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 March 31, 2024

or

☐	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)

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:

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 May 14, 2024: 8,067,144

 MIDDLEFIELD BANC CORP.

INDEX

Part 1 – Financial Information
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheet	3
	Consolidated Statement of Income	4
	Consolidated Statement of Comprehensive Income	5
	Consolidated Statement of Changes in Stockholders’ Equity	6
	Consolidated Statement of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	32
PART II – Other Information		32
Item 1.	Legal Proceedings	32
Item 1a.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other information	33
Item 6.	Exhibits	34
Signatures		37
Exhibit 31.1
Exhibit 31.2
Exhibit 32

2

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

	March 31,			December 31,
	2024			2023
ASSETS
Cash and due from banks	$	44,816		$	56,397
Federal funds sold		1,438			4,439
Cash and cash equivalents		46,254			60,836
Investment securities available for sale, at fair value		167,890			170,779
Other investments		907			955
Loans:
Commercial real estate:
Owner occupied		178,543			183,545
Non-owner occupied		398,845			401,580
Multifamily		81,691			82,506
Residential real estate		331,480			328,854
Commercial and industrial		227,433			221,508
Home equity lines of credit		129,287			127,818
Construction and other		135,716			125,105
Consumer installment		7,131			7,214
Total loans		1,490,126			1,478,130
Less: allowance for credit losses		21,069			21,693
Net loans		1,469,057			1,456,437
Premises and equipment, net		21,035			21,339
Goodwill		36,356			36,356
Core deposit intangibles		6,384			6,642
Bank-owned life insurance		34,575			34,349
Accrued interest receivable and other assets		34,210			35,190
TOTAL ASSETS	$	1,816,668		$	1,822,883
LIABILITIES
Deposits:
Noninterest-bearing demand	$	390,185		$	401,384
Interest-bearing demand		209,015			205,582
Money market		318,823			274,682
Savings		196,721			210,639
Time		332,165			334,315
Total deposits		1,446,909			1,426,602
Federal Home Loan Bank advances		137,000			163,000
Other borrowings		11,812			11,862
Accrued interest payable and other liabilities		15,372			15,738
TOTAL LIABILITIES		1,611,093			1,617,202
STOCKHOLDERS' EQUITY
Common stock, no par value; 25,000,000 shares authorized, 9,946,454 and 9,930,704 shares issued; 8,067,144 and 8,095,252 shares outstanding		161,823			161,388
Retained earnings		102,791			100,237
Accumulated other comprehensive loss		(18,130	)		(16,090	)
Treasury stock, at cost; 1,879,310 and 1,835,452 shares		(40,909	)		(39,854	)
TOTAL STOCKHOLDERS' EQUITY		205,575			205,681
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,816,668		$	1,822,883

See accompanying notes to unaudited consolidated financial statements.

3

 MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31,
	2024			2023
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	22,395		$	18,275
Interest-earning deposits in other institutions		437			250
Federal funds sold		152			253
Investment securities:
Taxable interest		467			458
Tax-exempt interest		972			980
Dividends on stock		189			88
Total interest and dividend income		24,612			20,304
INTEREST EXPENSE
Deposits		7,466			2,990
Short-term borrowings		1,993			653
Other borrowings		184			155
Total interest expense		9,643			3,798
NET INTEREST INCOME		14,969			16,506
(Recovery of) Provision for credit losses		(136	)		507
NET INTEREST INCOME AFTER (RECOVERY OF) PROVISION FOR CREDIT LOSSES		15,105			15,999
NONINTEREST INCOME
Service charges on deposit accounts		909			987
Loss on equity securities		(52	)		(138	)
Gain on other real estate owned		-			2
Earnings on bank-owned life insurance		227			200
Gain on sale of loans		10			23
Revenue from investment services		204			186
Gross rental income		67			102
Other income		431			318
Total noninterest income		1,796			1,680
NONINTEREST EXPENSE
Salaries and employee benefits		6,333			5,852
Occupancy expense		552			696
Equipment expense		240			317
Data processing and information technology costs		1,249			1,070
Ohio state franchise tax		397			385
Federal deposit insurance expense		251			120
Professional fees		558			538
Advertising expense		419			486
Software amortization expense		22			26
Core deposit intangible amortization		258			265
Gross other real estate owned expenses		99			132
Merger-related costs		-			245
Other expense		1,587			1,662
Total noninterest expense		11,965			11,794
Income before income taxes		4,936			5,885
Income taxes		769			989
NET INCOME	$	4,167		$	4,896
EARNINGS PER SHARE
Basic	$	0.52		$	0.60
Diluted	$	0.51		$	0.60

See accompanying notes to unaudited consolidated financial statements.

4

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Dollar amounts in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2024			2023
Net income	$	4,167		$	4,896
Other comprehensive (loss) income:
Unrealized holding (loss) gain on securities available for sale		(2,582	)		3,659
Tax effect		542			(768	)
Total other comprehensive (loss) income		(2,040	)		2,891
Comprehensive income	$	2,127		$	7,787

See accompanying notes to unaudited consolidated financial statements.

5

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, December 31, 2023		9,930,704	$	161,388	$	100,237		$	(16,090	)	$	(39,854	)	$	205,681
Net income						4,167									4,167
Other comprehensive loss									(2,040	)					(2,040	)
Stock-based compensation, net		15,750		435											435
Common shares repurchased (43,858)												(1,055	)		(1,055	)
Cash dividends ($0.20 per share)						(1,613	)								(1,613	)
Balance, March 31, 2024		9,946,454	$	161,823	$	102,791		$	(18,130	)	$	(40,909	)	$	205,575

								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						4,896									4,896
Other comprehensive income									2,891						2,891
Cumulative impact of ASC 326 adoption (CECL)						(4,421	)								(4,421	)
Stock-based compensation, net		7,779		219											219
Common shares repurchased (95,364)												(4,506	)		(4,506	)
Cash dividends ($0.20 per share)						(1,605	)								(1,605	)
Balance, March 31, 2023		9,924,245	$	161,248	$	93,024		$	(19,253	)	$	(39,854	)	$	195,165

See accompanying notes to unaudited consolidated financial statements.

6

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	For the Three Months Ended
	March 31,
	2024			2023
OPERATING ACTIVITIES
Net income	$	4,167		$	4,896
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for credit losses		(136	)		507
Loss on equity securities		52			138
Software amortization expense		22			26
Amortization of premium and discount on investment securities, net		140			150
Amortization of core deposit intangibles		258			265
Depreciation, amortization, and accretion, net		97			193
Stock-based compensation, net		-			30
Origination of loans held for sale		(629	)		1,494
Proceeds from sale of loans held for sale		639			(1,575	)
Gain on sale of loans held for sale		(10	)		(23	)
Earnings on bank-owned life insurance		(227	)		(200	)
Deferred income tax (benefit)		447			(381	)
Gains on other real estate owned		-			(2	)
(Increase) decrease in accrued interest receivable		(131	)		25
Increase in accrued interest payable		3,495			230
Other, net		(2,745	)		665
Net cash provided by operating activities		5,439			6,438
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		167			871
Purchases		-			(2,000	)
Purchase of other investments		(4	)		-
Increase in loans, net		(12,184	)		(29,763	)
Proceeds from the sale of other real estate owned		-			31
Purchase of premises and equipment		(92	)		(263	)
Purchase of restricted stock		-			(1,687	)
Redemption of restricted stock		503			1,793
Net cash used in investing activities		(11,610	)		(31,018	)
FINANCING ACTIVITIES
Net increase in deposits		20,307			23,588
Net (decrease) increase in short-term borrowings		(26,000	)		20,000
Repayment of other borrowings		(50	)		(49	)
Repurchase of common shares		(1,055	)		(4,506	)
Cash dividends		(1,613	)		(1,605	)
Net cash (used in) provided by financing activities		(8,411	)		37,428
(Decrease) increase in cash and cash equivalents		(14,582	)		12,848
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		60,836			53,809
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	46,254		$	66,657
	For the Three Months Ended
	March 31,
	2024			2023
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	6,148		$	3,568
Income taxes		1,890			-

See accompanying notes to unaudited consolidated financial statements.

7

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its bank subsidiary, The Middlefield Banking Company (“MBC” or “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”) and MB Insurance 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  March 31, 2024, 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 MIS as an operating subsidiary to offer retail and business customers various insurance services, including home, renters, automobile, pet, identity theft, travel, and professional liability insurance. On March 31, 2024, MIS 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 did not operate after the merger, and its existence ended January 19, 2024. All significant intercompany items have been eliminated between MBC and these subsidiaries.

The unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation SX. 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, 2023. 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.

The Company’s significant accounting policies involve the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2024. However, the Company has identified 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 securities held for sale, loan portfolios, and unfunded commitments.

Investments 

Management determines the appropriate classification of investment 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  March 31, 2024, the Company did not hold any held-to-maturity securities.

Equity securities, which are included in other investments on the Consolidated Balance Sheet, are measured at fair value with changes in fair value recognized in net income.

The Bank adopted ASU No. 2016-13, Financial Instruments - Credit Loses - Topic (326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), effective January 1, 2023. The Bank measures expected credit losses on available-for-sale investment 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 investment 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 is included within investment securities available for sale on the Consolidated Balance Sheet. Changes in the allowance for credit losses are recorded within the 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.

8

 

Accrued interest receivable on available-for-sale investment securities totaled $1.6 million on  March 31, 2024, 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 investment 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 investment securities are placed on nonaccrual status, unpaid interest credited to income is reversed.

Loans

Loans 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 unearned income, which includes net deferred loan fees and costs and unamortized premiums and discounts. Accrued interest receivable is included within accrued interest receivable and other assets on the Consolidated Balance Sheet. 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 amortizes 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. Interest income is primarily recognized on an accrual basis according to formulas in written contracts, such as loan agreements.

The loan 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, 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 credit losses. Interest received on nonaccrual 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 is determined based on contractual due dates for loan payments.

