,~~$3.5 million higher than the second quarter of ~~2021. Noninterest expense of $16.8~~2022, primarily due to the $2.2 million ~~for the six months ended June 30, 2022, was 3.6%, or $590,000, higher than the same period in 2021. The~~ increase for both the three and six-month periods was primarily the result of a $579,000 increase in merger-related costs, a $200,000 write-down of a foreclosed property, along with an increase in data processing costs. These increases were offset by a decrease in salaries and employee benefits, a $541,000 increase in other expense, ~~partially~~a $315,000 increase in data processing and information technology costs, and a $188,000 increase in core deposit intangible amortization. The Company also recognized $63,000 in gross OREO expenses in 2023. Primarily the increases in noninterest expense were attributable to the merger.

Noninterest expense of $23.8 million for the first half of 2023 was 41.9%, or $7.0 million higher than the first half of 2022, primarily due to ~~share-based compensation recoveries due~~the $3.7 million increase in salaries and employee benefits, a $1.1 increase in other expense, a $542,000 increase in data processing and information technology costs, and a $444,000 increase in advertising expense. The Company also recognized $195,000 in gross OREO expenses in 2023.

Although to ~~a decrease~~date, the Bank has not experienced any material losses related to cyber-attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the ~~market valuation~~future. On April 12, 2023, a cyber-attack resulted in a disruption to the computer systems of the ~~plans. Please refer~~Bank. The Bank took immediate action to ~~Note 3~~remediate the security vulnerability and retained a cybersecurity firm to investigate the nature and scope of the incident. The majority of the Bank’s products and services were operational throughout and since that date, restoration efforts have been completed and normal operations have resumed. The Bank has put additional security measures in place and continuously monitors for ~~more information~~suspicious activity. The investigation is ongoing.

The Company does not expect this incident to have a material impact on ~~share-based compensation plans.~~its business operations or financial results.

Provision for income taxes. The Company recognized ~~$787,000~~$986,000 in income tax expense, which reflected an effective tax rate of ~~16.1%~~16.2% for the three months ended June 30, ~~2022,~~2023, as compared to ~~$968,000~~$787,000 with an effective tax rate of ~~17.9%~~16.1% for the comparable ~~2021~~2022 period. The Company recognized ~~$1.6~~$2.0 million in income tax expense, which reflected an effective tax rate of ~~16.4%~~16.5% for the six months ended June 30, ~~2022,~~2023, as compared to ~~$1.9~~$1.6 million with an effective tax rate of ~~17.8%~~16.4% for the comparable ~~2021~~2022 period. ~~The decrease in the effective tax rate is due to an increase in tax-exempt income generated from the investment portfolio.~~

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~~credit 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,
	2022							2021								2023								2022

	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⁾	$	970,820	$	11,268		4.66	%	$	1,078,866	$	11,885		4.43	%		$	1,400,074		$	20,762		5.96	%	$	970,820	$	11,268		4.66	%
Investment securities ⁽³⁾		176,138		1,397		3.76	%		135,338		1,012		3.47	%			168,890			1,457		4.08	%		176,138		1,397		3.76	%
Interest-earning deposits with other banks ⁽⁴⁾		79,924		153		0.77	%		85,245		39		0.18	%			62,296			618		3.98	%		79,924		153		0.77	%
Total interest-earning assets		1,226,882		12,818		4.28	%		1,299,449		12,936		4.05	%			1,631,260			22,837		5.69	%		1,226,882		12,818		4.28	%
Noninterest-earning assets		89,555							70,692								114,120								89,555
Total assets	$	1,316,437						$	1,370,141							$	1,745,380							$	1,316,437
Interest-bearing liabilities:
Interest-bearing demand deposits	$	159,779	$	59		0.15	%	$	207,080	$	64		0.12	%			214,045			595		1.11	%		159,779		59		0.15	%
Money market deposits		185,711		228		0.49	%		185,728		212		0.46	%			234,497			1,294		2.21	%		185,711		228		0.49	%
Savings deposits		260,226		40		0.06	%		253,612		38		0.06	%			263,587			478		0.73	%		260,226		40		0.06	%
Certificates of deposit		184,748		382		0.83	%		233,930		696		1.19	%			252,785			1,484		2.35	%		184,748		382		0.83	%
Short-term borrowings		-		-		-			227		-		0.00	%			112,349			1,462		5.22	%		-		-		0.00	%
Other borrowings		12,945		81		2.51	%		13,062		71		2.18	%			11,992			170		5.69	%		12,945		81		2.51	%
Total interest-bearing liabilities		803,409		790		0.39	%		893,639		1,081		0.49	%		$	1,089,255		$	5,483		2.02	%	$	803,409	$	790		0.39	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		375,013							323,590							$	450,835							$	375,013
Other liabilities		4,638							6,193								(8,871	)							4,638
Stockholders' equity		133,377							146,719								214,161								133,377
Total liabilities and stockholders' equity	$	1,316,437						$	1,370,141							$	1,745,380							$	1,316,437
Net interest income			$	12,028						$	11,855								$	17,354						$	12,028
Interest rate spread ⁽¹⁾						3.89	%						3.56	%								3.67	%						3.89	%
Net interest margin ⁽²⁾						4.02	%						3.72	%								4.34	%						4.02	%
Ratio of average interest-earning assets to average interest-bearing liabilities						152.71	%						145.41	%	Ratio of average interest-earning assets to average interest-bearing liabilities							149.76	%						152.71	%

