Middlefield Banc (MBCN) 10-K 2009 FY Annual report

Exhibit 13

Statistical Summary	2
Decade of Progress	4
Letter to Our Shareholders	8
Letter from the Chairman	10
Middlefield Banc Corp. Board of Directors	11
Emerald Bank Directors & Officers	14
Emerald Bank Staff & Branch Locations	15
The Middlefield Banking Company Staff	16
The Middlefield Banking Company Officers	17
The Middlefield Banking Company Branch Locations	18
Financials	21

Middlefield Banc Corp.    2

2009 Annual Report     3

	2000			2001			2002
Interest Income	$	12,770,170		$	13,706,569		$	14,119,963
Interest Expense		5,909,884			6,747,922			6,148,086
Net Interest Income		6,860,286			6,958,647			7,971,877
Provision for Loan Loss		275,000			170,000			300,000
Net Interest Income After Provision for Loan Losses		6,585,286			6,788,647			7,671,877
Noninterest Income, Including Security Gains/Losses		982,663			1,194,193			1,143,217
Noninterest Expense		4,408,617			4,741,374			5,206,339
Income Before Income Taxes		3,159,332			3,241,466			3,608,755
Income Taxes		992,661			970,859			1,107,806
Net Income	$	2,166,671		$	2,270,607		$	2,500,949
Total Assets	$	176,488,813		$	197,857,964		$	226,245,533
Deposits		147,166,046			167,382,728			187,384,494
Equity Capital		18,243,362			19,786,807			21,746,408
Loans Outstanding, Net		133,266,893			150,766,103			172,642,646
Allowance For Loan Losses		2,037,322			2,062,252			2,300,485
Net Charge Offs (Recoveries)		(6,185	)		145,070			61,767
Full Time Employees (Average Equivalents)		57			64			66
Number of Offices		4			5			5
Earnings Per Share	$	1.50		$	1.54		$	1.68
Dividends Per Share		0.40			0.52			0.58
Book Value Per Share		12.96			13.93			15.35
Dividends Pay-out Ratio		27.47	%		34.00	%		34.30	%
Cash Dividends Paid	$	595,255		$	772,068		$	857,751
Return on Average Assets		1.31	%		1.22	%		1.17	%
Return on Average Equity		12.83	%		11.89	%		12.08	%

Middlefield Banc Corp.    4

2003			2004			2005			2006			2007			2008			2009
$	14,647,163		$	15,732,536		$	17,378,504		$	19,494,550		$	24,872,675		$	26,037,812		$	26,050,581
	5,724,907			5,768,898			6,654,614			8,567,442			13,530,919			14,058,084			11,782,825
	8,922,256			9,963,638			10,723,890			10,927,108			11,341,756			11,979,728			14,267,756
	315,000			174,000			302,000			60,000			429,391			608,000			2,578,047
	8,607,256			9,789,638			10,421,890			10,867,108			10,912,365			11,371,728			11,689,709
	1,428,144			1,779,231			2,119,237			2,427,455			2,631,851			2,226,506			2,668,280
	6,105,450			6,965,706			7,424,640			7,938,373			9,372,650			10,596,352			12,649,577
	3,929,950			4,603,163			5,116,487			5,356,190			4,171,566			3,001,882			1,708,412
	1,131,330			1,330,000			1,415,156			1,471,943			796,223			387,003			(72,574	)
$	2,798,620		$	3,273,163		$	3,701,331		$	3,884,247		$	3,375,343		$	2,614,879		$	1,780,986
$	262,369,448		$	291,213,986		$	311,214,191		$	340,603,704		$	434,273,056		$	467,846,934		$	558,657,769
	219,839,910			239,885,451			249,449,640			271,050,193			362,918,000			394,819,601			487,106,284
	23,504,314			24,822,024			27,289,365			30,463,934			34,961,384			35,059,248			36,707,271
	190,358,883			213,029,852			231,213,699			246,341,647			306,146,646			318,018,530			348,660,137
	2,521,270			2,623,431			2,841,098			2,848,887			3,299,276			3,556,763			4,936,575
	94,215			71,839			84,333			52,211			422,529			350,513			1,198,235
	72			73			75			80			91			101			106
	6			6			6			8			9			10			10
$	1.89		$	2.18		$	2.50		$	2.60		$	2.17		$	1.72		$	1.15
	0.65			0.72			0.80			0.87			0.94			1.03			1.04
	16.49			17.67			19.25			20.30			22.56			22.83			23.46
	34.37	%		32.72	%		31.69	%		33.43	%		43.07	%		60.25	%		90.28	%
$	961,901		$	1,070,833		$	1,173,044		$	1,298,567		$	1,453,707		$	1,575,482		$	1,607,911
	1.13	%		1.17	%		1.23	%		1.22	%		0.85	%		0.58	%		0.36	%
	12.39	%		13.36	%		14.43	%		13.59	%		10.06	%		7.91	%		4.90	%

NOTES: (1) The above per share amounts have been restated to reflect a two for one stock split effected in 2000 and 5% stock dividends paid in 2002, 2003, 2004, 2005, 2006 and 2007.

2009 Annual Report     5

Thomas G. Caldwell —President and Chief Executive Officer

To our Shareholders and Friends

On the following pages you will find our report on the performance of your company for 2009. The level of growth surpassed any in our long history. Additionally, in the face of continued unsettled economic times, locally, nationally, and across the globe, we are pleased to report another year of strong profitability.

Middlefield Banc Corp. ended 2009 with total assets of $558.7 million. This represents an increase of $90.8 million, or 19.4%, from our position at December 31, 2008. There was strong growth on both sides of the balance sheet and at both banking affiliates. The success that we enjoyed in the past year is directly attributable to the fine group of professionals with whom I am fortunate to work on a daily basis.

Deposits at year-end totaled $487.1 million. This represents an increase of $92.3 million from the end of 2008. Although all categories experienced positive results, the majority of our growth came in the lower cost categories. You will note that this strong growth was achieved while our interest expense on deposits decreased $2.1 million from the prior year. This increase in funding was utilized to grow our investment portfolio and, more importantly, to fund borrowing needs within our markets. Net loans outstanding grew to $348.7 million, nearly 10% higher than our previous record level. Contrary to much of the popular media stories, we continue to actively seek good lending opportunities.

As with seemingly each of the past several years, 2009 did present strong challenges. We found an increase in the level of loan delinquencies beyond any previously experienced. In many cases, this was the outgrowth of unemployment and underemployment of our neighbors. Even though our credit quality numbers reflect higher charge-offs and foreclosures, please let me assure you that we continue to work closely with all borrowers in an effort to achieve a mutually beneficial result. As community bankers, our present and future success is well grounded in our ability to contribute to strength within our markets.

You will note the impact of and our response to credit quality issues on our income statement. Our provision expense for 2009 was nearly $2.0 million higher than that taken for 2008. This factor nearly offset the $2.3 million positive growth in net interest income. Additionally, net income was impacted by both higher FDIC premiums and a one-time FDIC special deposit insurance assessment. 2009 also saw the first full year of operation of our two newest banking offices. While this growth is not without short-term negatives, we firmly believe that we are better positioned for positive long-term effect.

Net income for 2009 was $1.8 million, or $ 1.15 per diluted share. While disappointing from an historical perspective, our ability to achieve strong earnings is testament to the excellent foundation upon which your company has been built. Moving forward, our continued efforts to resolve issues within our credit portfolio and the development of our newer offices should work to return earnings to more familiar levels.

Middlefield Banc Corp.      8

As Thomas Paine, the famous pamphleteer of the American Revolution, wrote, “These are the times that try men’s souls.” These words well apply to 2009 and what we can foresee of 2010. Historically, banking has been managing risk, be it credit risk, liquidity risk, or interest rate risk. These all were, to some degree, manageable. However, there is a new risk looming very large, one that is unknown and portends future uncertainty. This new risk is Government risk.

As is all too often the case, when the national economy dips or struggles, the response is to enact new and onerous rules and regulations with little regard for the ultimate result. The disruption within the financial sector over the last few years was based in a few very large companies. Community banks, such as ours, continued to do what we have always done — work to fill the financial needs of our friends and neighbors. The problems were not of our doing. However, the changes that have been mandated will, without a doubt, impact our operations and our performance. You have our commitment that we will work diligently to mitigate the negative effect of this new risk.

In 2009, we renewed our focus on relationship banking. Our associates were provided with training that will manifest itself in stronger bonds with our clients. We have been fortunate to have a strong foundation upon which to build. I know that you will see positive results as we move forward.

For 2010, our efforts will remain true to our fundamentals. We will continue to enhance the capabilities of our team members, increase the number and depth of our relationships, positively impact our communities, and improve our financial performance for our shareholders. Opportunities abound. We will work diligently to seize them.

We believe that we assessed the challenges of 2009 with clarity and faced them early, adjusting our business model appropriately. While much uncertainty remains, both locally and nationally, I am excited by the possibilities. Our disciplined approach to serving our markets should serve us well. Our foundation and our fundamentals are sound.

Your continued confidence in our abilities and our performance is greatly appreciated. We remain committed to providing you with a safe investment and a sound return. We welcome your presence as we continue to build a company dedicated to delivering only the highest quality of financial services. Middlefield Banc Corp. has been and remains safe, solid, and sound.

Sincerely,

Thomas G. Caldwell
President and Chief Executive Officer

2009 Annual Report      9

Richard T. Coyne—Chairman, Board of Directors

Chairman’s Report to the Shareholders

When you read your 2009 annual report to shareholders you will find a mixture of good news and news that suggests there is room for improvement in our operations.