The Bank adopted ASU 2016-13, effective January 1, 2023. Upon adoption, the reserve for credit losses on loans increased by $5.4 million. The guidance applies an expected-loss methodology, recognizing current expected credit losses for the remaining life of the asset at the time of origination or acquisition.  The allowance for credit losses ("ACL") 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 that share similar risk characteristics and compares the results of this calculation to the amortized cost basis to determine its ACL 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 have 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 correlate LGD with PD.

Prepayment and Curtailment Rates

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

Curtailment Rates: Loan-level transaction data is used to calculate annual curtailment rates using 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 forecast.

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.

9

 

Discount Rate

The effective interest rate of the underlying loans of the Company 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. These instruments will not be included in the collective analyses. The individual analysis will establish a specific reserve for instruments in scope.

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 CRE loan segments consist of loans made to finance the activities of CRE owners and operators and certain agricultural loans. The RRE 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.

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 calculation 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 should, therefore, be individually assessed. Beginning in the third quarter of 2023, the Bank automatically considers all nonaccrual loans greater than $250,000 for individual analysis. Additional identification of loans to be individually evaluated is accomplished through the Bank’s normal loan review, criticized asset review, and portfolio management processes. The Bank previously evaluated all commercial loans greater than $150,000 for individual analysis that met 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, and 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. 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. Measurement of the expected credit losses on collateral-dependent loans is based on the fair value of the collateral, less any costs to sell. 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.

The Bank adopted ASU No. 2016-13 effective January 1, 2023. Upon adoption, the reserve for credit losses for unfunded commitments increased by $622,000. 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 included in accrued interest payable and other liabilities on the balance sheet and adjusted through provision for credit losses. 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, consistent with the estimation process on the loan portfolio.

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.

Accounting Pronouncements Adopted in 2024

In  March 2023, the FASB issued ASU 2023-02, Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments allow entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related tax credits. This method of accounting had been available only for qualifying investments in qualified affordable housing projects. The guidance also requires certain disclosures regarding an entity’s tax equity investments. On January 1, 2024, the Bank adopted ASU 2023-03. This ASU did not have a significant impact on the Bank’s financial statements.

Recent Accounting Pronouncements

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 (SOFR). 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. ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 Issued  December 2022, which was issued in  December 2022, extended the period of time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from  December 31, 2022 to  December 31, 2024. The ASUs are not expected to have a significant impact on the Bank’s financial statements.

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In  June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendment clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit account of the equity security and is not considered in measuring its fair value. The ASU clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The ASU also requires certain disclosures for equity securities subject to contractual sale restrictions. The amendments in this ASU are effective for all entities for fiscal years beginning after  December 15, 2024. This ASU is not expected to have a significant impact on the Company’s financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires enhanced disclosures about significant segment expenses for public entities reporting segment information under ASC Topic 280. The amendments include required disclosure of significant segment expenses regularly reviewed by the chief operating decision maker, description of the composition of other segment items, and title and position of the chief operating decision maker. Additionally, the ASU requires public entities to provide all annual disclosures under Topic 280 in interim periods. The ASU also requires that public entities with a single reportable segment provide all the disclosures required by this amendment and existing disclosure requirements in Topic 820. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company has a single reportable segment. This ASU is not expected to have a significant impact on the Company's financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require entities to disclose specific categories in the rate reconciliation and provide additional information for material reconciling items. The ASU also requires the disclosure of income taxes paid disaggregated by jurisdiction. The amendments in this ASU are effective for public business entities for annual periods beginning after  December 15, 2024. This ASU is not expected to have a significant impact on the Company’s financial statements.

In March 2024, the FASB issued ASU 2024-01, Compensation – Stock Compensation (Topic 718).  The ASU amended the guidance in ASC 718 to add an example showing how to apply the scope guidance to determine whether profits interest and similar awards should be accounted for as share-based payment arrangements.  The guidance is effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years.  The Company is currently evaluating the impact of this new guidance on its financial statements.

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 equity security gains (losses), gains on the sale of loans, rental income, and BOLI income, are not within the scope of ASC 606. For the three months ended March 31, 2024, these revenue sources cumulatively comprise 94.2% 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 whereby 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.

Revenue from investment services – The Company earns investment services revenue through its referral 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 with referral revenue 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 March 31,
Noninterest Income	2024			2023
(Dollar amounts in thousands)
Service charges on deposit accounts:
Overdraft fees	$	250		$	246
ATM banking fees		439			472
Service charges and other fees		220			269
Loss on equity securities ⁽ª⁾		(52	)		(138	)
Gain on sale of other real estate owned ⁽ª⁾		-			2
Earnings on bank-owned life insurance ⁽ª⁾		227			200
Gain on sale of loans ⁽ª⁾		10			23
Revenue from investment services		204			186
Miscellaneous fee income		93			86
Gross rental income ⁽ª⁾		67			102
Other income		338			232
Total noninterest income	$	1,796		$	1,680

(a) Not within scope of ASC 606

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NOTE 3 - EARNINGS PER SHARE

The Company provides a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the average shares outstanding. Diluted earnings per share adds the dilutive effects of 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
	Months Ended
	March 31,
	2024			2023
Weighted-average common shares outstanding		9,941,596			9,921,529
Average treasury stock shares		(1,850,393	)		(1,782,758	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		8,091,203			8,138,771
Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		5,114			13,858
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		8,096,317			8,152,629

On March 31, 2024, there were 38,836 shares of restricted stock, 33,722 shares of which were anti-dilutive.

On March 31, 2023, there were 70,219 shares of restricted stock, 56,361 shares of which were anti-dilutive.

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of March 31, 2024, the Company held 1,879,310 of the Company’s shares, which is an increase of 43,858 from the 1,835,452 shares held as of March 31, 2023.

NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the changes in accumulated other comprehensive (loss) income (“AOCI”) by component, net of tax, for the three months ended March 31, 2024, and 2023, respectively:

(Dollars in thousands)	Unrealized (losses)/gains on securities available-for-sale(a)
Balance as of December 31, 2023	$	(16,090	)
Other comprehensive loss		(2,040	)
Balance as of March 31, 2024	$	(18,130	)

(Dollars in thousands)	Unrealized (losses)/gains on securities available-for-sale(a)
Balance as of December 31, 2022	$	(22,144	)
Other comprehensive income		2,891
Balance as of March 31, 2023	$	(19,253	)

(a) All amounts are net of tax.

There were no other reclassifications of amounts from AOCI for the three months ended March 31, 2024, and 2023.

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 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.

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This hierarchy requires the use of observable market data when available.

The following tables present the assets measured at fair value on a recurring basis on the Consolidated Balance Sheet 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.

			March 31, 2024
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	25,186	$	6,581	$	31,767
Obligations of states and political subdivisions		-		130,103		-		130,103
Mortgage-backed securities in government-sponsored entities		-		6,020		-		6,020
Total investment securities available for sale		-		161,309		6,581		167,890
Equity securities		776		-		-		776
Total	$	776	$	161,309	$	6,581	$	168,666

			December 31, 2023
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	23,118	$	8,801	$	31,919
Obligations of states and political subdivisions		-		132,542		-		132,542
Mortgage-backed securities in government-sponsored entities		-		6,318		-		6,318
Private-label mortgage-backed securities		-		-		-		-
Total investment securities available for sale		-		161,978		8,801		170,779
Equity securities		814		-		-		814
Total	$	814	$	161,978	$	8,801	$	171,593

Investment Securities Available for Sale

An independent pricing service provides the Company fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, 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.

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

	Subordinated debt
(Dollar amounts in thousands)	March 31, 2024			December 31, 2023
Beginning of year	$	8,801		$	8,737
Purchases, sales, settlements:
Purchases		-			1,000
Transfers out of Level III (1)		(2,250	)		(1,000	)
Net change in unrealized loss on investment securities available-for-sale		30			64
Balance at end of period	$	6,581		$	8,801

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

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The following table presents the assets measured at fair value on a non-recurring basis on the Consolidated Balance Sheet by level within the fair value hierarchy.

			March 31, 2024
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Collateral-dependent loans	$	-	$	-	$	3,321	$	3,321

			December 31, 2023
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Collateral-dependent loans	$	-	$	-	$	3,361	$	3,361

Collateral-Dependent 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 in the period in which the adjustment is recorded. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the preceding tables include selling costs of $883,000 and $843,000 on  March 31, 2024, and  December 31, 2023, respectively.

The following table presents 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)
March 31, 2024
Collateral-dependent loans	$	3,321	Appraisal of collateral (1)	Appraisal adjustments (2)		21.0	%

	Quantitative Information about Level III Fair Value Measurements
(Dollar amounts in thousands)
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2023
Collateral-dependent loans	$	3,361	Appraisal of collateral (1)	Appraisal adjustments (2)		20.1	%

(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:

	March 31, 2024
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Net loans	$	1,469,057	$	-	$	-	$	1,391,216	$	1,391,216
Mortgage servicing rights		1,589						2,701		2,701
Financial liabilities:
Non-maturing deposits	$	1,114,744	$	1,114,744	$	-	$	-	$	1,114,744
Time deposits		332,165		-		-		329,023		329,023
Other borrowings		11,812		-		-		11,812		11,812

	December 31, 2023
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Net loans	$	1,456,437	$	-	$	-	$	1,370,657	$	1,370,657
Mortgage servicing rights		1,636						2,781		2,781
Financial liabilities:
Non-maturing deposits	$	1,092,287	$	1,092,287	$	-	$	-	$	1,092,287
Time deposits		334,315		-		-		331,638		331,638
Other borrowings		11,862		-		-		11,862		11,862

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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 to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to 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 above tables, cash and cash equivalents, bank-owned life insurance, Federal Home Loan Bank (the “FHLB”) stock, other investments, accrued interest receivable, FHLB advances, finance lease liabilities, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.