(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 ~~$269~~$294 and ~~$179~~$269 for the three months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

(4) Includes dividends received on restricted stock.

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, ~~2022,~~2023, and ~~2021,~~2022, in terms of (1) changes in the 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 the change in volume). The changes attributable to the combined impact of volume/rate are allocated consistently between the volume and rate variances.

	2022 versus 2021
										2023 versus 2022
	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate		Total

Interest-earning assets:
Loans receivable	$	(1,193	)	$	576		$	(617	)	$	4,987		$	4,507	$	9,494
Investment securities		353			32			385			(68	)		128		60
Interest-earning deposits with other banks		(2	)		116			114			(34	)		499		465
Total interest-earning assets		(842	)		724			(118	)	$	4,885		$	5,134	$	10,019


Interest-bearing liabilities:
Interest-bearing demand deposits		(14	)		9			(5	)	$	20		$	516	$	536
Money market deposits		-			16			16			60			1,006		1,066
Savings deposits		1			1			2			1			437		438
Certificates of deposit		(146	)		(168	)		(314	)		141			961		1,102
Short-term borrowings		-			-			-			-			1,462		1,462
Other borrowings		(1	)		11			10			(6	)		95		89
Total interest-bearing liabilities		(160	)		(131	)		(291	)	$	216		$	4,477	$	4,693


Net interest income	$	(682	)	$	855		$	173		$	4,669		$	657	$	5,326

	For the Six Months Ended June 30,														For the Six Months Ended June 30, 2023
	2022							2021							2023								2022