Our officers, managers and employees have produced amazing results in a very difficult business environment.

You will read that our customers, your neighbors, have increased total deposits by 23.4% and our operating companies were able to increase our net loans by $30.6 million dollars. This is community banking at its best, neighbors looking out for neighbors.

Our 2009 record is a testimony to our commitment to you, our shareholders. We will improve on our weaknesses and work tirelessly toward making 2010 a year that surpasses 2009’s record growth in total assets, net loans and deposits. It is because we believe in people, in community and in responsibility that all these goals are achievable.

Thank you for your continued support of Middlefield Banc Corp.

Sincerely yours,

Richard T. Coyne
Chairman, Board of Directors

Middlefield Banc Corp.      10

Board of Directors

	Richard T. Coyne — 1997 Chairman, Board of Directors, Middlefield Banc Corp. The Middlefield Banking Company Retired: Jaco Products and Capital Plastics		Carolyn J. Turk, C.P.A. — 2004 Controller Molded Fiber Glass Companies
	Frances H. Frank — 1995 Secretary/Treasurer The Frank Agency, Inc.		William J. Skidmore — 2007 Northeast Ohio Senior District Manager Waste Management of Ohio, Inc.
	Thomas G. Caldwell — 1997 President and Chief Executive Officer Middlefield Banc Corp. The Middlefield Banking Company		Kenneth E. Jones — 2008 President Chesapeake Financial Advisors
	James R. Heslop, II — 2001 Executive Vice President Chief Operating Officer Middlefield Banc Corp. The Middlefield Banking Company		Robert W. Toth — 2009 Retired: Gold Key Processing, Ltd
	James J. McCaskey — 2004 President McCaskey Landscape and Design, LLC		Eric W. Hummel* — 2009 President Hummel Construction

* denotes The Middlefield Banking Company Director only

2009 Annual Report      11

Board of Directors	Officers
Kenneth E. Jones — 2004	James L. Long — 2008
Chairman, Board of Directors, Emerald Bank	President and Chief Executive Officer
President
Chesapeake Financial Advisors	Donald L. Stacy — 2007
	Chief Financial Officer and Treasurer
George J. Kontogiannis, AIA — 2004
Chief Executive Officer	Joe T. Glassco — 2009
The Kontogiannis Companies	Vice President
	Commercial Lender
Joseph C. Zanetos — 2004
President	Charles T. Woodson — 2008
Anthony-Thomas Candy Co.	Assistant Vice President
	Westerville Branch Manager
Clayton W. Rose, III, C.P.A. — 2006
Shareholder	Laura E. Neale — 2010
Rea & Associates, Inc.	Assistant Vice President
	Commercial Lender
Thomas G. Caldwell — 2007
President and Chief Executive Officer	Barbara Howard — 2004
Middlefield Banc Corp.	Administrative Officer
The Middlefield Banking Company	Accounting
Richard T. Coyne — 2007	Jessica L. Vituccio — 2009
Chairman, Board of Directors, Middlefield Banc Corp.	Administrative Officer
The Middlefield Banking Company	Loan Specialist
Retired: Jaco Products and Capital Plastics
James L. Long — 2008
President and Chief Executive Officer
Emerald Bank

Middlefield Banc Corp.      14

Staff	Branch Locations
Dublin Branch: Valorie Thorpe — 2004 —Branch Supervisor Elaine Gaub — 2005 —Customer Services Marcia Boatwright — 2009 —Customer Services Westerville Branch: Lisa Stokes — 2006 —Branch Supervisor Rebekah Bolton — 2008 —Customer Services Tracy Needham — 2008 —Customer Services
	Dublin BranchDrive up ATM
	6215 Perimeter Drive
	Dublin, Ohio 43017
	614.793.4631• fax: 614.793.8922
	Westerville BranchDrive up ATM
	17 North State Street
	Westerville, Ohio 43081
	614.890.7832• fax: 614.890.4633

2009 Annual Report      15

Staff

Main Office:

Louise Fenselon — 1984 —Head Teller
Bonnie Steele — 1985 —Customer Services
Diana Koller — 1998 —Teller
Rachel Reese — 2005 —Receptionist
Amanda Howes — 2006 —Teller
Jenna Janssen — 2006 —Teller*
Kristina Stephens — 2006 —Customer Services
Linda Chandler — 2007 —Teller
Katie Wolfert — 2007 —Teller*
Brenda Bowden — 2008 —Teller
Benjamin Yeater — 2009 —Teller*

West Branch:

Patti Haendel — 1982 —Customer Services
Rachel Lilly — 1985 —Head Teller
Amy Kothera — 2006 —Teller
Jodi Fisher — 2008 —Teller
Linda Hammel — 2008 —Teller
Bethany Pentek — 2008 —Teller
Amy Blair — 2009 —Teller*
Karrie Simcox — 2009 —Teller*

Garrettsville Branch:

Gretchen Cram — 2008 —Branch Manager
Vickie Moss — 1998 —Teller
Colleen Steele — 1998 —Head Teller
Dawn Semich — 2005 —Customer Services
LynnRae Derthick — 2006 —Teller
Leah McPhail — 2006 —Teller*
Donna Marcello — 2009 —Teller

Chardon Branch:

Jean Carter — 2009 —Branch Manager
Amanda DiMeolo — 2001 —Customer Services
Gretchen Mihalic — 2001 —Teller*
Kim Koynock — 2005 —Teller*
Beverly Palinsky — 2005 —Teller*
Dottie Brown — 2006 —Head Teller
Dianne Knuth — 2009 —Teller*

Orwell Branch:

Jessica Slusher — 2006 —Teller*
Lisa Swango — 2006 —Customer Services
Michelle Scott — 2007 —Teller
Melissa Gay — 2008 —Teller*
Denise Smith — 2009 —Teller*

Mantua Branch:

Rebecca Reinard — 2002 —Head Teller
Jodie Lawless — 2004 —Customer Services
Melissa Mathews — 2009 —Teller*

Newbury Branch:

Kathy Shanholtzer — 2007 —Branch Manager
Diane Thomas — 2006 —Teller*
Susan Grosik — 2008 —Teller
Helen Milburn — 2008 —Customer Services
Marlene Stefancin — 2009 —Teller*

Cortland Branch:

Jeanette Meardith — 2006 —Teller
Onita Kocka — 2008 —Teller*
Sherry Krok — 2008 —Customer Services
Dane Bliss — 2009 —Teller*
Shannon Smith — 2009 —Teller*

Loan Department:

Helen Stowe — 1985 —Loan Administrative Assistant
Jane Armstrong — 1998 —Lender
Vivian Helmick — 1998 —Loan Administrative Assistant
Carolyn Fackler — 2001 —Loan Administrative Assistant
Sarah Brook — 2004 —Loan Administrative Assistant
Jamie Peck — 2003 —Loan Collection Manager
Sue Trumbull — 2005 —Loan Administrative Assistant
Joan Limpert — 2006 —Loan Administrative Assistant
Brian Martinko — 2006 —Lender
Darleen Beaver — 2007 —Loan Receptionist
Terry Lehmann — 2009 —Credit Analyst

Operations:

Karen Westover — 1983 —Bookkeeper
Pamela Malcuit — 1989 —Bookkeeper
Donna Williams — 1990 —Bookkeeper
Lauren Harth — 1995 —Audit Assistant*
Tara Morgan — 1997 —Proof Operator
Bonnie Hofstetter — 1998 —Courier*
Lisa Sanborn — 2000 —Bookkeeper
Melody Askey — 2005 —Compliance Assistant
Marcia Dziczkowski — 2008 —Float Teller
David Harth — 2008 —Facility Maintenance
Carrie Reiter — 2008 —Courier*
Dale Moore — 2009 —Computer Support Technician
Michael Wolf — 2009 —Accounting Specialist

Financial Services:

Thomas Hart — 2004 —Financial Consultant

* denotes part time

Middlefield Banc Corp.    16

Officers
Thomas G. Caldwell — 1986	Thomas Munson — 2003
President and Chief Executive Officer	Vice President/Lending
James R. Heslop, II — 1996	Matthew Bellin — 2006
Executive Vice President	Vice President
Chief Operating Officer	Commercial Lender
Teresa M. Hetrick — 1996	Felicia Hough — 2009
Senior Vice President	Vice President
Operations/Administration	Regional Branch Administration
Jay P. Giles — 1998	Karen Branham — 1983
Senior Vice President	Assistant Vice President
Senior Lender	Bookkeeping Manager
Donald L. Stacy — 1999	Gail Neikirk — 1983
Senior Vice President	Assistant Vice President
Chief Financial Officer	Executive Secretary
Dennis E. Linville — 2006	Thomas R. Neikirk — 1994
Senior Vice President	Assistant Vice President
Area Executive	West Branch Manager
Kathleen M. Johnson — 1971	Marlin J. Moschell — 2000
Vice President	Assistant Vice President
Chief Accounting Officer	Orwell Lending Officer
Joann Vance — 1986	Kathy Vanek — 1998
Vice President	Banking Officer
Human Resource Administrator	Cortland Branch Manager
Jack L. Lester — 1990	Joan Sweet — 2002
Vice President	Banking Officer
Compliance and Security Officer	Mantua Branch Manager
Alfred F. Thompson, Jr. — 1996	Kevin Mitchell — 2007
Vice President	Banking Officer
Loan Administration	Main Office Manager
Sharon R. Jarold — 2001
Vice President
Commercial Lender