NOTE 6 – INVESTMENT AND EQUITY SECURITIES

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

	March 31, 2024
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost (a)		Gains		Losses			Value
Subordinated debt	$	34,300	$	61	$	(2,594	)	$	31,767
Obligations of states and political subdivisions:
Tax-exempt		149,747		45		(19,689	)		130,103
Mortgage-backed securities in government-sponsored entities		6,793		-		(773	)		6,020
Total	$	190,840	$	106	$	(23,056	)	$	167,890

(a) Amortized cost excludes accrued interest receivable of $1.6 million for the period ending  March 31, 2024.

	December 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost (a)		Gains		Losses			Value
Subordinated debt	$	34,300	$	70	$	(2,451	)	$	31,919
Obligations of states and political subdivisions:
Tax-exempt		149,881		153		(17,492	)		132,542
Mortgage-backed securities in government-sponsored entities		6,965		-		(647	)		6,318
Total	$	191,146	$	223	$	(20,590	)	$	170,779

(a) Amortized cost excludes accrued interest receivable of $1.6 million for the period ending  December 31, 2023.

The amortized cost and fair value of investment securities at March 31, 2024, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	565	$	565
Due after one year through five years		2,063		1,993
Due after five years through ten years		56,271		53,099
Due after ten years		131,941		112,233
Total	$	190,840	$	167,890

There were no investment securities sold during the three months ended March 31, 2024, or year ended  December 31, 2023. 

Investment securities with an approximate carrying value of $116.4 million and $91.2 million on  March 31, 2024, and  December 31, 2023, 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.

	March 31, 2024
	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	$	3,743	$	(307	)	$	26,964	$	(2,287	)	$	30,707	$	(2,594	)
Obligations of states and political subdivisions:
Tax-exempt		9,105		(47	)		104,148		(19,642	)		113,253		(19,689	)
Mortgage-backed securities in government-sponsored entities		147		(3	)		5,873		(770	)		6,020		(773	)
Total	$	12,995	$	(357	)	$	136,985	$	(22,699	)	$	149,980	$	(23,056	)

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	December 31, 2023
	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	$	994	$	(6	)	$	29,356	$	(2,445	)	$	30,350	$	(2,451	)
Obligations of states and political subdivisions:
Tax-exempt		1,386		(10	)		106,078		(17,482	)		107,464		(17,492	)
Mortgage-backed securities in government-sponsored entities		195		(1	)		6,122		(646	)		6,317		(647	)
Total	$	2,575	$	(17	)	$	141,556	$	(20,573	)	$	144,131	$	(20,590	)

Every quarter, the Company evaluates investment securities with unrealized losses to determine if the decline in fair value has resulted from credit losses or other factors. There were 18 securities in an unrealized loss position for less than twelve months and 166 securities in an unrealized loss position for twelve months or greater on March 31, 2024. Unrealized losses on investment securities available for sale have not been recognized into income because we do not intend to sell and it is more likely than not that we will not be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost. The unrealized losses on investment securities were attributable to changes in interest rates and not related to the credit quality of these issuers. As of March 31, 2024, no ACL was required on investment securities available for sale.

Other investments, which primarily represents equity securities, totaled $907,000 and $955,000 at March 31, 2024 and December 31, 2023, respectively. The Company recognized a net loss on other investments of $52,000 and $138,000 for the three months ended March 31, 2024 and 2023, respectively. No other investments were sold during these periods.

NOTE 7 – LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES

The following table summarizes the loan portfolio by primary segment and class of financial receivable (in thousands) ^(a)(b):

	March 31,			December 31,
	2024			2023
Commercial real estate:
Owner occupied	$	178,543		$	183,545
Non-owner occupied		398,845			401,580
Multifamily		81,691			82,506
Residential real estate		331,480			328,854
Commercial and industrial		227,433			221,508
Home equity lines of credit		129,287			127,818
Construction and Other		135,716			125,105
Consumer installment		7,131			7,214
Total loans		1,490,126			1,478,130
Less: Allowance for credit losses		(21,069	)		(21,693	)
Net loans	$	1,469,057		$	1,456,437

(a)	Accrued interest of $5.6 million and $5.5 million at  March 31, 2024 and December 31, 2023, respectively, is excluded from amortized cost and presented in "Accrued interest receivable and other assets" on the Consolidated Balance Sheets.
(b)	Unearned income, including net deferred loan fees and costs and unamortized premiums and discounts, totaled $9.1 million and $9.2 million at March 31, 2024 and December 31, 2023, respectively.

Allowance for Credit Losses: Loans

On January 1, 2023, the Company adopted ASU 2016-13. 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 similar credit risk elements. An ACL is maintained to absorb losses from the loan portfolio. The 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.

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

16

 

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

	For the Three Months Ended March 31, 2024
	Allowance for Credit Losses
	Balance										Balance
	December 31, 2023		Charge-offs			Recoveries		Provision			March 31, 2024
Loans:
Commercial real estate:
Owner occupied	$	2,668	$	-		$	11	$	(619	)	$	2,060
Non-owner occupied		4,480		-			-		3,288			7,768
Multifamily		1,796		-			-		(592	)		1,204
Residential real estate		5,450		-			-		(676	)		4,774
Commercial and industrial		4,377		-			8		(2,347	)		2,038
Home equity lines of credit		750		(7	)		-		42			785
Construction and other		1,990		-			-		383			2,373
Consumer installment		182		-			56		(171	)		67
Total	$	21,693	$	(7	)	$	75	$	(692	)	$	21,069

	For the Three Months Ended March 31, 2023
	Allowance for Credit Losses
	Balance		CECL											Balance
	December 31, 2022		Adoption			Charge-offs			Recoveries		Provision			March 31, 2023
Loans:
Commercial real estate:
Owner occupied	$	2,203	$	811		$	-		$	1	$	(337	)	$	2,678
Non-owner occupied		5,597		(1,206	)		-			-		321			4,712
Multifamily		662		591			-			-		118			1,371
Residential real estate		2,047		2,744			-			-		176			4,967
Commercial and industrial		1,483		2,320			(54	)		10		60			3,819
Home equity lines of credit		1,753		(1,031	)		-			70		17			809
Construction and other		609		956			-			-		(12	)		1,553
Consumer installment		84		197			(58	)		39		(9	)		253
Total	$	14,438	$	5,382		$	(112	)	$	120	$	334		$	20,162

The total ACL decreased by $624,000, or 2.9%, from  December 31, 2023 to March 31, 2024. The decrease was driven by portfolio activity and the economic outlook. The Bank utilized Moody’s December 2023 consensus information to estimate credit losses. The forecast takes into account the national housing price index and national unemployment rates. To the extent that credit risk is not fully identified within the forecasts, management has made qualitative adjustments to the ACL balance. The fluctuation in the ACL can also be attributed to the following:

• Increased non-owner occupied CRE and construction as well as an increase in loss rate included in the ACL calculation.

• Decreased C&I and Owner occupied CRE as well as a decrease in loss rate included in the ACL calculation.

The provision fluctuations during the three months ended March 31, 2023, allocated to:

• non-owner occupied commercial loans, multifamily loans, and residential real estate loans are due to an increase in outstanding balances.

• owner-occupied loans are due to a decrease in outstanding balances

Credit Quality Indicators

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidelines established by the Board of Directors. Loans are 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 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 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. 

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. A loan categorized as Doubtful contains all of the weaknesses as a Substandard loan with the added characteristic that the weaknesses are so pronounced that the collection or liquidation in full of both principal and interest is highly questionable or improbable. Any portion of a loan that has been charged off is placed in the Loss category.

17

 

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. Detailed reviews, including plans for resolution, are performed on criticized loans of $150,000 or more 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.

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 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 as of March 31, 2024:

March 31, 2024
Term Loans Amortized Cost Basis by Origination Year														Revolving Amortized
(Dollar amounts in thousands)	2024		2023		2022		2021		2020		Prior			Cost Basis		Total
Commercial real estate:
Owner occupied
Pass	$	1,578	$	14,302	$	31,905	$	39,988	$	24,704	$	52,482		$	2,815	$	167,774
Special Mention		-		-		2,256		411		-		801			-		3,468
Substandard		-		-		2,345		-		1,549		3,407			-		7,301
Total Owner occupied	$	1,578	$	14,302	$	36,506	$	40,399	$	26,253	$	56,690		$	2,815	$	178,543
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Non-owner occupied
Pass	$	1,738	$	44,287	$	95,604	$	40,639	$	22,463	$	149,349		$	-	$	354,080
Special Mention		-		-		2,508		-		-		2,163			-		4,671
Substandard		-		-		-		-		-		35,588			-		35,588
Doubtful		-		-		-		647		-		3,859			-		4,506
Total Non-owner occupied	$	1,738	$	44,287	$	98,112	$	41,286	$	22,463	$	190,959		$	-	$	398,845
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Multifamily
Pass	$	-	$	29,008	$	25,617	$	4,235	$	10,354	$	12,378		$	99	$	81,691
Total Multifamily	$	-	$	29,008	$	25,617	$	4,235	$	10,354	$	12,378		$	99	$	81,691
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Residential real estate
Pass	$	9,477	$	49,672	$	55,248	$	77,851	$	38,676	$	98,345		$	690	$	329,959
Substandard		-		-		124		109		-		1,288			-		1,521
Total Residential real estate	$	9,477	$	49,672	$	55,372	$	77,960	$	38,676	$	99,633		$	690	$	331,480
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Commercial and industrial
Pass	$	10,679	$	45,309	$	41,062	$	16,611	$	23,381	$	6,244		$	66,241	$	209,527
Special Mention		214		-		-		-		-		-			925		1,139
Substandard		-		5,012		14		-		345		940			10,460		16,771
Loss		-		-		-		-		-		(4	)		-		(4	)
Total Commercial and industrial	$	10,893	$	50,321	$	41,076	$	16,611	$	23,726	$	7,180		$	77,626	$	227,433
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Home equity lines of credit
Pass	$	-	$	-	$	155	$	-	$	15	$	1,953		$	125,655	$	127,778
Substandard		-		-		104		-		36		583			786		1,509
Total Home equity lines of credit	$	-	$	-	$	259	$	-	$	51	$	2,536		$	126,441	$	129,287
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	7		$	-	$	7
Construction and other
Pass	$	989	$	65,912	$	24,122	$	19,942	$	1,618	$	4,202		$	9,558	$	126,343
Special Mention		-		-		3,566		2,351		-		254			-		6,171
Substandard		-		-		-		420		-		1,771			1,011		3,202
Total Construction and other	$	989	$	65,912	$	27,688	$	22,713	$	1,618	$	6,227		$	10,569	$	135,716
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Consumer installment
Pass	$	514	$	1,623	$	966	$	228	$	71	$	3,534		$	-	$	6,936
Substandard		-		-		5		6		-		184			-		195
Total Consumer installment	$	514	$	1,623	$	971	$	234	$	71	$	3,718		$	-	$	7,131
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Total Loans	$	25,189	$	255,125	$	285,601	$	203,438	$	123,212	$	379,321		$	218,240	$	1,490,126