	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⁾	$	977,336	$	22,253		4.60	%	$	1,091,119	$	24,052		4.45	%	$	1,380,470		$	39,037		5.71	%	$	977,336	$	22,253		4.60	%
Investment securities ⁽³⁾		173,483		2,624		3.59	%		125,924		1,940		3.60	%		168,738			2,895		4.08	%		173,483		2,624		3.59	%
Interest-earning deposits with other banks ⁽⁴⁾		85,807		204		0.48	%		89,477		86		0.19	%		65,802			1,210		3.71	%		85,807		204		0.48	%
Total interest-earning assets		1,236,626		25,081		4.17	%		1,306,520		26,078		4.08	%	$	1,615,010		$	43,142		5.46	%	$	1,236,626	$	25,081		4.17	%
Noninterest-earning assets		87,382							70,850							114,951								87,382
Total assets	$	1,324,008						$	1,377,370						$	1,729,961							$	1,324,008
Interest-bearing liabilities:
Interest-bearing demand deposits	$	165,066		119		0.15	%	$	205,063	$	141		0.14	%	$	195,990		$	960		0.99	%	$	165,066	$	119		0.15	%
Money market deposits		184,988		440		0.48	%		190,502		441		0.47	%		221,452			2,077		1.89	%		184,988		440		0.48	%
Savings deposits		260,194		78		0.06	%		254,882		85		0.07	%		289,318			1,281		0.89	%		260,194		78		0.06	%
Certificates of deposit		189,203		798		0.85	%		251,711		1,548		1.24	%		249,468			2,523		2.04	%		189,203		798		0.85	%
Short-term borrowings		-		-		-			169		-		0.00	%		84,404			2,114		5.05	%		-		-		0.00	%
Other borrowings		12,944		150		2.34	%		13,660		146		2.16	%		12,015			326		5.47	%		12,944		150		2.34	%
Total interest-bearing liabilities		812,395		1,585		0.39	%		915,987		2,361		0.52	%	$	1,052,647		$	9,281		1.78	%	$	812,395	$	1,585		0.39	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		367,334							309,395						$	471,242							$	367,334
Other liabilities	5,276								6,096							(2,858	)							5,276
Stockholders' equity	$	139,003							145,892							208,930								139,003
Total liabilities and stockholders' equity	$	1,324,008						$	1,377,370						$	1,729,961							$	1,324,008
Net interest income			$	23,496						$	23,717							$	33,861						$	23,496
Interest rate spread ⁽¹⁾						3.78	%						3.56	%							3.68	%						3.78	%
Net interest margin ⁽²⁾						3.91	%						3.71	%							4.30	%						3.91	%
Ratio of average interest-earning assets to average interest-bearing liabilities						152.22	%						142.64	%							153.42	%						152.22	%

(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 ~~$492~~$572 and ~~$347~~$492 for the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

(4) Includes dividends received on restricted stock.

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, ~~2022,~~2023, and ~~2021,~~2022, in terms of (1) changes in the 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 the change in volume). The changes attributable to the combined impact of volume/rate are allocated consistently between the volume and rate variances.

	2022 versus 2021
										2023 versus 2022
	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate		Total

Interest-earning assets:
Loans receivable	$	(2,511	)	$	712		$	(1,799	)	$	9,196		$	7,588	$	16,784
Investment securities		849			(165	)		684			(68	)		339		271
Interest-earning deposits with other banks		(3	)		121			118			(48	)		1,054		1,006
Total interest-earning assets		(1,665	)		668			(997	)	$	9,080		$	8,981	$	18,061


Interest-bearing liabilities:
Interest-bearing demand deposits		(28	)		6			(22	)	$	23		$	818	$	841
Money market deposits		(13	)		12			(1	)		87			1,550		1,637
Savings deposits		2			(9	)		(7	)		9			1,194		1,203
Certificates of deposit		(384	)		(366	)		(750	)		254			1,471		1,725
Short-term borrowings		-			-			-			-			2,114		2,114
Other borrowings		(8	)		12			4			(11	)		187		176
Total interest-bearing liabilities		(431	)		(345	)		(776	)	$	362		$	7,334	$	7,696


Net interest income	$	(1,234	)	$	1,013		$	(221	)	$	8,718		$	1,647	$	10,365

LIQUIDITY

Management's objective in managing liquidity is to maintain the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold, and cash and deposits with banks. While securities are generally considered as a source of cash, in the current environment, it is unlikely that securities would be sold for such funding needs. The Company offers a line of retail deposit products created to 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 FHLB, and the adjustment of interest rates to obtain depositors. ~~Management believes the Company has the capital adequacy, profitability, and reputation for meeting the current and projected needs of its customers.~~

On June 30, ~~2022,~~2023, the additional borrowing capacity at the FHLB was ~~$459.1~~$482.9 million, as compared to ~~$417.4~~$380.8 million on December 31, ~~2021. For~~2022. Considering the ~~six months ended June 30, 2022, wholesale funding decreased by $10.0 million.~~Company’s strong capital levels, robust liquidity, and diverse loans and deposit portfolios, along with the maximum borrowing capacity of $582.9 million at the FHLB, the Company decided not to use the Federal Reserve’s Bank Term Funding Program. The Company also has the option of borrowing from the Federal Reserve discount window with any assets not currently pledged elsewhere. Given the flexibility of borrowing structure options with the FHLB, if the Company needed additional borrowings, we would likely use FHLB capacity first.