2009 Annual Report       17

Main OfficeWalk up ATM	Chardon BranchDrive up ATM
15985 East High Street, P.O. Box 35	348 Center Street, P.O. Box 1078
Middlefield, Ohio 44062	Chardon, Ohio 44024
888.801.1666• 440.632.1666• fax: 440.632.1700	888.801.1666• 440.286.1222• fax: 440.286.1111
Garrettsville BranchDrive up ATM	Newbury BranchDrive up ATM
8058 State Street	11110 Kinsman Road, Suite 1, P.O. Box 208
Garrettsville, Ohio 44231	Newbury, Ohio 44065
888.801.2121• 330.527.2121• fax: 330.527.4210	888.801.1666• 440.564.7000• fax: 440.564.7004

Middlefield Banc Corp.    18

Middlefield West BranchDrive up ATM	Orwell BranchDrive up ATM
15545 West High Street, P.O. Box 35	30 South Maple Street, P.O. Box 66
Middlefield, Ohio 44062	Orwell, Ohio 44076
888.801.1666• 440.632.1666• fax: 440.632.9781	888.801.1666• 440.437.7200• fax: 440.437.1111
Mantua BranchWalk up ATM	Cortland BranchDrive up ATM
10519 Main Street, P.O. Box 648	3450 Niles-Cortland Road, P.O. Box 636
Mantua, Ohio 44255	Cortland, Ohio 44410
877.274.0881• 330.274.0881• fax: 330.274.0883	888.801.1666• 330.637.3208• fax: 330.637.3207

2009 Annual Report       19

Financial Table of Contents
Consolidated Financial Statements	22
Notes to Consolidated Financial Statements	26
Management’s Discussion and Analysis	56
Shareholder Information	74

	December 31,
Consolidated Balance Sheet	2009			2008
ASSETS
Cash and due from banks	$	12,908,859		$	9,795,248
Federal funds sold		28,122,892			7,548,000
Interest-bearing deposits in other institutions		120,885			112,215
Cash and cash equivalents		41,152,636			17,455,463
Investment securities available for sale		136,711,100			104,270,366
Loans		353,596,712			321,575,293
Less allowance for loan losses		4,936,575			3,556,763
Net loans		348,660,137			318,018,530
Premises and equipment		8,394,369			8,448,915
Goodwill		4,558,687			4,558,687
Bank-owned life insurance		7,706,476			7,440,687
Accrued interest and other assets		11,474,364			7,654,287
TOTAL ASSETS	$	558,657,769		$	467,846,935
LIABILITIES
Deposits:
Noninterest-bearing demand	$	44,386,654		$	42,357,154
Interest-bearing demand		38,111,042			26,404,660
Money market		56,451,504			27,845,438
Savings		107,358,352			68,968,844
Time		240,798,732			229,243,506
Total deposits		487,106,284			394,819,602
Short-term borrowings		6,799,555			1,886,253
Other borrowings		25,864,508			33,903,019
Accrued interest and other liabilities		2,180,151			2,178,813
TOTAL LIABILITIES		521,950,498			432,787,687
STOCKHOLDERS’ EQUITY
Common stock, no par value; 10,000,000 shares authorized, 1,754,112 and 1,725,381 shares issued		27,919,228			27,301,403
Retained earnings		14,959,428			14,786,353
Accumulated other comprehensive income (loss)		562,222			(294,901	)
Treasury stock, at cost; 189,530 shares in 2009 and 2008		(6,733,607	)		(6,733,607	)
TOTAL STOCKHOLDERS’ EQUITY		36,707,271			35,059,248
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	558,657,769		$	467,846,935

See accompanying notes to consolidated financial statements.

Middlefield Banc Corp.     22

	Year Ended December 31,
Consolidated Statement of Income	2009			2008			2007
INTEREST INCOME
Interest and fees on loans	$	20,270,987		$	21,426,372		$	21,063,258
Interest-bearing deposits in other institutions		14,561			12,468			155,550
Federal funds sold		20,557			135,104			498,040
Investment securities:
Taxable interest		3,794,149			2,538,237			1,265,673
Tax-exempt interest		1,881,752			1,810,319			1,773,292
Dividends on FHLB stock		68,575			115,313			116,121
TOTAL INTEREST INCOME		26,050,581			26,037,813			24,871,934
INTEREST EXPENSE
Deposits		10,296,404			12,352,211			11,633,010
Short-term borrowings		34,110			46,084			92,720
Other borrowings		918,600			1,120,491			1,269,910
Trust preferred securities		533,711			539,298			535,279
TOTAL INTEREST EXPENSE		11,782,825			14,058,084			13,530,919
NET INTEREST INCOME		14,267,756			11,979,729			11,341,015
Provision for loan losses		2,578,047			608,000			429,391
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,689,709			11,371,729			10,911,624
NONINTEREST INCOME
Service charges on deposit accounts		1,905,130			1,888,059			1,954,992
Investment securities gains (losses), net		(14,323	)		(344,049	)		7,942
Earnings on bank-owned life insurance		265,788			287,305			280,638
Other income		511,685			395,191			389,020
TOTAL NONINTEREST INCOME		2,668,280			2,226,506			2,632,592
NONINTEREST EXPENSE
Salaries and employee benefits		5,938,239			4,911,671			4,458,075
Occupancy expense		928,425			885,904			745,935
Equipment expense		508,875			539,040			525,250
Data processing costs		916,990			803,230			699,185
Ohio state franchise tax		493,200			468,000			424,873
Federal deposit insurance expense		707,328			187,867			49,209
Other expense		3,156,520			2,800,641			2,470,123
TOTAL NONINTEREST EXPENSE		12,649,577			10,596,353			9,372,650
Income before income taxes		1,708,412			3,001,882			4,171,566
Income taxes		(72,574	)		387,003			796,223
NET INCOME	$	1,780,986		$	2,614,879		$	3,375,343
EARNINGS PER SHARE
Basic	$	1.15		$	1.72		$	2.17
Diluted		1.15			1.69			2.14
DIVIDENDS DECLARED PER SHARE	$	1.04		$	1.03		$	0.94

See accompanying notes to consolidated financial statements.

2009 Annual Report     23

								Accumulated
								Other						Total
Consolidated Statement of	Common Stock				Retained			Comprehensive			Treasury			Stockholders’			Comprehensive
Changes in Stockholders’ Equity	Shares		Amount		Earnings			Income (Loss)			Stock			Equity			Income (Loss)
Balance, December 31, 2006	$	1,519,887	$	19,507,257	$	14,685,971		$	(520,987	)	$	(3,208,307	)	$	30,463,934
Net income						3,375,343									3,375,343		$	3,375,343
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of reclassification adjustment, net of taxes of $241,100									468,018						468,018			468,018
Comprehensive income																	$	3,843,361
Exercise of stock options		538		14,182											14,182
Expense related to stock options				26,435		12,695									39,130
Purchase of treasury stock (56,665 shares)												(2,174,419	)		(2,174,419	)
Common stock issued as a result of the acquisition of Emerald Bank		92,447		3,662,750											3,662,750
Five percent stock dividend (including cash paid for fractional shares)		73,547		2,857,301		(2,873,346	)								(16,045	)
Dividend reinvestment and purchase plan		15,127		582,198											582,198
Cash dividends ($.94 per share)						(1,453,707	)								(1,453,707	)
Balance, December 31, 2007	$	1,701,546	$	26,650,123	$	13,746,956		$	(52,969	)	$	(5,382,726	)	$	34,961,384
Net income						2,614,879									2,614,879		$	2,614,879
Other comprehensive income:
Unrealized loss on available-for-sale securities, net of reclassification adjustment, net of tax benefit of $124,632									(241,932	)					(241,932	)		(241,932	)
Comprehensive income																	$	2,372,947
Exercise of stock options		992		19,642											19,642
Expense related to stock options				15,048											15,048
Purchase of treasury stock (37,785 shares)												(1,350,881	)		(1,350,881	)
Dividend reinvestment and purchase plan		22,843		616,590											616,590
Cash dividends ($1.03 per share)						(1,575,482	)								(1,575,482	)
Balance, December 31, 2008	$	1,725,381	$	27,301,403	$	14,786,353		$	(294,901	)	$	(6,733,607	)	$	35,059,248
Net income						1,780,986									1,780,986		$	1,780,986
Other comprehensive income:
Unrealized gains on available-for-sale securities, net of taxes of $441,548									857,123						857,123			857,123
Comprehensive income																	$	2,638,109
Expense related to stock options				60,588											60,588
Dividend reinvestment and purchase plan		28,731		557,237											557,237
Cash dividends ($1.04 per share)						(1,607,911	)								(1,607,911	)
Balance, December 31, 2009	$	1,754,112	$	27,919,228	$	14,959,428		$	562,222		$	(6,733,607	)	$	36,707,271

	2009		2008			2007
Components of comprehensive income (loss):
Change in net unrealized gain (loss) on investments available for sale	$	847,670	$	(469,004	)	$	472,771
Realized losses (gains) included in net income, net of taxes of $4,870, $116,976, and $2,448		9,453		227,072			(4,753	)
TOTAL	$	857,123	$	(241,932	)	$	468,018

See accompanying notes to consolidated financial statements.