18

 

December 31, 2023
Term Loans Amortized Cost Basis by Origination Year														Revolving Amortized
(Dollar amounts in thousands)	2023		2022		2021		2020		2019		Prior			Cost Basis		Total
Commercial real estate:
Owner occupied
Pass	$	14,634	$	34,850	$	41,609	$	25,040	$	12,304	$	41,976		$	2,662	$	173,075
Special Mention		-		2,271		-		-		13		799			-		3,083
Substandard		-		2,356		-		1,559		146		3,326			-		7,387
Total Owner occupied	$	14,634	$	39,477	$	41,609	$	26,599	$	12,463	$	46,101		$	2,662	$	183,545
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	46		$	-	$	46
Non-owner occupied
Pass	$	43,393	$	95,098	$	40,959	$	22,707	$	32,405	$	127,469		$	504	$	362,535
Special Mention		-		2,508		-		-		-		2,197			-		4,705
Substandard		-		-		-		-		5,237		24,569			-		29,806
Doubtful		-		-		647		-		3,887		-			-		4,534
Total Non-owner occupied	$	43,393	$	97,606	$	41,606	$	22,707	$	41,529	$	154,235		$	504	$	401,580
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Multifamily
Pass	$	29,218	$	25,776	$	4,267	$	10,453	$	1,391	$	11,231		$	104	$	82,440
Substandard		-		-		-		-		-		66			-		66
Total Multifamily	$	29,218	$	25,776	$	4,267	$	10,453	$	1,391	$	11,297		$	104	$	82,506
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Residential real estate
Pass	$	50,086	$	56,180	$	78,909	$	39,476	$	19,418	$	82,441		$	672	$	327,182
Substandard		-		127		210		-		24		1,311			-		1,672
Total Residential real estate	$	50,086	$	56,307	$	79,119	$	39,476	$	19,442	$	83,752		$	672	$	328,854
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	108		$	-	$	108
Commercial and industrial
Pass	$	46,918	$	43,494	$	17,909	$	25,143	$	2,741	$	6,533		$	66,842	$	209,580
Special Mention		-		-		-		-		-		-			184		184
Substandard		13		15		-		353		124		876			10,367		11,748
Loss		-		-		-		-		-		(4	)		-		(4	)
Total Commercial and industrial	$	46,931	$	43,509	$	17,909	$	25,496	$	2,865	$	7,405		$	77,393	$	221,508
Current-period gross charge-offs	$	-	$	-	$	75	$	-	$	6	$	4		$	-	$	85
Home equity lines of credit
Pass	$	-	$	126	$	-	$	16	$	63	$	2,097		$	124,001	$	126,303
Substandard		-		105		-		36		29		583			762		1,515
Total Home equity lines of credit	$	-	$	231	$	-	$	52	$	92	$	2,680		$	124,763	$	127,818
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Construction and other
Pass	$	55,528	$	23,059	$	20,246	$	1,777	$	5,609	$	851		$	9,152	$	116,222
Special Mention		-		3,573		2,371		-		265		-			-		6,209
Substandard		-		-		420		-		1,770		-			484		2,674
Total Construction and other	$	55,528	$	26,632	$	23,037	$	1,777	$	7,644	$	851		$	9,636	$	125,105
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-		$	-	$	-
Consumer installment
Pass	$	1,810	$	1,088	$	324	$	89	$	74	$	3,669		$	-	$	7,054
Substandard		-		7		-		-		-		153			-		160
Total Consumer installment	$	1,810	$	1,095	$	324	$	89	$	74	$	3,822		$	-	$	7,214
Current-period gross charge-offs	$	-	$	25	$	-	$	-	$	-	$	38		$	-	$	63
Total Loans	$	241,600	$	290,633	$	207,871	$	126,649	$	85,500	$	310,143		$	215,734	$	1,478,130

Collateral-dependent Loans

The following table presents individually analyzed and collateral-dependent loans by class of loans (in thousands):

	March 31, 2024
	Type of Collateral
(Dollar amounts in thousands)	Real Estate		Blanket Lien		Investment/Cash		Other		Total
Commercial real estate:
Owner occupied	$	2,345	$	-	$	-	$	-	$	2,345
Non-owner occupied		8,122		-		-		1,894		10,016
Commercial and industrial		-		14,948		-		-		14,948
Total	$	10,467	$	14,948	$	-	$	-	$	27,309

	December 31, 2023
	Type of Collateral
(Dollar amounts in thousands)	Real Estate		Blanket Lien		Investment/Cash		Other		Total
Commercial real estate:
Non-owner occupied	$	8,150	$	-	$	-	$	-	$	8,150
Total	$	8,150	$	-	$	-	$	-	$	8,150

19

 

Nonperforming and Past Due Loans 

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
March 31, 2024	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate:
Owner occupied	$	178,158	$	279	$	-	$	106	$	385	$	178,543
Non-owner occupied		391,238		3,991		-		3,616		7,607		398,845
Multifamily		81,691		-		-		-		-		81,691
Residential real estate		328,670		2,132		678		-		2,810		331,480
Commercial and industrial		226,900		392		50		91		533		227,433
Home equity lines of credit		128,648		171		23		445		639		129,287
Construction and other		135,716		-		-		-		-		135,716
Consumer installment		7,123		8		-		-		8		7,131
Total	$	1,478,144	$	6,973	$	751	$	4,258	$	11,982	$	1,490,126

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2023	Current		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate:
Owner occupied	$	183,242	$	197	$	-	$	106	$	303	$	183,545
Non-owner occupied		397,964		3,616		-		-		3,616		401,580
Multifamily		82,440		-		-		66		66		82,506
Residential real estate		326,224		1,366		1,010		254		2,630		328,854
Commercial and industrial		221,304		-		146		58		204		221,508
Home equity lines of credit		126,894		447		180		297		924		127,818
Construction and other		125,040		65		-		-		65		125,105
Consumer installment		7,138		69		-		7		76		7,214
Total	$	1,470,246	$	5,760	$	1,336	$	788	$	7,884	$	1,478,130

The following tables present the recorded investment in nonaccrual loans and loans 90 and greater days past due and still on accrual by class of loans (in thousands):

	March 31, 2024
	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	$	-	$	245	$	245	$	-	$	245
Non-owner occupied		4,505		3,617		8,122		-		8,122
Multifamily		-		33		33		-		33
Residential real estate		-		1,024		1,024		-		1,024
Commercial and industrial		-		266		266		-		266
Home equity lines of credit		-		850		850		96		946
Consumer installment		184		11		195		-		195
Total	$	4,689	$	6,046	$	10,735	$	96	$	10,831

	December 31, 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	$	-	$	252	$	252	$	-	$	252
Non-owner occupied		4,534		3,616		8,150		-		8,150
Multifamily		-		66		66		-		66
Residential real estate		-		1,170		1,170		-		1,170
Commercial and industrial		-		223		223		-		223
Home equity lines of credit		-		856		856		-		856
Consumer installment		153		7		160		-		160
Total	$	4,687	$	6,190	$	10,877	$	-	$	10,877

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $128,000 and $115,000 for the three months ended March 31, 2024 and 2023, respectively.

20

 

Modifications to Borrowers Experiencing Financial Difficulty

Effective January 1, 2023, the Company implemented ASU 2022-02, which eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. The Bank may modify the contractual terms of a loan to a borrower experiencing financial difficulty to mitigate the risk of loss. Such modifications may include a term extension, interest rate reduction, significant payment deferral, other modifications, or a combination of modification types. In general, any delay in payment of greater than 90 days in the last 12 months is considered to be a significant payment deferral.

The table below details the amortized cost basis of the loans modified to borrowings experiencing financial difficulty, disaggregated by class of loans and type of concessions granted, and the financial effect of the modifications:

	For the Three Months Ended March 31, 2024
	Modifications
					Payment		Interest Rate		Interest Rate				Percentage of
					Deferral		Reduction		Reduction				Total Loans
	Payment		Term		and Term		and Term		and Principal				Held for
	Deferral		Extension		Extension		Past Due		Forgiveness		Total		Investment
Commercial real estate:
Non-owner occupied	$	-	$	14,924	$	2,507	$	-	$	-	$	17,431		1.2	%
Construction and other		-		3,202		-		-		-		3,202		0.2	%
Total	$	-	$	18,126	$	2,507	$	-	$	-	$	20,633		1.4	%

	For the Three Months Ended March 31, 2023
	Modifications
					Payment		Interest Rate		Interest Rate				Percentage of
					Deferral		Reduction		Reduction				Total Loans
	Payment		Term		and Term		and Term		and Principal				Held for
	Deferral		Extension		Extension		Past Due		Forgiveness		Total		Investment
Commercial real estate:
Non-owner occupied	$	-	$	4,179	$	-	$	-	$	-	$	4,179		0.3	%
Commercial and industrial		-		149		-		-		-		149		0.0	%
Consumer installment		-		8		-		-		-		8		0.0	%
Total	$	-	$	4,336	$	-	$	-	$	-	$	4,336		0.3	%

As of March 31, 2024, the Bank had no commitments to lend additional funds on modified loans. As of March 31, 2024, the Bank did not have any loans that were modified for borrowers experiencing financial difficulty and subsequently defaulted. As of March 31, 2024, there were no modified loans that were delinquent. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first. At  March 31, 2024 and  December 31, 2023, the Company reported $262,000 and $228,000, respectively, in residential real estate loans in the process of foreclosure.