At June 30, 2023, total net available liquidity was $776.8 million, which accounted for 54.3% of total deposits. At June 30, 2023, these liquidity sources exceeded the amount of the Company’s uninsured deposit balances. 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, ~~2022.~~2023. Although the Company currently exhibits strong liquidity, management will continue to monitor liquidity in future ~~periods to look for signs of stress resulting from the COVID-19 pandemic.~~periods.

For the six months ended June 30, ~~2022,~~2023, 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~~credit 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. The consolidated financial statements and related financial data are presented following GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, except for securities available for sale, ~~impaired~~individually analyzed 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 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. 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. Within the tabular presentation that follows is the adequately capitalized ratio plus a 2.50% capital conservation buffer.

4652

Middlefield Bank and the Company met each of the well-capitalized ratio guidelines on June 30, ~~2022.~~2023. The following table indicates the capital ratios for Middlefield Bank and the Company on June 30, ~~2022,~~2023, and December 31, ~~2021.~~2022.

	As of June 30, 2022												As of June 30, 2023
		Leverage		Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based			Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.23	%		12.81	%		12.81	%		14.06	%		13.02	%		15.20	%		15.20	%		16.42	%
Middlefield Banc Corp.		10.64	%		13.30	%		12.52	%		14.54	%		14.36	%		16.89	%		16.36	%		18.11	%
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, 2022
	As of December 31, 2021												Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		9.80	%		12.72	%		12.72	%		13.97	%		11.16	%		12.63	%		12.63	%		13.61	%
Middlefield Banc Corp.		10.02	%		12.96	%		12.18	%		14.21	%		11.30	%		12.80	%		12.25	%		13.78	%
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	%

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 repricing 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 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~~Interest Rate Sensitivity Simulation Analysis

The Company engages an external consultant to facilitate income simulation modeling quarterly. This modeling measures interest rate risk and sensitivity. The Asset and Liability Management Committee of the Company believes the various rate scenarios of the simulation modeling enable the Company to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, various loan and mortgage-backed security prepayments, and deposit decay assumptions.

Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across all rate risk measures.

The Company has established the following guidelines for assessing interest rate risk:

Net interest income simulation (“NII”) - Projected net interest income over the next twelve months will not be reduced by more than 10% given a gradual shift (i.e., over 12 months) in interest rates of up to 200 basis points (+ or -) and assuming no balance sheet growth.

Portfolio equity simulation - Portfolio equity is the net present value of the Company’s existing assets and liabilities. The Company uses an Economic Value of Equity (“EVE”) analysis which shows the estimated changes in portfolio equity considering certain long-term shock rates. Given a 200 basis point immediate and permanent increase in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity. Given a 100 basis point immediate and permanent decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 10% of stockholders’ equity.

The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market interest rates on net interest income and the change in portfolio equity. This analysis was done assuming the interest-earning asset and interest-bearing liability levels at June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over one year from the June 30, ~~2022,~~2023, and December 31, ~~2021~~2022 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, ~~2022,~~2023, and December 31, ~~2021,~~2022, for portfolio equity:

	June 30, 2022						December 31, 2021						June 30, 2023						12/31/2022
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		1.40	%		0.60	%		2.40	%		2.50	%		(2.40	)%		(7.00	)%		(0.50	)%		(2.80	)%
-100bp		(3.50	)%		(5.70	)%		(1.40	)%		(12.70	)%		0.85	%		0.80	%		(0.30	)%		(1.30	)%

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, ~~2022,~~2023, have remained unchanged from December 31, ~~2021.~~2022. However, the Company has identified accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses, for both the investment, loan portfolios, and unfunded commitments. Please refer to Note 1 for further discussion on significant accounting policies.