Middlefield Banc Corp.     24

	Year Ended December 31,
Consolidated Statement of Cash Flows	2009			2008			2007
OPERATING ACTIVITIES
Net income	$	1,780,986		$	2,614,879		$	3,375,343
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,578,047			608,000			429,391
Depreciation and amortization		679,870			645,186			597,741
Amortization of premium and discount on investment securities		(482,959	)		182,656			226,766
Amortization of deferred loan fees, net		(67,503	)		(143,673	)		(65,763	)
Investment securities (gains) losses, net		14,323			344,049			(7,942	)
Earnings on bank-owned life insurance		(265,788	)		(287,305	)		(280,638	)
Deferred income taxes		(469,190	)		(269,947	)		97,308
Expense related to stock option		60,588			15,048			26,435
Loss on other real estate owned		182,796			—			—
Decrease (increase) in accrued interest receivable		35,144			94,061			(292,056	)
Increase (decrease) in accrued interest payable		(393,940	)		(210,461	)		540,144
Increase in prepaid federal deposit insurance		(2,499,346	)		(43,064	)		(19,841	)
Other, net		(19,235	)		(352,559	)		(332,855	)
Net cash provided by operating activities		1,133,793			3,196,870			4,294,033
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		20,673,671			16,912,691			10,583,584
Proceeds from sale of securities		815,655			2,953,089			—
Purchases		(52,162,754	)		(39,061,652	)		(32,990,009	)
Investment securities held to maturity:
Proceeds from sale of securities		—			—			102,942
Increase in loans, net		(34,493,122	)		(13,388,057	)		(20,959,699	)
Acquisition of subsidiary bank		—			—			(1,828,301	)
Purchase of Federal Home Loan Bank stock		(14,100	)		(142,100	)		(91,100	)
Purchase of premises and equipment		(466,768	)		(1,407,631	)		(570,065	)
Proceeds from the sale of other real estate owned		100,000			—			61,229
Deposit acquisition premium		—			—			(2,124,212	)
Net cash used for investing activities		(65,547,418	)		(34,133,660	)		(47,815,631	)
FINANCING ACTIVITIES
Net increase in deposits		92,286,682			25,804,674			38,528,910
Increase (decrease) in short-term borrowings, net		4,913,302			375,645			(99,131	)
Proceeds from other borrowings		—			13,500,000			2,000,000
Repayment of other borrowings		(8,038,511	)		(11,992,300	)		(8,967,419	)
Purchase of treasury stock		—			(1,350,881	)		(2,174,419	)
Exercise of stock options		—			19,642			14,182
Proceeds from dividend reinvestment and purchase plan		557,237			616,590			582,198
Tax effect of stock options		—			—			12,695
Cash dividends		(1,607,911	)		(1,575,482	)		(1,469,752	)
Net cash received from deposit acquisition		—			5,179,043			19,270,054
Net cash provided by financing activities		88,110,798			30,576,931			47,697,318
Increase (decrease) in cash and cash equivalents		23,697,173			(359,859	)		4,175,720
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		17,455,463			17,815,322			13,639,602
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	41,152,636		$	17,455,463		$	17,815,322
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	12,176,765		$	14,268,545		$	12,910,196
Income taxes		275,000			600,000			850,000
Noncash investing transactions:
Transfers from loans to other real estate owned	$	1,872,170		$	1,106,278		$	78,394
Loans to facilitate the sale of other real estate owned		531,203			—			—
SUMMARY OF BUSINESS ACQUISITION
Fair value of tangible assets acquired	$	—		$	—		$	42,657,925
Fair value of core deposit intangible acquired		—			—			103,781
Fair value of liabilities assumed		—			—			(38,408,610	)
Stock issued for the purchase of acquired company’s common stock		—			—			(3,662,750	)
Cash paid in the acquisition		—			—			(3,887,110	)
Deferred tax asset		—			—			889,361
Goodwill recognized	$	—		$	—		$	(2,307,403	)

See accompanying notes to consolidated financial statements.

2009 Annual Report     25

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Nature of Operations and Basis of Presentation

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio. On April 19, 2007, Middlefield Banc Corp. acquired Emerald Bank (“EB”), an Ohio-chartered commercial bank headquartered in Dublin, Ohio. On October 23, 2009, the Company established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services, which includes interest earnings on residential real estate, commercial mortgage, commercial and consumer financings as well as interest earnings on investment securities and deposit services to its customers through ten locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while MBC and EB are subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions.

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

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates.

Investment Securities

Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using a level yield method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.

Common stock of the Federal Home Loan Bank (“FHLB”) represents ownership in an institution that is wholly owned by other financial institutions. This equity security is accounted for at cost and classified with other assets.

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

Middlefield Banc Corp.     26

Loans

Loans are reported at their principal amount net of the allowance for loan losses. Interest income is recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest received on non-accrual loans is recorded as income or applied against principal according to management’s judgment as to the collectibility of such principal.

Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans.

Allowance for Loan Losses

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

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a non-accrual loan, in which case the portion of the payment related to interest is recognized as income.

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.

2009 Annual Report     27

Premises and Equipment

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

Goodwill

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

Intangible Assets

Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to expense over a 10 year life on a straight-line basis. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

Bank-Owned Life Insurance (BOLI)

The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans including healthcare. The cash surrender value of these policies is included as an asset on the consolidated balance sheet and any increases in the cash surrender value are recorded as noninterest income on the consolidated statements of income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as noninterest income.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Earnings Per Share

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator.

Stock-Based Compensation

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

The cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) are classified as financing cash flows. Excess tax benefits of $12,695 have been classified as a financing cash inflow for the year-ended December 31, 2007, in the Consolidated Statement of Cash Flows. There were no excess tax benefits recognized in 2009 and 2008.

Middlefield Banc Corp.     28

For purposes of computing results, the Company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. The fair value of each stock option granted was estimated using the following weighted-average assumptions:

	Expected						Expected Life
Grant Year	Dividend Yield		Risk-Free Interest Rate		Expected Volatility		(in years)
2007		2.53		3.70 - 4.80		4.09		9.94
2008		8.54		3.53 - 3.73		33.29		9.94

During the years ended December 31, 2009, 2008, and 2007, the Company recorded $60,588, $15,048, and $26,435 of compensation cost related to vested share-based compensation awards granted in 2008, 2007, and 2006. As of December 31, 2009, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in 2009 that is expected to be recognized in 2010.

The weighted-average fair value of each stock option granted for 2008 and 2007 was $2.70 and $3.35, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008 and 2007, was $5,486, and $2,717, respectively.

Cash Flow Information

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions as “Cash and due from banks,” “Federal funds sold,” and “Interest-bearing deposits with other institutions” with original maturities of less than 90 days.

Advertising Costs

Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to $370,832, $372,988, and $316,112 for 2009, 2008, and 2007, respectively.

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.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-01, Topic 105 —Generally Accepted Accounting Principles — FASB Accounting Standards Codification™and the Hierarchy of Generally Accepted Accounting Principles. The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The Company adopted this standard for the interim reporting period ending September 30, 2009. The adoption of this standard did not have a material impact on the Company’s results of operations or financial position.

2009 Annual Report     29

In June 2009, the FASB issued new authoritative accounting guidance under ASC Topic 810,Consolidation, which amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.

In April 2009, the FASB issued new guidance impacting ASC Topic 820,Fair Value Measurements and Disclosures. This ASC provides additional guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The adoption of this new guidance did not have a material effect on the Company’s results of operations or financial position.

In April 2009, the FASB issued new guidance impacting ASC 825-10-50,Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company has presented the necessary disclosures in Note 5 herein.

In April 2009, the FASB issued new guidance impacting ASC 320-10,Investments —Debt and Equity Securities, which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company has presented the necessary disclosures in Note 5 herein.

In August 2009, the FASB issued ASU No. 2009-05,Fair Value Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The Company is currently evaluating the impact of this standard on the Company’s financial condition, results of operations, and disclosures.

The FASB issued new authoritative accounting guidance under ASC Topic 855,Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC Topic 855 is effective for periods ending after June 15, 2009. The required disclosures are provided in Note 22.

Middlefield Banc Corp.     30

2. MERGERS AND ACQUISITIONS

On November 15, 2006, Middlefield Banc Corp. entered into an Agreement and Plan of Merger for the acquisition of Emerald Bank, an Ohio-chartered savings bank headquartered in Dublin, Ohio. Middlefield Banc Corp. organized an interim bank subsidiary under Ohio commercial bank law to carry out the merger with Emerald Bank. The Agreement and Plan of Merger was amended on January 3, 2007 to make the new interim bank subsidiary, known as EB Interim Bank, a party to the agreement. At the effective time of the merger Emerald Bank merged into the new interim subsidiary, which is the surviving corporation and which operates under the name Emerald Bank as a wholly owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for Emerald Bank totaled $7,326,890 with one half of the merger consideration payable in cash and the other half in shares of Middlefield Banc Corp. common stock. The merger was approved by both bank regulators and Emerald Bank stockholders. The transaction was completed on April 19, 2007. Emerald Bank operates as a separate banking subsidiary of Middlefield Banc Corp. under the Emerald Bank name, employing a commercial bank charter.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had the merger taken place at January 1, 2007.

	2007
Interest income	$	25,712,096
Interest expense		14,041,702
Net interest income		11,670,394
Provision for loan losses		475,493
Net interest income after provisions for loan losses		11,194,901
Noninterest income		2,659,299
Noninterest expense		10,385,875
Income before income taxes		3,468,325
Provision for income taxes		639,923
Net income including restructuring charges		2,828,402
Restructuring charges of $418,848, net of tax benefit of $142,408		276,440
Net income excluding restructuring charges	$	3,104,842
Net loss per share including restructuring charges
Basic	$	1.82
Diluted	$	1.79
Net income per share excluding restructuring
Basic	$	2.00
Diluted	$	1.97

Merger and restructuring charges were recorded in unaudited pro forma condensed combined financial information, and include incremental costs to integrate Emerald Bank with the Company’s operations. These charges represented costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. These one-time charges, as shown in the table above, were expensed as incurred at Emerald Bank prior to the acquisition.