Allowance for Credit Losses: Unfunded Commitments

Upon adoption of ASU 2016-13 on January 1, 2023, the Company recorded a separate ACL for unfunded commitments using a methodology that is inherently similar to the methodology used for calculating the ACL for loans. The liability for credit losses on these exposures is included in “Accrued interest payable and other liabilities” on the Consolidated Balance Sheet and amounted to $2.3 million and $1.8 million as of March 31, 2024, and December 31, 2023, respectively. 

NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES

In the ordinary course of business, various outstanding commitments and certain contingent liabilities are not reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments reflect the extent of involvement in particular types of financial instruments.

Commitments to Extend Credit which were composed of the following:

(Dollar amounts in thousands)	March 31, 2024		December 31, 2023
Commitments to extend credit	$	490,178	$	418,952
Standby letters of credit		5,000		5,884
Total	$	495,178	$	424,836

The commitments to extend credit involve, to varying degrees, elements of credit and interest rate risk over the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval, review procedures, and collateral requirements as deemed necessary. Loan commitments generally have fixed expiration dates within one year of their origination. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically one year, with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. The collateral is typically bank deposit instruments or customer business assets for secured letters of credit.

21

 

Commitments to Fund

In August 2023, we invested in a low-income housing tax credit operating partnership. As a limited partner, we are allocated tax credits and deductions associated with the underlying properties. Our maximum exposure to loss in connection with the partnership consists of the unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. The investment at March 31, 2024 and December 31, 2023, was $1.9 million and $2.0 million, respectively, and recorded in the Consolidated Balance Sheet in "Accrued interest receivable and other assets". We do not have any loss reserves recorded since we believe the likelihood of loss is remote. The investment is amortized over the period that we expect to receive the tax benefits using the proportional amortization method. For the three months ended March 31, 2024, we recognized $21,000 of amortization. At March 31, 2024 and December 31, 2023, we had an unfunded tax credit commitment of $1.7 million, which is recorded in the Consolidated Balance Sheet in "Accrued interest payable and other liabilities".

Cannabis Industry

We provide deposit services to customers who are licensed by the State of Ohio to do business in (or are related to) the Division of Cannabis Control as growers, processors, and dispensaries. 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 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 as a new client, 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.

Litigation

As previously disclosed, a cyber-attack occurred in April 2023 that resulted in a temporary disruption to our computer systems. A cybersecurity firm investigated the nature and scope of the incident, evaluated our systems, and confirmed that nonpublic information relating to current and former employees, customers, and others was obtained from our systems. We have no knowledge as to how the unauthorized third party has or plans to use the impacted data. On January 8, 2024, a customer filed a lawsuit against The Middlefield Banking Company in the U.S. District Court for the Northern District of Ohio related to the cyber-attack incident. A similar lawsuit was filed on January 10, 2024, against the Middlefield Banking Company in the Court of Common Pleas for Cuyahoga County, Ohio. The plaintiffs and class members in the two cases, who are current and former customers of the Bank, claim to have been harmed by alleged actions or inactions by the Bank in connection with the incident. The plaintiffs assert a variety of common law and statutory claims regarding the compromised nonpublic information and seek monetary damages, equitable and injunctive relief, pre-judgment and post-judgment interest, awards of actual and punitive damages, costs and attorneys’ fees, and other related relief. We dispute the allegations in the lawsuits.

We maintain a cyber risk insurance policy to cover the costs resulting from cyber-attacks, such as the event that occurred in April 2023. The policy has an aggregate limit of $3 million and a deductible of $50,000. The policy includes coverage for business loss, breach response, and liabilities that could occur as a result of a cyber event. We believe that our insurance policy will fully cover the losses associated with these lawsuits; however, it is possible that the losses could exceed the policy limit. It is not possible to reasonably estimate the amount of such losses or range of losses that might result from the resolution of the lawsuit filed in Cuyahoga County Common Pleas Court. We expect that any costs associated with these lawsuits, including attorney fees, adverse judgments or settlements, will be billed to and paid by the insurance company in accordance with the terms of the policy.

NOTE 9 - RELATED PARTY TRANSACTION

Loans to principal officers, directors, and their affiliates during March 31, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)	March 31, 2024			December 31, 2023
Beginning balance	$	24,185		$	2,057
New loans		2,259			23,922
Repayments		(76	)		(1,794	)
Ending balance	$	26,368		$	24,185

Deposits of related parties amount to $33.3 million and $33.1 million as of  March 31, 2024 and  December 31, 2023, respectively.

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

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 future economic, competitive, cybersecurity, and financial market conditions, conflicts around the world, and future business decisions.  These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond the Company's control.  Although the Company believes its estimates and assumptions are reasonable, actual results could vary materially from those shown.  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.

22

These forward-looking statements may involve significant risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results in these forward-looking statements.

CHANGES IN FINANCIAL CONDITION

Overview

The following is management’s discussion and analysis of certain significant factors that have affected the financial condition and results of operations of the Company as reflected on the unaudited Consolidated Balance Sheet as of March 31, 2024, as compared with December 31, 2023, and operating results for the three month periods ended March 31, 2024, and 2023. 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.

2024 Three-Month Financial Highlights (on a year-over-year basis unless noted):

● Net income was $4.2 million, compared to $4.9 million for the quarter ended March 31, 2023, and $3.5 million for the quarter ended December 31, 2023

● Earnings were $0.51 per diluted share, compared to $0.60 per diluted share for the quarter ended March 31, 2023, and $0.44 per diluted share for the quarter ended December 31, 2023

● Net interest income after the provision for credit losses was $15.1 million, compared to $16.0 million

● Noninterest income increased 6.9% to $1.8 million

● Total loans increased 7.8% to a record $1.49 billion

● Total deposits were $1.45 billion, compared to $1.43 billion

● Return on average assets annualized was 0.92%, compared to 0.78% for the quarter ended December 31, 2023

● Return on average equity annualized was 8.16%, compared to 7.13% for the quarter ended December 31, 2023

● Return on average tangible common equity⁽¹⁾ was 10.30%, compared to 9.11% for the quarter ended December 31, 2023

● Excellent asset quality with nonperforming assets to total assets of 0.60%, compared to 0.73%

● Allowance for credit losses was 1.41% of total loans, compared to 1.46%

● Equity to assets remained strong at 11.32%, compared to 11.30%

● Book value increased 5.6% to $25.48 per share

⁽¹⁾  See non-GAAP reconciliation under the section “GAAP to Non-GAAP Reconciliations”

(Dollar amounts in thousands, except per share and share amounts, unaudited)
	For the Three Months Ended
	Mar 31,			Dec 31,			Sep 30,			Jun 30,			Mar 31,
	2024			2023			2023			2023			2023
Per common share data
Net income per common share - basic	$	0.52		$	0.44		$	0.47		$	0.63		$	0.60
Net income per common share - diluted	$	0.51		$	0.44		$	0.47		$	0.63		$	0.60
Dividends declared per share	$	0.20		$	0.25		$	0.20		$	0.20		$	0.20
Book value per share (period end)	$	25.48		$	25.41		$	23.94		$	24.38		$	24.13
Tangible book value per share (period end) (1) (2)	$	20.18		$	20.10		$	18.62		$	19.02		$	19.29
Dividends declared	$	1,613		$	2,023		$	1,619		$	1,616		$	1,605
Dividend yield		3.37	%		3.06	%		3.12	%		2.99	%		2.89	%
Dividend payout ratio		38.71	%		57.10	%		42.21	%		31.74	%		32.78	%
Average shares outstanding - basic		8,091,203			8,093,478			8,092,494			8,088,793			8,138,771
Average shares outstanding - diluted		8,096,317			8,116,261			8,101,306			8,101,984			8,152,629
Period ending shares outstanding		8,067,144			8,095,252			8,092,576			8,088,793			8,088,793
Selected ratios
Return on average assets (Annualized)		0.92	%		0.78	%		0.86	%		1.17	%		1.16	%
Return on average equity (Annualized)		8.16	%		7.13	%		7.73	%		10.41	%		10.19	%
Return on average tangible common equity (1) (3)		10.30	%		9.11	%		9.91	%		13.12	%		12.77	%
Efficiency (4)		68.68	%		68.99	%		65.65	%		61.27	%		62.44	%
Equity to assets at period end		11.32	%		11.28	%		10.80	%		11.26	%		11.30	%
Noninterest expense to average assets		0.66	%		0.68	%		0.68	%		0.69	%		0.69	%

(1) See section “GAAP to Non-GAAP Reconciliations” for the reconciliation of GAAP performance measures to non-GAAP measures.

(2) Calculated by dividing tangible common equity by shares outstanding.

(3) Calculated by dividing annualized net income for each period by average tangible common equity.

(4) 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.

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	For the Three Months Ended
	Mar 31,			Dec 31,			Sep 30,			Jun 30,			Mar 31,
Yields	2024			2023			2023			2023			2023
Interest-earning assets:
Loans receivable (1)		6.11	%		6.01	%		5.82	%		5.96	%		5.45	%
Investment securities (1) (2)		3.52	%		3.52	%		3.51	%		3.54	%		3.55	%
Interest-earning deposits with other banks		4.88	%		3.71	%		4.13	%		3.98	%		3.46	%
Total interest-earning assets		5.77	%		5.64	%		5.49	%		5.60	%		5.14	%
Deposits:
Interest-bearing demand deposits		1.86	%		1.67	%		1.51	%		1.11	%		0.83	%
Money market deposits		3.81	%		3.58	%		2.94	%		2.21	%		1.52	%
Savings deposits		0.58	%		0.59	%		0.58	%		0.73	%		1.03	%
Certificates of deposit		4.06	%		3.68	%		3.27	%		2.35	%		1.71	%
Total interest-bearing deposits		2.88	%		2.56	%		2.16	%		1.60	%		1.28	%
Non-Deposit Funding:
Borrowings		5.61	%		5.57	%		5.66	%		5.26	%		4.78	%
Total interest-bearing liabilities		3.23	%		2.96	%		2.48	%		2.02	%		1.52	%
Cost of deposits		2.08	%		1.81	%		1.53	%		1.09	%		0.84	%
Cost of funds		2.42	%		2.18	%		1.80	%		1.43	%		1.02	%
Net interest margin (3)		3.54	%		3.63	%		3.82	%		4.27	%		4.19	%

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

(2) Yield is calculated on the basis of amortized cost.