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 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 in ensuring 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 periods specified in Securities and Exchange Commission rules and forms. After 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 concerning 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~~

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

~~Item 1a. Risk Factors~~

~~There~~The Company is attentive to various risks and continuously evaluates the potential impact of such risks. Except as set forth below, where an already disclosed risk factor has been updated for the current period, there have been no material updates or changes in risks faced by the ~~Company’s~~Company since December 31, 2022. For more information regarding our risk factors, ~~from those disclosed in~~refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

~~Item 2. Unregistered Sales of Equity Securities~~We could experience an unexpected inability to obtain needed liquidity which could adversely affect our business, profitability, and ~~Use of Proceeds~~viability as a going concern.

Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests and to accommodate possible outflows in deposits. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The bank failures in March 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition, and results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Details of repurchases of Company common stock during the ~~second~~first quarter of ~~2022~~2023 are included in the following table:

2022 period
In thousands, except per share data

Total shares
purchased

Average price
paid per share
Total shares purchased as part of a publicly announced program (a) Maximum number of shares that may yet be purchased under the program

April 1-30
10,996 $ 25.33 43,146 344,405
May 1-31
20,089 $ 25.83 63,235 324,316
June 1-30
32,129 $ 25.06 95,364 292,187
Total
63,214 $ 25.35

2023 period In thousands, except per share data	Total shares purchased		Average price paid per share		Total shares purchased as part of a publicly announced program (a)		Maximum number of shares that may yet be purchased under the program

April 1-30		-	$	-		-		29,391
May 1-31		-		-		-		29,391
June 1-30		-		-		-		29,391
Total		0	$	-

~~(a)~~Item 3.

In February of 2022, the Board of Directors authorized an increase to the Program resulting in 300,000 additional shares being available for repurchase. The Program may be modified, suspended or terminated by the Company at any time.Defaults Upon Senior Securities

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

None

Item 4. ~~Mine Safety Disclosures~~

Mine Safety Disclosures

N/A

Item 5. ~~Other information~~

Other information

None

Item 6.

~~Item 6.~~ Exhibits

Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended June 30, ~~2022~~2023

Exhibit Number	Description	Location

22.1	Agreement and Plan of Merger dated as of May 26, 2022, by and among Middlefield Banc Corp., MBCN Merger Subsidiary, LLC, and Liberty Bancshares, Inc.~~, dated May 26, 2022~~	Incorporated by reference to Exhibit 2.1 of Middlefield Banc Corp.’s Form 8-K Current Report and Form 425 filed on May 27, 2022

3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended	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 108-K Current Report filed on ~~April 17, 2001~~December 1, 2022

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

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

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

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

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

10.1.1*	~~[reserved]~~

10.2*10.1.1		[reserved]

10.2		[reserved]

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~~December 1, 2022

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~~[reserved]	~~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~~Quarterly Report filed on November 5, 2019

10.4.6*10.4.6	~~Compensation Agreement between Middlefield Banc Corp. and Michael C. Ranttila~~[reserved]	~~Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.’s Form 10-K Current Report filed on March 15, 2022~~

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~~Annual Report filed on March 12, 2021

~~10.5~~10.4.8*	~~[reserved]~~Change in Control Agreement between Middlefield Banc Corp. and Courtney M. Erminio	Incorporated by reference to Exhibit 10.4.8 of Middlefield Bank Corp’s Form 10-K Annual Report filed on March 15, 2023

10.5*	Severance Agreement between Middlefield Banc Corp. and Ronald L. Zimmerly, Jr., dated December 1, 2022	Incorporated by reference to Exhibit 10.5 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2022, filed on March 15, 2023

10.6*	~~[reserved]~~Restricted Stock Award Agreement between Middlefield Banc Corp. and Ronald L. Zimmerly, Jr., dated December 1, 2022	Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2022, filed on March 15, 2023

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

5157

~~10.8~~10.8*	Executive Retention Agreement between The Middlefield Banking Company and Michael C. Ranttila	Incorporated by reference to Exhibit 10.8 of Middlefield Banc Corp.’s Form 10-Q ~~Current~~Quarterly Report filed on May 10, 2022

~~10.9~~10.9*	Executive Retention Agreement between The Middlefield Banking Company and Michael L. Allen	Incorporated by reference to Exhibit ~~10.8~~10.9 of Middlefield Banc Corp.’s Form 10-Q ~~Current~~Quarterly Report filed on May 10, 2022