	Twelve Months Ended December 31,
	2007
Compensation and benefits	$	40,092
Professional fees		221,389
Acceleration of contracts		157,367
Total	$	418,848

2009 Annual Report     31

On November 9, 2008, EB completed its acquisition of certain deposit liabilities attributable to a third-party financial institution’s branch office located in Westerville, Ohio. The acquisition included management personnel, certain other assets, and retail deposits of approximately $5.9 million. EB recorded goodwill and core deposit intangible of approximately $355,000.

On August 1, 2007, MBC completed its acquisition of certain deposit liabilities attributable to a third-party financial institution’s branch office located in Middlefield, Ohio. The acquisition included management personnel and retail deposits of approximately $21 million. MBC recorded goodwill and core deposit intangible of approximately $2.1 million.

3. EARNINGS PER SHARE

There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

	2009			2008			2007
Weighted-average common shares outstanding		1,736,769			1,710,861			1,666,265
Average treasury stock shares		(189,530	)		(177,888	)		(110,667	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		1,547,239			1,532,973			1,555,598
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		740			13,440			21,649
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		1,547,979			1,546,413			1,577,247

Options to purchase 89,077 shares of common stock at prices ranging from $22.33 to $40.24 were outstanding during the year-ended December 31, 2009, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the average market price as of December 31, 2009. Options to purchase 40,307 shares of common stock at prices ranging from $30.45 to $40.24 were outstanding during the year-ended December 31, 2008, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the average market price as of December 31, 2008. Options to purchase 25,897 shares of common stock at prices ranging from $36.73 to $40.24 were outstanding during the year-ended December 31, 2007, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the average market price as of December 31, 2007.

4. STOCK DIVIDEND

The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 1, 2007, payable December 15, 2007. As a result of the dividend, 73,547 additional shares of the Company’s common stock were issued, common stock was increased by $2,857,301, and retained earnings decreased by $2,873,346. Fractional shares paid were paid in cash.

Middlefield Banc Corp.     32

5. INVESTMENT SECURITIES AVAILABLE FOR SALE

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2009	Cost		Gains		Losses			Value
U.S. government agency securities	$	18,656,862	$	38,001	$	(365,326	)	$	18,329,537
Obligations of states and political subdivisions:
Taxable		3,450,994		9,948		(86,131	)		3,374,811
Tax-exempt		52,751,674		942,871		(349,048	)		53,345,497
Mortgage-backed securities		60,055,436		1,816,587		(1,129,518	)		60,742,505
Total debt securities		134,914,966		2,807,407		(1,930,023	)		135,792,350
Equity securities		944,283		80,000		(105,533	)		918,750
Total	$	135,859,249	$	2,887,407	$	(2,035,556	)	$	136,711,100

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2008	Cost		Gains		Losses			Value
U.S. government agency securities	$	4,376,650	$	126,912	$	—		$	4,503,562
Obligations of states and political subdivisions:
Taxable		499,528		—		(3,278	)		496,250
Tax-exempt		44,328,318		405,958		(1,050,244	)		43,684,032
Mortgage-backed securities		54,568,407		1,042,038		(1,046,085	)		54,564,360
Total debt securities		103,772,903		1,574,908		(2,099,607	)		103,248,204
Equity securities		944,283		141,079		(63,200	)		1,022,162
Total	$	104,717,186	$	1,715,987	$	(2,162,807	)	$	104,270,366

The amortized cost and fair value of debt securities at December 31, 2009, 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
	Cost		Value
Due in one year or less	$	1,630,140	$	1,659,476
Due after one year through five years		7,052,906		7,396,783
Due after five years through ten years		23,240,506		23,519,817
Due after ten years		102,991,414		103,216,274
Total	$	134,914,966	$	135,792,350

Investment securities with an approximate carrying value of $37,365,291 and $26,102,154 at December 31, 2009 and 2008, respectively, were pledged to secure deposits and other purposes as required by law.

2009 Annual Report     33

Proceeds from sales of investment securities available for sale were $815,655 during 2009. Gross gains and gross losses realized were $73,631 and $0, respectively, during 2009. Proceeds from sales of investment securities available for sale were $2,953,089 during 2008. Gross gains and gross losses realized were $34,509 and $2,109, respectively, during 2008. There were no sales of investment securities available for sale during 2007.

Proceeds from the sale of investment securities held to maturity and gross gains realized were $102,942 and $7,942, respectively, during 2007. The Company transferred investment securities held to maturity with a carrying amount of $19,899 and fair value of $20,641 to investment securities available for sale during 2007. The Company no longer maintains a held-to-maturity portfolio.

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, at December 31, 2009 and 2008.

	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2009	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	17,133,678	$	(365,326	)	$	—	$	—		$	17,133,678	$	(365,326	)
Obligations of states and political subdivisions		21,593,529		(314,599	)		1,416,832		(120,580	)		23,010,361		(435,179	)
Mortgage-backed securities		18,509,047		(333,823	)		4,063,906		(795,695	)		22,572,953		(1,129,518	)
Equity securities		580,450		(67,883	)		8,300		(37,650	)		588,750		(105,533	)
Total	$	57,816,704	$	(1,081,631	)	$	5,489,038	$	(953,925	)	$	63,305,742	$	(2,035,556	)

	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2008	Value		Losses			Value		Losses			Value		Losses
Obligations of states and political subdivisions	$	17,777,295	$	(561,005	)	$	7,820,417	$	(492,517	)	$	25,597,712	$	(1,053,522	)
Mortgage-backed securities		16,107,618		(966,793	)		5,062,619		(79,292	)		21,170,237		(1,046,085	)
Equity securities		221,500		(28,500	)		11,250		(34,700	)		232,750		(63,200	)
Total	$	34,106,413	$	(1,556,298	)	$	12,894,286	$	(606,509	)	$	47,000,699	$	(2,162,807	)

There were 103 and 124 securities that were considered temporarily impaired at December 31, 2009 and 2008.

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (OTTI) pursuant to FASB ASC Topic 320Investments - Debt and Equity Securities. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other-than-temporary. Prior to the adoption of FSP FAS 115-2, which was subsequently incorporated into FASB ASC Topic 320Investments — Debt and Equity Securities, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available for sale securities, whereas unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available for sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded to earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and the Company did not have the positive intent and ability to hold the security until recovery or maturity.

Middlefield Banc Corp.     34

The Company adopted this ASC during the second quarter of 2009 which amended the OTTI model for debt securities. Under the new guidance, OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

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

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for more than 85% of the total available-for-sale portfolio as of December 31, 2009 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company’s assessment was concentrated mainly on private-label collateralized mortgage obligations of approximately $20.4 million for which the Company evaluates credit losses on a quarterly basis. Gross unrealized gain and loss positions related to these private-label collateralized mortgage obligations amounted to $687,000 and $984,000, respectively. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

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

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

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

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

The Company’s investment in two private-label collateralized mortgage obligations with a carrying value of $1.1 million were impaired in 2009 as a result of the Company’s determination that declines in their fair value were other than temporary. As a result of this determination, the Company recognized an $87,954 before tax, non-cash charge, which was recorded as a reduction to noninterest income.

The Company’s investment in two private-label collateralized mortgage obligations with a carrying value of $1.4 million were impaired in 2008 as a result of the Company’s determination that declines in their fair value were other than temporary. As a result of this determination, the Company recognized a $376,449 before tax, non-cash charge, which was recorded as a reduction to noninterest income.

2009 Annual Report     35

6. LOANS

Major classifications of loans at December 31 are summarized as follows:

	2009		2008
Commercial and industrial	$	56,968,994	$	66,523,227
Real estate — construction		7,837,226		7,964,892
Real estate — mortgage:
Residential		205,073,341		199,354,277
Commercial		78,762,847		42,789,470
Consumer installment		4,954,304		4,943,427
		353,596,712		321,575,293
Less allowance for loan losses		4,936,575		3,556,763
Net loans	$	348,660,137	$	318,018,530

The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at December 31, 2009 and 2008, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

Nonperforming loans consist of commercial and consumer loans which are on a non-accrual basis and loans contractually past due 90 days or more but are not on non-accrual status because they are well secured or in the process of collection.

Information regarding nonperforming loans at December 31 is as follows:

	2009		2008
90 days or more past due and accruing interest	$	1,766,438	$	2,226,632
Non-accrual loans		14,519,026		6,254,748
Total nonperforming loans	$	16,285,464	$	8,481,380

Interest income that would have been recorded had these loans not been placed on non-accrual status was $682,606 in 2009, $393,397 in 2008, and $101,398 in 2007.

Information regarding impaired loans at December 31 is as follows:

	2009		2008
Impaired loans without a related allowance for loan loss	$	4,296,251	$	—
Impaired loans with a related allowance for loan loss		2,067,076		2,661,300
Related allowance for loan loss		570,572		439,340
Average recorded investment in impaired loans		3,841,894		1,886,661
Interest income recognized		32,801		13,078

Middlefield Banc Corp.     36

7. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31 are as follows:

	2009		2008		2007
Balance, January 1	$	3,556,763	$	3,299,276	$	2,848,887
Add:
Additions from acquisitions		—		—		436,063
Provisions charged to operations		2,578,047		608,000		429,391
Recoveries		88,862		64,353		13,839
Less loans charged off		1,287,097		414,866		428,904
Balance, December 31	$	4,936,575	$	3,556,763	$	3,299,276

8. PREMISES AND EQUIPMENT

Major classifications of premises and equipment at December 31 are summarized as follows:

	2009		2008
Land and land improvements	$	1,897,876	$	1,896,376
Building and leasehold improvements		8,953,633		8,858,066
Furniture, fixtures, and equipment		4,481,546		4,111,853
		15,333,055		14,866,295
Less accumulated depreciation and amortization		6,938,686		6,417,380
Total	$	8,394,369	$	8,448,915

Depreciation charged to operations was $521,307 in 2009, $518,296 in 2008, and $504,058 in 2007.