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

GAAP to Non-GAAP Reconciliations

Reconciliation of Common Stockholders' Equity to Tangible Common Equity	For the Period Ended
(Dollar amounts in thousands, unaudited)	Mar 31,		Dec 31,		Sep 30,		Jun 30,		Mar 31,
	2024		2023		2023		2023		2023
Stockholders' equity	$	205,575	$	205,681	$	193,749	$	197,227	$	195,165
Less goodwill and other intangibles		42,740		42,998		43,103		43,368		39,171
Tangible common equity	$	162,835	$	162,683	$	150,646	$	153,859	$	155,994
Shares outstanding		8,067,144		8,095,252		8,092,576		8,088,793		8,088,793
Tangible book value per share	$	20.18	$	20.10	$	18.62	$	19.02	$	19.29

Reconciliation of Average Equity to Return on Average Tangible Common Equity	For the Three Months Ended
	Mar 31,			Dec 31,			Sep 30,			Jun 30,			Mar 31,
	2024			2023			2023			2023			2023
Average stockholders' equity	$	205,342		$	197,208		$	196,795		$	196,183		$	194,814
Less average goodwill and other intangibles		42,654			42,972			43,232			40,522			39,300
Average tangible common equity	$	162,688		$	154,236		$	153,563		$	155,661		$	155,514
Net income	$	4,167		$	3,543		$	3,836		$	5,092		$	4,897
Return on average tangible common equity (annualized)		10.30	%		9.11	%		9.91	%		13.12	%		12.77	%

Reconciliation of Pre-Tax Pre-Provision Income (PTPP)	For the Three Months Ended
	Mar 31,			Dec 31,		Sep 30,		Jun 30,		Mar 31,
	2024			2023		2023		2023		2023
Net income	$	4,167		$	3,543	$	3,836	$	5,092	$	4,897
Add income taxes		769			709		703		986		989
Add (recovery of) provision for credit losses		(136	)		554		1,127		814		507
PTPP	$	4,800		$	4,806	$	5,666	$	6,892	$	6,393

24

Financial Condition

General. The Company’s total assets on March 31, 2024 were $1.82 billion, a decrease of $6.2 million from December 31, 2023. For the same period, total loans increased by $12.0 million, cash and cash equivalents decreased by $14.6 million, and investment securities decreased by $2.9 million. Stockholders’ equity decreased by $106,000, or 0.1%, as a result of an increase in treasury stock and higher accumulated other comprehensive loss, partially offset by higher retained earnings. Excluding the increase in treasury stock, total stockholders’ equity increased by $949,000.

Cash and cash equivalents. Cash and cash equivalents decreased $14.6 million to $46.3 million on March 31, 2024, from $60.8 million on December 31, 2023. The decrease in cash and cash equivalents is primarily due to an increase in loans and decrease in short-term borrowings, and partially offset by an increase in deposits. 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. 

Investment securities. Management's objective in structuring the portfolio is to maintain liquidity while providing an acceptable rate of return without sacrificing asset quality. Securities available for sale on March 31, 2024, totaled $167.9 million, a decrease of $2.9 million, or 1.69%, from $170.8 million on December 31, 2023. There were no sales or purchases of securities for the three months ended March 31, 2024. During this period, the Company recorded repayments, calls, and maturities of $167,000 and an increase in the net unrealized holding loss through AOCI of $2.0 million. 

On March 31, 2024, the Company held $31.8 million at fair value of subordinated debt in other banks, as compared to $31.9 million on December 31, 2023. The average yield on this portfolio was 4.92% on March 31, 2024, as compared to 4.79% on December 31, 2023.

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 77.49% of the overall portfolio. These investments have historically proven to have extremely low credit risk.

Loans. The loan portfolio 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. Loans increased $12.0 million, or 0.81%, to $1.49 billion as of March 31, 2024. The following table summarizes fluctuation within the primary segments of the loan portfolio (in thousands):

	March 31,			December 31,
	2024			2023			$ change			% change			% of loans
Commercial real estate:
Owner occupied	$	178,543		$	183,545		$	(5,002	)		(2.73	%)		11.98	%
Non-owner occupied		398,845			401,580			(2,735	)		(0.68	%)		26.77	%
Multifamily		81,691			82,506			(815	)		(0.99	%)		5.48	%
Residential real estate		331,480			328,854			2,626			0.80	%		22.25	%
Commercial and industrial		227,433			221,508			5,925			2.67	%		15.26	%
Home equity lines of credit		129,287			127,818			1,469			1.15	%		8.68	%
Construction and Other		135,716			125,105			10,611			8.48	%		9.11	%
Consumer installment		7,131			7,214			(83	)		(1.15	%)		0.48	%
Total loans		1,490,126			1,478,130			11,996			0.81	%		100.00	%
Less: Allowance for credit losses		(21,069	)		(21,693	)		(624	)		(2.88	%)
Net loans	$	1,469,057		$	1,456,437		$	12,620			0.87	%

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 loans held for sale at March 31, 2024, and December 31, 2023. The Company recorded gains on the sale of these loans totaling $10,000 based on proceeds of $639,000 million for the three months ended March 31, 2024.

The federal banking regulators have issued guidance for those institutions that 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 that 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 March 31, 2024, commercial real estate loans (including construction, land, and land development loans) represented 302.3% of total risk-based capital; however, growth in that segment over the past 36 months was 12.6%, which is less than the 50% threshold laid out in the regulatory guidance. Construction, land, and land development loans represent 66.5% 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 in 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 that requires a periodic review of 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 as defined by regulatory requirements.

25

The Company opted not to phase in, over three years, the effects of the initial CECL entry to equity for the implementation of ASC 326, recorded on January 1, 2023. As of March 31, 2024, management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject.

The Company monitors fluctuations in unused commitments as a means of identifying potential material drawdowns on existing lines of credit. On March 31, 2024, unused line of credit commitments increased by $68.1 million, or 16.25%, from December 31, 2023. The commercial unused line of credit commitments were $343.3 million as of March 31, 2024, compared to $279.4 million on December 31, 2023.

Allowance for Credit Losses and Asset Quality. The ACL decreased by $624,000, or 2.9%, to $21.1 million on March 31, 2024, from $21.7 million on December 31, 2023. For the three months ended March 31, 2024, net loan recoveries totaled $68,000, or 0.02% of average loans, annualized, compared to $8,000 or (0.01%) of average loans, annualized, for the same period in 2023. The allocation of the recovery of credit losses associated with loans was $0.7 for the three months ended March 31, 2024. The ratio of the allowance for credit losses to nonperforming loans was 194.5% as of March 31, 2024, compared to 293.0% for the same period in the prior year. The allowance for credit losses to total loans ratio decreased from 1.46% as of March 31, 2023, to 1.41% as of March 31, 2024. 

Management analyzes the adequacy of the allowance for 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 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 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 credit losses. Future additions or reductions to the allowance for 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 credit losses allocated to these types of loans. Management believes the allowance for credit losses is appropriately stated as of March 31, 2024. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for credit losses is considered a critical accounting policy.

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

	For the Three Months Ended March 31,
	2024								2023
	Average Loan Balance		Net recoveries (charge-offs)			Net recoveries (charge-offs) to average loans			Average Loan Balance		Net recoveries (charge-offs)			Net recoveries (charge-offs) to average loans
(Dollars in Thousands)
Type of Loans:
Commercial real estate:
Owner occupied	$	180,119	$	11			0.02	%	$	187,740	$	(1	)		(0.00%	)
Non-owner occupied		398,167		-			0.00	%		385,475		-			0.00	%
Multifamily		81,679		-			0.00	%		60,759		-			0.00	%
Residential real estate		328,480		-			0.00	%		299,703		-			0.00	%
Commercial and industrial		223,323		8			0.01	%		194,314		44			0.09	%
Home equity lines of credit		127,896		(7	)		(0.02%	)		126,659		(70	)		(0.22%	)
Construction and other		129,744		-			0.00	%		98,289		-			0.00	%
Consumer installment		7,136		56			3.14	%		7,927		19			0.96	%
Total	$	1,476,543	$	68			0.02	%	$	1,360,866	$	(8	)		(0.00%	)

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.

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	Asset Quality History
(Dollar amounts in thousands)	March 31, 2024			December 31, 2023
Nonperforming loans (2)	$	10,831		$	2,111
Other real estate owned		0			0
Nonperforming assets	$	10,831		$	2,111
Allowance for credit losses (a)	$	21,069			21,693
Ratios:
Nonperforming loans to total loans		0.73	%		0.14	%
Nonperforming assets to total assets		0.60	%		0.12	%
Allowance for credit losses to total loans		1.41	%		1.47	%
Allowance for credit losses to nonperforming loans		194.52	%		1,027.62	%
Total loans	$	1,490,126		$	1,478,130
Total assets	$	1,816,668		$	1,822,883

Nonperforming loans secured by real estate totaled $10.2 million and $2.3 million as of March 31, 2024 and December 31, 2023, respectively.

A major factor in determining the appropriateness of the allowance for credit losses is the type of collateral that secures the loans. Of the total nonperforming loans on March 31, 2024, 95.4% 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 future loss exposure.

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 in 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 that requires a periodic review of 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 a 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 as defined by regulatory requirements.