10.10	~~Executive Retention Agreement between The Middlefield Banking Company and Charles O. Moore~~[reserved]	~~Incorporated by reference to Exhibit 10.8 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 10, 2022~~

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

~~10.12~~10.12*	~~[reserved]~~Split-Dollar Agreement between The Middlefield Banking Company and Ronald L. Zimmerly, Jr.	Incorporated by reference to Exhibit 10.12 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2022, filed on March 15, 2023

10.13	[reserved]

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

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

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

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

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

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

5258

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

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

10.22.1	[reserved]

10.23**	Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

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

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

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

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

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

10.29*	~~[reserved]~~Executive Deferred Compensation Agreement with Ronald L. Zimmerly, Jr.	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2022, filed on March 15, 2023

10.29.1	Form of a 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

5359

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~~Quarterly 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~~Quarterly 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~~Annual Report filed on March 12, 2021

10.33**	Executive Deferred Compensation Agreement with Courtney M. Erminio	Incorporated by reference to Exhibit 10.33 of Middlefield Banc Corp.’s Form 10-Q Quarterly Report filed ~~herewith~~on August 8, 2022

10.34**	Executive Deferred Compensation Agreement with Alfred F. Thompson	Incorporated by reference to Exhibit 10.34 of Middlefield Banc Corp.’s Form 10-Q Quarterly Report filed ~~herewith~~on August 8, 2022

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

100	[reserved]

101.INS***	Inline XBRL Instance	furnished herewith

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

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

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

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

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

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

* management contract or compensatory plan or arrangement

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

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

5460

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 14, 2023			By: /s/ James R. Heslop, II

	----------------------------------------


~~Date: August 8, 2022~~	~~By:~~	~~/s/~~ ~~James R. Heslop, II~~

		James R. Heslop, II

		~~President and~~ Chief Executive Officer





~~Date: August 8, 2022~~		~~By: /s/ Donald L. Stacy~~

		~~Donald L. Stacy~~

		~~Principal Financial and Accounting Officer~~

Date: August 14, 2023	By: /s/Michael C. Ranttila

	----------------------------------------

	Michael C. Ranttila

	Executive Vice President, Chief Financial Officer

5561

(Dollar amounts in thousands)
	Subordinated debt
Balance as of January 1, 2022	$	12,200
Transfers out of Level III ⁽¹⁾		(2,250	)
Net unrealized holding gain on available-for-sale investment securities		(120	)
Balance as of June 30, 2022	$	9,830

(Dollars in thousands)	Unrealized (losses)/gains on available-for-sale securities (a)
Balance as of March 31, 2022	$	(6,674	)
Other comprehensive loss		(10,917	)
Balance at June 30, 2022	$	(17,591	)

Balance as of December 31, 2021	$	3,462
Other comprehensive loss		(21,053	)
Balance at June 30, 2022	$	(17,591	)

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

June 30, 2022
Ending Allowance Balance by Impairment Evaluation:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	9	$	1,794	$	1,803
Non-owner occupied		621		6,726		7,347
Multifamily		0		416		416
Residential real estate		13		1,840		1,853
Commercial and industrial		212		1,001		1,213
Home equity lines of credit		1		1,494		1,495
Construction and other		0		399		399
Consumer installment		0		24		24
Total	$	856	$	13,694	$	14,550

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

Commercial real estate:
Owner occupied	$	1,489	$	15	$	1,514	$	31
Non-owner occupied		4,776		23		4,558		67
Residential real estate		1,227		13		1,257		24
Commercial and industrial		864		6		854		13
Home equity lines of credit		239		1		241		3
Total	$	8,595	$	58	$	8,424	$	138

2022 period In thousands, except per share data	Total shares purchased		Average price paid per share		Total shares purchased as part of a publicly announced program (a)		Maximum number of shares that may yet be purchased under the program

April 1-30		10,996	$	25.33		43,146		344,405
May 1-31		20,089	$	25.83		63,235		324,316
June 1-30		32,129	$	25.06		95,364		292,187
Total		63,214	$	25.35