9. GOODWILL AND INTANGIBLE ASSETS

Goodwill totaled $4,558,687 at December 31, 2009 and December 31, 2008. During 2008, the Company recorded goodwill totaling $187,481 in connection with the acquisition of a third-party financial institution’s branch office. In 2007, the Company recorded goodwill totaling $2,339,403 in connection with the acquisition of EB and the Company recorded goodwill totaling $2,031,803 in connection with the acquisition of a third-party financial institution’s branch office.

The Company recorded core deposit intangibles in 2008 of $109,300 in connection with the acquisitions of a third-party financial institution’s branch office.

The Company recorded core deposit intangibles in 2007 of $103,781 and $182,100 in connection with the acquisitions of EB and a third-party financial institution’s branch office, respectively.

2009 Annual Report     37

Core deposit intangible assets are amortized on a straight-line basis over their estimated lives of ten years. Amortization expense totaled $39,518 in 2009 and $30,409 in 2008 and $11,912 in 2007. The estimated aggregate future amortization expense for core deposit intangible assets as of December 31, 2009 is as follows:

2010	$	39,518
2011		39,518
2012		39,518
2013		39,518
2014		39,518
Thereafter		115,752
Total	$	313,342

10. OTHER ASSETS

The components of other assets are as follows:

	2009		2008
FHLB stock	$	1,887,200	$	1,873,100
Accrued interest on investment securities		670,875		528,067
Accrued interest on loans		740,354		918,306
Deferred tax asset, net		1,795,512		1,767,873
Prepaid federal deposit insurance		2,562,251		62,905
Other		3,818,172		2,504,036
Total	$	11,474,364	$	7,654,287

11. DEPOSITS

Time deposits at December 31, 2009, mature $141,353,448, $45,383,947, $11,185,327, $24,725,038, and $18,150,972 during 2010, 2011, 2012, 2013, and 2014, respectively.

The aggregate of all time deposit accounts of $100,000 or more amounted to $82,345,230 and $69,663,278 at December 31, 2009 and 2008, respectively.

Maturities on time deposits of $100,000 or more at December 31, 2009, are as follows:

Within three months	$	7,458,530	9.06	%
Beyond three but within six months		10,924,554	13.27
Beyond six but within twelve months		26,542,350	32.23
Beyond one year		37,419,796	45.44
Total	$	82,345,230	100.00	%

Middlefield Banc Corp.     38

12. SHORT-TERM BORROWINGS

The outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase, short term borrowings from other banks, and Federal funds purchased, are summarized as follows:

	2009			2008			2007
Balance at year-end	$	6,799,555		$	1,886,253		$	1,510,607
Average balance outstanding		2,280,815			2,967,069			2,383,902
Maximum month-end balance		7,405,872			6,057,893			5,768,057
Weighted-average rate at year-end		3.47	%		1.10	%		2.96	%
Weighted-average rate during the year		1.50	%		1.55	%		3.89	%

Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.

The Company maintains a $4,000,000 line of credit at an adjustable rate, currently 3.73 percent, from Lorain National Bank and a $3,000,000 line of credit at an adjustable rate, currently at 4.00 percent, from Liberty Bank N.A. At December 31, 2009, 2008, and 2007, outstanding borrowings under these lines were $5,700,000, $0, and $0, respectively.

13. OTHER BORROWINGS

Other borrowings consist of advances from the FHLB as follows:

					Weighted-
	Maturity range				average			Stated interest rate range
Description	from		to		interest			from			to			2009		2008
Fixed rate		11/17/10		12/27/10		4.59	%		3.87	%		5.07	%	$	1,250,000	$	4,250,000
Fixed rate amortizing		02/01/12		09/04/28		3.95			2.70			4.48			12,366,508		17,405,019
Convertible		07/28/10		10/09/12		5.30			4.14			6.45			4,000,000		4,000,000
Junior subordinated debt		12/21/37		12/21/37		6.58			6.58			6.58			8,248,000		8,248,000
Total														$	25,864,508	$	33,903,019

The scheduled maturities of advances outstanding are as follows:

	2009
			Weighted-
Year Ending December 31,	Amount		Average Rate
2010	$	6,543,543		4.82	%
2011		2,496,362		3.93
2012		3,854,264		4.04
2013		1,361,829		3.95
2014		984,222		3.99
Beyond 2014		10,624,288		6.01
	$	25,864,508		5.03	%

2009 Annual Report     39

The Bank entered into a ten-year “Convertible Select” fixed commitment advance arrangement with the FHLB. Rates may be reset at the FHLB’s discretion on a quarterly basis based on the three-month LIBOR rate. At each rate change, the Bank may exercise a put option and satisfy the obligation without penalty.

Fixed rate amortizing advances from the FHLB require monthly principal and interest payments and an annual 20 percent paydown of outstanding principal. Monthly principal and interest payments are adjusted after each 20 percent paydown. Under terms of a blanket agreement, collateral for the FHLB borrowings are secured by certain qualifying assets of the Bank, which consist principally of first mortgage loans. Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $69 million at December 31, 2009.

In December 2006, the Company formed a special purpose entity (“Entity”) to issue $8,000,000 of floating rate, obligated mandatorily redeemable securities and $248,000 in common securities as part of a pooled offering. The rate is fixed through January 2012 at 6.58 percent and floats quarterly thereafter, equal to LIBOR plus 1.67 percent. The Entity may redeem them, in whole or in part, at face value after January 30, 2012. The Company borrowed the proceeds of the issuance from the Entity in December 2006 in the form of an $8,248,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet. Debt issue costs of $248,000 have been capitalized and are being amortized through the first call date.

14. OTHER LIABILITIES

The components of other liabilities are as follows:

	2009		2008
Accrued interest payable	$	905,174	$	1,299,114
Other		1,274,977		879,699
Total	$	2,180,151	$	2,178,813

15. INCOME TAXES

The provision (benefit) for federal income taxes consists of:

	2009			2008			2007
Current payable	$	396,616		$	656,950		$	698,915
Deferred		(469,190	)		(269,947	)		97,308
Total provision (benefit)	$	(72,574	)	$	387,003		$	796,223

Middlefield Banc Corp.     40

The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

	2009		2008
Deferred tax assets:
Allowance for loan losses	$	1,530,254	$	1,114,868
Net unrealized loss on securities		—		151,919
Supplemental retirement plan		149,104		134,121
Origination costs		—		7,811
Alternative minimum tax credits		267,564		65,637
Investment security basis adjustment		157,897		127,993
Intangibles		—		45,295
Deferred origination fees, net		17,871		—
Net operating losses		398,547		502,676
Other		78,367		—
Gross deferred tax assets		2,599,604		2,150,320
Deferred tax liabilities:
Deferred origination costs, net		—		29,523
Premises and equipment		215,119		83,425
Net unrealized gain on securities		289,632		—
FHLB stock dividends		224,904		224,904
Intangibles		62,661		—
Other		11,776		44,595
Gross deferred tax liabilities		804,092		382,447
Net deferred tax assets	$	1,795,512	$	1,767,873

No valuation allowance was established at December 31, 2009 and 2008, in view of the Company’s ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows:

	2009						2008						2007
				% of						% of						% of
				Pre-tax						Pre-tax						Pre-tax
	Amount			Income			Amount			Income			Amount			Income
Provision at statutory rate	$	580,860			34.0	%	$	1,020,640			34.0	%	$	1,418,332			34.0	%
Tax-free income		(728,850	)		(42.7	)		(713,193	)		(23.8	)		(702,123	)		(16.8	)
Nondeductible interest expense		73,505			4.3			96,250			3.2			102,830			2.5
Other		1,911			(0.1	)		(16,694	)		(0.7	)		(22,816	)		(0.6	)
Actual tax expense (benefit) and effective rate	$	(72,574	)		(4.3	)%	$	387,003			12.7	%	$	796,223			19.1	%

2009 Annual Report     41

ASC 740-10 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. At December 31, 2009 and December 31, 2008, the Company had no ASC 740-10 unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next 12 months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense. The Company and the Banks are subject to U.S. federal income tax as well as an income tax in the state of Ohio, and the Banks are subject to a capital-based franchise tax in the state of Ohio. The Company and the Banks are no longer subject to examination by taxing authorities for years before December 31, 2006.

16. EMPLOYEE BENEFITS

Retirement Plan

The Banks maintain section 401(k) employee savings and investment plans for all full-time employees and officers of the Banks with more than one year of service. The Banks’ contributions to the plans are based on 50 percent matching of voluntary contributions up to 6 percent of compensation. An eligible employee can contribute up to 15 percent of salary. Employee contributions are vested at all times, and MBC contributions are fully vested after six years beginning at the second year in 20 percent increments. EB contributions are vested at 25 percent for less than a year of employment, 50 percent after one year, 75 percent after two years, and fully vested after three years. Contributions for 2009, 2008, and 2007 to these plans amounted to $95,648, $95,752, and $79,959, respectively.