The Company’s commercial real estate portfolio included the following categories as of March 31, 2024:

	Balance		Percent of			Percent of
CRE Category	(in thousands)		CRE Portfolio			Loan Portfolio
Multifamily	$	81,691		12.4	%		5.5	%
Office Space		78,789		12.0	%		5.3	%
Shopping Plazas		73,250		11.1	%		4.9	%
Self-Storage		61,525		9.3	%		4.1	%
Hospitality		39,779		6.0	%		2.7	%
Senior Living		26,545		4.0	%		1.8	%
Other		297,500		45.1	%		20.0	%
Total CRE	$	659,079		100.0	%		44.2	%

Nonperforming loans in the commercial real estate segment were $8.4 million at March 31, 2024. The allowance for credit losses for this segment totaled $11.0 million at March 31, 2024, representing an allowance for credit losses to loans ratio of 1.67% specific to the commercial real estate segment. 

Our residential real estate loans totaled $331.5 million, or 22.2% of total loans, at March 31, 2024. The Bank grants real estate loans primarily within its designated lending areas, consisting of the communities surrounding branch offices in Ashtabula, Geauga, Portage, Summit, Cuyahoga, Lake, Trumbull, Madison, Delaware, Franklin, Union, Logan, and Hardin counties in Ohio. At March 31, 2024, approximately 99% of our residential real estate loans were concentrated in Ohio. Management believes our knowledge of these markets and our relative connectedness to the consumer borrowers we serve outweighs the geographic concentration risks. Our credit policy requires minimum credit scores, evidence of stable income, and maximum loan-to-values when underwriting residential real estate loans. The evaluation of our retail credit portfolio is defined in our credit policy and incorporates the Uniform Real Credit Classification and Account Management Policy as prescribed by federal regulatory authorities. Nonperforming loans in the residential real estate segment were $1.0 million at March 31, 2024. The allowance for credit losses for this segment totaled $4.8 million at March 31, 2024, representing an allowance for credit losses to loans ratio of 1.44% specific to the residential real estate segment.

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Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling $1.45 billion or 90.4% of the Company’s total average funding sources at March 31, 2024. Total deposits increased $20.3 million on March 31, 2024, from $1.43 billion on December 31, 2023. The following table summarizes fluctuation within the primary segments of the deposit portfolio (in thousands):

	March 31,		December 31,
	2024		2023		$ change			% change
Noninterest-bearing demand	$	390,185	$	401,384	$	(11,199	)		(2.79	%)
Interest-bearing demand		209,015		205,582		3,433			1.67	%
Money market		318,823		274,682		44,141			16.07	%
Savings		196,721		210,639		(13,918	)		(6.61	%)
Time		332,165		334,315		(2,150	)		(0.64	%)
Total deposits	$	1,446,909	$	1,426,602	$	20,307			1.42	%

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 $90.4 million on March 31, 2024 and $90.3 million on December 31, 2023.     

Deposit balances in excess of the $250,000 FDIC-insured limit totaled approximately $404.4 million, or 28.0% of total deposits, at March 31, 2024 and approximately $390.0 million, or 27.3% of total deposits, at December 31, 2023.

States and political subdivisions in the U.S. deposits (“Public funds”) compared to total deposits were $160.0 million, or 11.1% at March 31, 2024 and $141.3 million, or 9.9% at December 31, 2023.

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 FHLB, subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings decreased by $26.0 million to $137.0 million as of March 31, 2024, compared to $163.0 million at December 31, 2023. Other borrowings were relatively unchanged at $11.8 million as of March 31, 2024 and $11.9 million on December 31, 2023.   

Stockholders’ equity. Stockholders’ equity decreased $106,000, or 0.05%, to $205.6 million at March 31, 2024 from $205.7 million at December 31, 2023. This decrease was primarily the result of a $1.1 million increase in treasury stock due to repurchasing 43,858 common shares during the three months ended March 31, 2024, $1.6 million of cash dividends paid, and an increase of $2.0 million in other comprehensive loss due to an increase in the unrealized losses on investment securities available for sale. These changes were partially offset by $4.2 million in net income.

The Company's tangible book value per share, which is a non-GAAP financial measure, was $20.18 at March 31, 2024 compared to $19.29 at March 31, 2023 and $20.10 at December 31, 2023. Tangible equity has been impacted by the changes in stockholders' equity described in the previous paragraph, including the unrealized losses of the Company's available-for-sale investment securities portfolio.  Net unrealized losses from available for sale investment securities were $23.0 million as of March 31, 2024, compared to net unrealized losses of $24.4 million at March 31, 2023, and net unrealized losses of $20.4 million at December 31, 2023.

RESULTS OF OPERATIONS

General. Net income for the three months ended March 31, 2024, was $4.2 million, a $729,000, or 14.9%, decrease from the amount earned during the same period in 2023. Diluted earnings per share for the quarter was $0.51 for the three months ended March 31, 2024 and $0.60 for the same period in 2023.

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest-earning assets and interest-bearing liabilities. Management reviews and periodically adjusts the mix of interest-earning assets and interest-bearing 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 March 31, 2024, totaled $15.0 million, a decrease of 9.3% from that reported in the comparable period of 2023. The net interest margin was 3.54% for the three months ended March 31, 2024, a decrease of 65 basis points for the same period of 2023. The decrease in the net interest margin is attributable to an increase in the average balance of interest-bearing deposits of $96.9 million, coupled with a 131-basis point increase in the yield earned on those deposits. This was partially offset by a $115.7 million increase in the average balance of loans receivable, coupled with a 66-basis point increase in the rate paid on those loans.

The Company is currently in a liability-sensitive position and expects to remain so for the next two-year outlook period. An increase in rates 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 liability sensitivity is due to deposit account increase in cost of funds. 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 March 31, 2024, nearly all loan contracts with floor rates exceed their contractual floor rates and are repricing accordingly with rising interest rates. Please refer to Item 3, Quantitative and Qualitative Disclosures about Market Risk, for further discussion on asset and liability management and interest rate sensitivity.

Interest and dividend income. Interest and dividend income increased $4.3 million or 21.2%, for the three months ended March 31, 2024, compared to the same period in the prior year. This is attributable to a $4.1 million increase in interest and fees on loans and a $187,000 increase in interest on interest-earning deposits in other institutions, offset by a decrease of $101,000 in interest on federal funds sold. The average balance of investment securities decreased by $221,000, or 0.1%, and the 3.52% yield on the investment portfolio decreased by 4 basis points, from 3.55%, for the same period in the prior year.  The yield for the investment portfolio is based on amortized cost.

Interest expense. Interest expense increased by $5.8 million, or 153.9%, for the three months ended March 31, 2024, compared to the same period in the prior year. This is attributable to an increase in deposit expense of $4.5 million and a $1.4 million increase in short-term and other borrowings expenses. The increase in deposit expense is attributable to an increase in the average balance of interest-bearing deposits of $96.9 million, or 0.4% as well as an increase of 235 basis points in the rates paid on certificates of deposits and an increase of 229 basis points in the rates paid on money market deposits. The increase in short-term borrowing expenses is a result of the Bank taking on additional FHLB advances.

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Provision for credit losses. The provision for credit losses represents the charge to income necessary to adjust the allowance for 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 the loan portfolio for estimated probable expected credit losses. Based on this review, a recovery of credit losses of $136,000 was recorded for the three months ended March 31, 2024, including a recovery for credit losses on loans of $692,000 and a reserve for unfunded commitments of $556,000. A provision of  $507,000 was recorded for the three months ended March 31, 2023. The recovery for credit losses for the three months ended March 31, 2024 was mainly due to changes in projected loss drivers, prepayment assumptions, and curtailment expectations over the reasonable and supportable forecast period in the calculation of the allowance for credit losses.

The ACL to total loans for the quarter ended March 31, 2024, was 1.41%, compared to 1.46% during the same period in the prior year. The Company remains confident in its conservative and disciplined approach to credit and risk management.

Noninterest income. Noninterest income increased by $116,000, or 6.9%, for the three months ended March 31, 2024, over the comparable 2023 period. This increase was the result of a $113,000 increase in other income, a $86,000 improvement in loss on equity securities, a $27,000 increase in earnings on bank-owned life insurance, and a $18,000 increase in revenue from investment services. These increases were partially offset by a $78,000 decrease in service charges on deposit accounts and a $35,000 decrease in gross rental income.

Noninterest expense. Noninterest expense of $12.0 million for the first quarter of 2024 was 1.4%, or $171,000 million higher than the first quarter of 2023, primarily due to the $481,000 million increase in salaries and employee benefits, a $179,000 increase in data processing and information technology costs, a $131,000 increase in federal deposit insurance expense, and a $20,000 increase in professional fees. These increases were partially offset by a $144,000 decrease in occupancy expense, a $245,000 decrease in merger-related costs, and a decrease of $77,000 in equipment expense. The Company also recognized $99,000 in gross OREO expenses in the three months ended March 31, 2024. 

To date, the Bank has not experienced any material losses related to cyber-attacks or other information security breaches; however, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. On April 12, 2023, a cyber-attack resulted in a disruption to the computer systems of the Bank. The Bank took immediate action to remediate the security vulnerability and retained a cybersecurity firm to investigate the nature and scope of the incident. Restoration efforts were completed and normal operations resumed shortly thereafter. The Bank has put additional security measures in place and continuously monitors for suspicious activity. The Company does not expect this incident to have a material impact on its business operations or financial results.

Provision for income taxes. The Company recognized $769,000 in income tax expense for the three months ended March 31, 2024, which reflected an effective tax rate of 15.58%, as compared to $989,000 in income tax expense with an effective tax rate of 16.81% for the comparable 2023 period. 