Supplemental Retirement Plan

MBC maintains a Directors’ Retirement Plan to provide postretirement payments over a ten-year period to members of the Board of Directors who have completed five or more years of service. The plan requires payment of 25 percent of the final average annual board fees paid to a director in the three years preceding the director’s retirement.

The following table illustrates the components of the net periodic pension cost for the Directors’ Retirement Plan for the years ended:

	2009		2008		2007
Components of net periodic pension costs
Service cost	$	6,129	$	12,656	$	11,991
Interest cost		12,842		12,813		12,189
Net periodic pension cost	$	18,971	$	25,469	$	24,180

Middlefield Banc Corp.     42

Executive Deferred Compensation Plan

During 2006, MBC implemented an Executive Deferred Compensation Plan (the “Plan”) to provide post-retirement payments to members of senior management. The Plan agreements are noncontributory, defined contribution arrangements that provide supplemental retirement income benefits to three officers, with contributions made solely by MBC. During 2009, 2008, and 2007, MBC contributed $67,258, $26,145 and $49,932, respectively, to the Plan.

Stock Option and Restricted Stock Plan

The Company maintains a stock option and restricted stock plan (“the Plan”) for granting incentive stock options, nonqualified stock options, and restricted stock for key officers and employees and nonemployee directors of the Company. A total of 160,000 shares of authorized and unissued or issued common stock are reserved for issuance under the Plan, which expires ten years from the date of stockholder ratification. The per share exercise price of an option granted will not be less than the fair value of a share of common stock on the date the option is granted. No option shall become exercisable earlier than one year from the date the Plan was approved by the stockholders.

The following table presents share data related to the outstanding options:

				Weighted-					Weighted-
				Average					Average
				Exercise					Exercise
	2009			Price		2008			Price
Outstanding, January 1		110,465		$	27.21		88,211		$	28.04
Granted		—			—		24,837			23.71
Exercised		—			—		(992	)		19.80
Forfeited		(11,246	)		30.34		(1,591	)		23.48
Outstanding, December 31		99,219			26.85		110,465			27.21
Exercisable at year-end		99,219			26.85		85,628			28.22

The following table summarizes the characteristics of stock options at December 31, 2009:

	��
				Outstanding						Exercisable
						Contractual		Average				Average
		Exercise				Average		Exercise				Exercise
Grant Date		Price		Shares		Life		Price		Shares		Price
December 11, 2000		$	17.90		10,142		0.95	$	17.90		10,142	$	17.90
December 9, 2002			22.33		9,426		2.94		22.33		9,426		22.33
December 8, 2003			24.29		20,663		3.94		24.29		20,663		24.29
May 12, 2004			27.35		907		4.33		27.35		907		27.35
December 13, 2004			30.45		12,958		4.95		30.45		12,958		30.45
December 14, 2005			36.73		8,485		5.95		36.73		8,485		36.73
December 10, 2006			40.24		3,675		6.95		40.24		3,675		40.24
April 19, 2007			37.33		3,639		7.31		37.33		3,639		37.73
May 16, 2007			37.48		1,337		7.41		37.48		1,337		37.48
December 10, 2007			37.00		3,150		7.95		37.00		3,150		37.00
January 2, 2008			36.25		1,337		8.12		36.25		1,337		36.25
November 10, 2008			23.00		23,500		8.95		23.00		23,500		23.00
					99,219						99,219

2009 Annual Report     43

For the years ended December 31, 2009, 2008, and 2007, the Company granted 150, 150, and 130 shares, respectively, of common stock under the restricted stock plan. The Company recognizes compensation expense in the amount of fair value of the common stock at the grant date and as an addition to stockholders’ equity.

17. COMMITMENTS

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

	2009		2008
Commitments to extend credit	$	59,497,589	$	56,648,649
Standby letters of credit		351,125		1,357,173
Total	$	59,848,714	$	58,005,822

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Performance letters of credit represent conditional commitments issued by the Bank 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 a one-year period 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. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

18. REGULATORY RESTRICTIONS

Loans

Federal law prevents the Company from borrowing from the Banks unless the loans are secured by specific obligations. Further, such secured loans are limited in amount of 10 percent of the Banks’ common stock and capital surplus.

Dividends

MBC and EB are subject to dividend restrictions that generally limit the amount of dividends that can be paid by an Ohio state-chartered bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net profits for the two preceding years less any required transfers to surplus. Under this formula, for MBC, the amount available for payment of dividends for 2010 approximates $2,586,000 plus 2010 profits retained up to the date of the dividend declaration. For EB, the amount available for payment of dividends for 2010 is $0 until the net deficit for the two preceding years of $1.3 million is overcome.

Middlefield Banc Corp.     44

19. REGULATORY CAPITAL

Federal regulations require the Company and the Banks to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.

As of December 31, 2009 and 2008, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at least 10 percent, 6 percent, and 5 percent, respectively.

The Company’s and its subsidiaries’ actual capital ratios are presented in the following table that shows that all regulatory capital requirements were met as of December 31, 2009.

	Middlefield Banc Corp.					The Middlefield Banking Co.					Emerald Bank
	December 31,					December 31,					December 31,
	2009					2009					2009
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Actual	$	43,548,978		12.34	%	$	34,837,744		11.47	%	$	7,067,261		14.91	%
For Capital Adequacy Purposes		28,242,856		8.00			24,305,760		8.00			3,792,899		8.00
To Be Well Capitalized		35,303,570		10.00			30,382,200		10.00			4,741,124		10.00
Tier I Capital (to Risk-Weighted Assets)
Actual	$	39,121,139		11.08	%	$	31,639,717		10.41	%	$	6,460,474		13.63	%
For Capital Adequacy Purposes		14,121,428		4.00			12,152,880		4.00			1,896,450		4.00
To Be Well Capitalized		21,182,142		6.00			18,229,320		5.00			2,844,674		6.00
Tier I Capital (to Average Assets)
Actual	$	39,121,139		7.99	%	$	31,639,717		7.45	%	$	6,460,474		10.29	%
For Capital Adequacy Purposes		19,583,492		4.00			16,984,228		4.00			2,510,359		4.00
To Be Well Capitalized		24,479,365		5.00			21,230,285		5.00			3,137,949		5.00

2009 Annual Report     45

The Company’s and its subsidiaries’ actual capital ratios are presented in the following table that shows that all regulatory capital requirements were met as of December 31, 2008.

	Middlefield Banc Corp.					The Middlefield Banking Co.					Emerald Bank
	December 31,					December 31,					December 31,
	2008					2008					2008
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Actual	$	42,281,067		13.57	%	$	32,793,489		12.30	%	$	7,472,699		16.73	%
For Capital Adequacy Purposes		24,931,715		8.00			21,324,640		8.00			3,572,686		8.00
To Be Well Capitalized		31,164,644		10.00			26,655,800		10.00			4,465,857		10.00
Tier I Capital (to Risk-Weighted Assets)
Actual	$	38,689,258		12.41	%	$	29,956,378		11.24	%	$	6,912,474		15.48	%
For Capital Adequacy Purposes		12,465,858		4.00			10,662,320		4.00			1,786,343		4.00
To Be Well Capitalized		18,698,787		6.00			15,993,480		6.00			2,679,514		6.00
Tier I Capital (to Average Assets)
Actual	$	38,689,258		8.66	%	$	29,956,378		7.69	%	$	6,912,474		12.91	%
For Capital Adequacy Purposes		17,860,169		4.00			15,578,777		4.00			2,142,047		4.00
To Be Well Capitalized		22,325,211		5.00			19,473,471		5.00			2,677,558		5.00

20. REORGANIZATION

On October 23, 2009, the Company received from the Federal Reserve Bank of Cleveland approval to establish an asset resolution subsidiary. Organized as an Ohio corporation under the name EMORECO, Inc. and wholly owned by the Company, the purpose of the asset resolution subsidiary is to maintain, manage, and ultimately dispose of non-performing loans and real estate acquired by subsidiary banks as the result of borrower default on real-estate-secured loans. EMORECO’s assets consist of 26 non-performing loans and three real estate development properties consisting of 18 lots transferred by Emerald Bank. EMORECO paid to Emerald Bank a total of approximately $4.6 million for the non-performing loans and real estate, using funds contributed by the Company, which were borrowed under lines of credit of the holding company. According to Federal law governing bank holding companies, the real estate must be disposed of within two years after the properties were originally acquired by Emerald Bank, which occurred in May and June of 2008, although limited extensions may be granted by the Federal Reserve Bank. Federal law governing bank holding companies also provides that a holding company subsidiary has limited real estate investment powers. EMORECO may only manage and maintain property and may not improve or develop property without advance approval of the Federal Reserve Bank.

Until recently, Middlefield Banc Corp. has been entitled to engage in the expanded range of activities in which a financial holding company, as defined in Federal Reserve Board rules, may engage. However, Middlefield Banc Corp. has not taken advantage of that expanded authority and has elected to rescind its financial holding company status. Middlefield Banc Corp. continues to be entitled to engage in activities deemed permissible to a bank holding company, as defined by Federal Reserve Board rules and the applicable laws of the United States.