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 spreads and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages, the average loan balances include nonaccrual loans and exclude the allowance for 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 March 31,
	2024							2023
	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽¹⁾	$	1,476,543	$	22,395		6.11	%	$	1,360,866	$	18,275		5.45	%
Investment securities (1)(2)		193,810		1,439		3.52	%		194,031		1,438		3.55	%
Interest-earning deposits with other banks ⁽³⁾		64,139		778		4.88	%		69,308		591		3.46	%
Total interest-earning assets	$	1,734,492	$	24,612		5.77	%	$	1,624,205	$	20,304		5.14	%
Noninterest-earning assets		88,192							89,158
Total assets	$	1,822,684						$	1,713,363
Interest-bearing liabilities:
Interest-bearing demand deposits	$	211,009		978		1.86	%	$	177,935	$	364		0.83	%
Money market deposits		298,479		2,827		3.81	%		208,408		783		1.52	%
Savings deposits		201,080		290		0.58	%		315,049		804		1.03	%
Certificates of deposit		333,871		3,371		4.06	%		246,151		1,039		1.71	%
Short-term borrowings		144,357		1,993		5.55	%		56,459		653		4.69	%
Other borrowings		11,840		184		6.25	%		12,038		155		5.22	%
Total interest-bearing liabilities	$	1,200,636	$	9,643		3.23	%	$	1,016,040	$	3,798		1.52	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	$	400,209						$	491,649
Other liabilities		16,497							10,860
Stockholders' equity		205,342							194,814
Total liabilities and stockholders' equity	$	1,822,684						$	1,713,363
Net interest income			$	14,969						$	16,506
Interest rate spread ⁽⁴⁾						2.54	%						3.62	%
Net interest margin ⁽⁵⁾						3.54	%						4.19	%
Ratio of average interest-earning assets to average interest-bearing liabilities						144.46	%						159.86	%

(1) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were $281 and $278 for the three months ended March 31, 2024 and 2023, respectively.

(2) Yield is calculated on the basis of amortized cost.

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(3) Includes dividends received on restricted stock.

(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

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

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 March 31, 2024, and 2023, 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.

	2024 versus 2023
	Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total
Interest-earning assets:
Loans receivable	$	1,567		$	2,553		$	4,120
Investment securities		(2	)		3			1
Interest-earning deposits with other banks		(44	)		231			187
Total interest-earning assets	$	1,521		$	2,787		$	4,308
Interest-bearing liabilities:
Interest-bearing demand deposits	$	68		$	546		$	614
Money market deposits		340			1,704			2,044
Savings deposits		(292	)		(222	)		(514	)
Certificates of deposit		373			1,959			2,332
Short-term borrowings		1,025			315			1,340
Other borrowings		(3	)		32			29
Total interest-bearing liabilities	$	1,511		$	4,334		$	5,845
Net interest income	$	10		$	(1,547	)	$	(1,537	)

LIQUIDITY

Management's objective in managing liquidity is to continue meeting the cash flow needs of banking customers, such as new or increased borrowings or deposit withdrawals, as well as the Company’s financial commitments, while doing so at a reasonable cost and in a timely manner. The principal sources of liquidity are customer deposits, loan repayments, maturing and principal reductions and sales of securities available for sale, and federal funds sold, which generate cash that the Company deposits with banks. While investment securities available for sale are generally considered as a source of cash, in the current interest rate environment, it is unlikely that any of these securities would be sold for 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 deposits.

At March 31, 2024, the additional borrowing capacity at the FHLB was $482.1 million, as compared to $430.1 million on December 31, 2023. Considering the Company’s strong capital levels, robust liquidity, and diverse loans and deposit portfolios, along with the maximum borrowing capacity of $644.1 million at the FHLB, the Company did not need 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 liquidity, the FHLB capacity would likely be used before other funding mechanisms.

At March 31, 2024, total net available liquidity was $745.7 million, which accounted for 5.15% of total deposits. At March 31, 2024, 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 the Bank with strong liquidity as of March 31, 2024. Although the Company currently exhibits strong liquidity, management will continue to monitor liquidity in future periods.

For the three months ended March 31, 2024, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment, the recovery of credit losses, origination and proceeds from the sale of loans held for sale, amortization of CDI, earnings on bank-owned life insurance, amortization of premium and discount on investment securities, and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Consolidated Statement 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 investment securities available for sale, individually analyzed loans, and other real estate owned that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

Management believes that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the inflation rate. It should be noted that interest rates and inflation do affect each other but do not always move in correlation with each other. Please refer to item 3, Quantitative and Qualitative Disclosures about Market Risk, for further discussion on interest rate risk.

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.

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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, the 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.

The Bank and the Company met each of the well-capitalized ratio guidelines as of March 31, 2024. The following table indicates the capital ratios for the Bank and the Company as of March 31, 2024, and December 31, 2023, as well as the capital category threshold ratios for a well-capitalized, adequately capitalized plus the capital conservation buffer institution.

	As of March 31, 2024
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.50	%		11.67	%		11.67	%		12.93	%
Middlefield Banc Corp.		10.64	%		11.98	%		11.47	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

	As of December 31, 2023
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.48	%		11.82	%		11.82	%		13.08	%
Middlefield Banc Corp.		10.68	%		12.18	%		11.66	%		13.43	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

ASSET AND LIABILITY MANAGEMENT

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives, and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the 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 meets quarterly, and generally monitors various asset and liability management policies and strategies.

Interest Rate Sensitivity Simulation Analysis

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

Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and 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.

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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 assumed the interest-earning asset and interest-bearing liability levels at March 31, 2024, and December 31, 2023, remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over one year from the March 31, 2024, and December 31, 2023 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 March 31, 2024, and December 31, 2023, for portfolio equity.  

	March 31, 2024						December 31, 2023
Change in Rates	% Change in NII			% Change in EVE			% Change in NII			% Change in EVE
+200bp		(3.20	%)		(8.60	%)		(3.20	%)		(9.20	%)
-100bp		1.03	%		2.30	%		1.73	%		2.90	%

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2024, have remained unchanged from December 31, 2023. 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 securities available for sale, loan portfolios, and unfunded commitments. Please refer to Note 1 - Summary of Significant Accounting Policies 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 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
	See the information in Note 8, which we incorporate here by reference.
	From time to time, the Company and the subsidiary bank may be involved in litigation relating to claims arising out of their normal course of business. In the opinion of management, no other current legal proceedings are material to the Company's financial condition or the subsidiary bank, either individually or in the aggregate.

Item 1a.	Risk Factors
	The Company is attentive to various risks and continuously evaluates the potential impact of such risks. There have been no material updates or changes in risks faced by the Company since December 31, 2023. For more information regarding our risk factors, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

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

The following table summarized the Company's repurchases of common shares for the three months ended March 31, 2024:

2024 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
January 1-31		-	$	-		-		293,910
February 1-29		-		-		-		293,910
March 1-31		43,858		24.00		43,858		250,052
Total		43,858	$	24.00

(a) In February 2022, the Board of Directors authorized the repurchase of up to 300,000 of common stock under the Company's repurchase program (the "Program") to enhance the value of Company stock and manage its capital. In February 2023, the Board of Directors authorized the Company to repurchase an additional 300,000 shares under the Program. The Company has completed the repurchase of 349,948 shares under the Program through March 31, 2024. The Program may be modified, suspended or terminated by the Company at any time.

Item 3.	Defaults Upon Senior Securities
	None

Item 4.	Mine Safety Disclosures
	N/A

Item 5.	Other information
	During the three months ended March 31, 2024, there were no “Rule 10b5-1 trading plans” or “non-Rule 10b5-1 trading arrangements” adopted, modified or terminated by any director or officer of the Company (as such terms are defined in Item 408 of Regulation S-K of the Exchange Act).

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Item 6. Exhibits

Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended March 31, 2024

Exhibit Number	Description	Location
3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended	Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006
3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on 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*	Split-Dollar Agreement between The Middlefield Banking Company and Rebecca A. Noblit	filed herewith
10.2*	Split-Dollar Agreement between The Middlefield Banking Company and Thomas M. Wilson	filed herewith

10.3	[reserved]
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*	Change in Control Agreement between Middlefield Banc Corp. and Michael L. Cheravitch	filed herewith
10.4.2*	Change in Control Agreement between Middlefield Banc Corp. and Rebecca A. Noblit	filed herewith
10.4.3*	Change in Control Agreement between Middlefield Banc Corp. and Thomas M. Wilson	filed herewith
10.4.4*	Change in Control Agreement between Middlefield Banc Corp. and Sarah A. Winters	filed herewith
10.4.5	[reserved]
10.4.6	[reserved]
10.4.7*	Amended change in Control Agreement between Middlefield Banc Corp. and Michael C. Ranttila	Incorporated by reference to Exhibit 99 of Middlefield Banc Corp.’s Form 8-K Report filed on August 15, 2023
10.4.8*	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*	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

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10.8*	Supplemental Executive Retirement Benefits Agreement with Ronald L. Zimmerly, Jr.	filed herewith
10.9*	First Amendment to the Supplemental Executive Retirement Benefits Agreement with Ronald L. Zimmerly, Jr.	filed herewith
10.10*	Secondary Supplemental Executive Retirement Plan with Ronald L. Zimmerly, Jr.	filed herewith
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*	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*	Supplemental Executive Retirement Plan with Ronald L. Zimmerly, Jr.	filed herewith
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	[reserved]
10.17*	DBO Agreement with Teresa M. Hetrick	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.18 *	Executive Deferred Compensation Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012
10.19	[reserved]
10.20*	DBO Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.21*	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.22*	Annual Incentive Plan	Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019
10.22.1	[reserved]
10.23**	Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020
10.24**	Amended Executive Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020
10.25**	Amended Executive Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020
10.26**	Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.26 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020
10.27**	Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.27 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020
10.28**	Executive Deferred Compensation Agreement with Charles O. Moore	Incorporated by reference to Exhibit 10.28 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

35

10.29* 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

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 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 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 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 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 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

36

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: May 14, 2024	By: /s/ Ronald L. Zimmerly, Jr.
	----------------------------------------
	Ronald L. Zimmerly, Jr.
	Chief Executive Officer
	(Principal Executive Office)

Date: May 14, 2024	By: /s/Michael C. Ranttila
	----------------------------------------
	Michael C. Ranttila
	Executive Vice President, Chief Financial Officer
	(Principal Financial and Accounting Officer)

37