Middlefield Banc Corp.     46

21. FAIR VALUE DISCLOSURE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

Level I:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:	Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III:	Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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

The following table presents the assets reported on the balance sheet at their fair value as of December 31, 2009 and 2008, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	December 31, 2009
	Level I		Level II		Level III		Total
Assets Measured on a Recurring Basis:
U.S. government agency securities	$	—	$	18,329,537	$	—	$	18,329,537
Obligations of states and political subdivisions		—		56,720,308		—		56,720,308
Mortgage-backed securities		—		60,742,505		—		60,742,505
Total debt securities		—		135,792,350		—		135,792,350
Equity securities		918,750		—		—		918,750
Total	$	918,750	$	135,792,350	$	—	$	136,711,100

	December 31, 2008
	Level I		Level II		Level III		Total
Assets Measured on a Recurring Basis:
U.S. government agency securities	$	—	$	4,503,562	$	—	$	4,503,562
Obligations of states and political subdivisions		—		44,180,282		—		44,180,282
Mortgage-backed securities		—		47,884,210		6,680,150		54,564,360
Total debt securities		—		96,568,054		6,680,150		103,248,204
Equity securities		1,022,162		—		—		1,022,162
Total	$	1,022,162	$	96,568,054	$	6,680,150	$	104,270,366

2009 Annual Report     47

Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The following table presents the changes in the Level III fair value category for the twelve months ended December 31, 2009.

The following represent fair value measurements using significant unobservable inputs (Level III):

	Available-for-Sale
	Securities
Balance, December 31, 2008	$	6,680,150
Total gains or losses (realized/unrealized)
Included in earnings		—
Included in other comprehensive gain (loss)		(468,742	)
Purchases, issuances, and settlements		(1,120,525	)
Net transfers in and/or out of Level III		(5,090,883	)
Balance, December 31, 2009	$	—
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	—

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the year-ended December 31, 2009 are reported as investment securities gains (losses), net on the Consolidated Statement of Income.

At December 31, 2008, the Company changed its valuation technique for certain private-label collateralized mortgage obligations (“CMOs”). Previously, the Company relied on prices compiled by third party vendors using observable market data (Level II) to determine the values of these securities. Based on financial market conditions at December 31, 2008, the Company concluded the fair values obtained from third-party vendors reflected forced liquidation or distressed sales for these CMOs. Therefore, the Company estimated fair value based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. The change in the valuation technique for these CMOs resulted in a transfer of $6,680,150 into Level III financial assets.

Beginning in September of 2009, the Company reverted back to using prices compiled by third party vendors due to the recent stabilization in the markets along with improvements in third party pricing methodology that have narrowed the variances between third party vendor prices and actual market prices. The change in valuation technique for these CMOs resulted in a transfer out of Level III financial assets.

The following table presents the assets measured on a nonrecurring basis on the consolidated statements of financial condition at their fair value as of December 31, 2009, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

Middlefield Banc Corp.     48

	December 31, 2009
	Level I		Level II		Level III		Total
Assets Measured on a Nonrecurring Basis:
Impaired loans	$	—	$	1,347,893	$	148,611	$	1,496,504
Other real estate owned		—		2,164,452		—		2,164,452

	December 31, 2008
	Level I		Level II		Level III		Total
Assets Measured on a Nonrecurring Basis:
Impaired loans	$	—	$	1,194,594	$	1,027,366	$	2,221,960
Other real estate owned		—		1,106,281		—		1,106,281

22. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments at December 31 is as follows:

	December 31,
	2009				2008
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	41,152,636	$	41,152,636	$	17,455,463	$	17,455,463
Investment securities available for sale		136,711,100		136,711,100		104,270,366		104,270,366
Net loans		348,660,137		332,401,339		318,018,530		317,010,526
Bank-owned life insurance		7,706,476		7,706,476		7,440,687		7,440,687
Federal Home Loan Bank stock		1,887,200		1,887,200		1,873,100		1,873,100
Accrued interest receivable		1,411,229		1,411,229		1,446,373		1,446,373
Financial liabilities:
Deposits	$	487,106,284	$	491,435,879	$	394,819,602	$	399,946,594
Short-term borrowings		6,799,555		6,799,555		1,886,253		1,886,253
Other borrowings		25,864,508		27,356,052		33,903,019		35,771,019
Accrued interest payable		905,174		905,174		1,299,114		1,299,114

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

2009 Annual Report     49

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

Investment Securities Available for Sale

The fair value of investment securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Fair value for certain private-label collateralized mortgage obligations were determined utilizing discounted cash flow models, due to the absence of a current market to provide reliable market quotes for the instruments.

Loans

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Deposits and Other Borrowed Funds

The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.

Middlefield Banc Corp.     50

23. PARENT COMPANY

Following are condensed financial statements for the Company.

	December 31,
CONDENSED BALANCE SHEET	2009		2008
ASSETS
Cash and due from banks	$	979,069	$	695,025
Interest-bearing deposits in other institutions		120,885		112,215
Investment securities available for sale		918,750		1,022,162
Investment in non-bank subsidiary		4,543,601		—
Investment in subsidiary banks		43,951,175		41,435,443
Other assets		248,000		248,000
TOTAL ASSETS	$	50,761,480	$	43,512,845
LIABILITIES
Trust preferred securities	$	8,248,000	$	8,248,000
Other borrowings		5,700,000		—
Other liabilities		106,209		205,597
STOCKHOLDERS’ EQUITY		36,707,271		35,059,248
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	50,761,480	$	43,512,845

	Year Ended December 31,
CONDENSED STATEMENT OF INCOME	2009			2008			2007
INCOME
Dividends from subsidiary bank	$	2,188,989		$	2,184,241		$	2,018,050
Interest income		8,670			10,029			154,199
Other		—			5,108			6,965
TOTAL INCOME		2,197,659			2,199,378			2,179,214
EXPENSES
Interest expense		547,220			539,298			535,280
Other		265,951			379,076			269,861
TOTAL INCOME		813,171			918,374			805,141
Income before income tax benefit		1,384,488			1,281,004			1,374,073
Income tax benefit		(273,229	)		(322,991	)		(218,952	)
Income before equity in undistributed net income of subsidiaries		1,657,717			1,603,995			1,593,025
Equity in undistributed net income of subsidiaries		123,269			1,010,884			1,782,318
NET INCOME	$	1,780,986		$	2,614,879		$	3,375,343

2009 Annual Report     51

	Year Ended December 31,
CONDENSED STATEMENT OF CASH FLOWS	2009			2008			2007
OPERATING ACTIVITIES
Net income	$	1,780,986		$	2,614,879		$	3,375,343
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Middlefield Banking Company		(1,604,534	)		(981,770	)		(1,749,538	)
Equity in undistributed net income of Emerald Bank		1,324,766			(29,114	)		(32,780	)
Equity in undistributed net income of EMORECO		156,499			—			—
Expense related to stock options		60,588			15,048			26,435
Other		(124,817	)		168,526			76,419
Net cash provided by operating activities		1,593,488			1,787,569			1,695,879
INVESTING ACTIVITIES
Investment in subsidiary bank		(1,250,000	)		—			—
Investment in non-bank subsidiary		(4,700,100	)		—			—
Purchase of investment securities		—			—			(250,000	)
Net assets of Emerald Bank acquired		—			—			(5,912,621	)
Net cash used for investing activities		(5,950,100	)		—			(6,162,621	)
FINANCING ACTIVITIES
Increase in short-term borrowings, net		5,700,000			—			—
Purchase of treasury stock		—			(1,350,881	)		(2,174,419	)
Exercise of stock options		—			19,642			14,182
Proceeds from dividend reinvestment and purchase plan		557,236			616,589			582,198
Tax effect of stock options		—			—			12,695
Cash dividends		(1,607,910	)		(1,575,482	)		(1,469,752	)
Net cash provided by (used for) financing activities		4,649,326			(2,290,132	)		(3,035,096	)
Increase (decrease) in cash		292,714			(502,563	)		(7,501,838	)
CASH AT BEGINNING OF YEAR		807,240			1,309,803			8,811,641
CASH AT END OF YEAR	$	1,099,954		$	807,240		$	1,309,803

24. SUBSEQUENT EVENTS

Effective February 11, 2010, the Board of Directors of the Company’s subsidiary, EB, entered into a Memorandum of Understanding (“MOU”) with the FDIC and the Ohio Division of Financial Institutions as a result of the joint examination by the FDIC and the Ohio Division of Financial Institutions completed in the fourth quarter of 2009. The MOU sets forth certain actions required to be taken by management of EB to rectify unsatisfactory conditions identified by the federal and state banking regulators that relate to EB’s concentration of credit for non-owner occupied one-to-four family residential mortgage loans. The MOU requires EB to reduce delinquent and classified loans and enhance credit administration for non-owner occupied residential real estate; to develop specific plans for the reduction of borrower indebtedness on classified and delinquent credits; to correct violations of laws and regulations listed in the joint examination report; to implement an earnings improvement plan; to maintain specified capital discussed below; to submit to the FDIC and the Ohio Division of Financial Institutions for review and comment a revised methodology for calculating and determining the adequacy of the allowance for loan losses; and to provide 30 days advance notification of proposed dividend payments.

Middlefield Banc Corp.     52

Compliance with the terms of the MOU is a high priority for the Company. In anticipation of the requirements that would be imposed by the MOU executed February 11, 2010, management devoted significant resources to the preceding matters during the fiscal year-ended December 31, 2009, and intends to continue to do so during 2010. Specific actions taken included the evaluation and reorganization of lending and credit administration personnel, retention of collection and workout personnel, and the sale of $4.6 million of non-performing assets to a sister, nonbank-asset resolution subsidiary established late in the fourth quarter of 2009. In 2009, the Company invested $1.25 million in EB in the form of capital infusions to maintain Tier I capital at the level expected by the FDIC and the Ohio Division of Financial Institutions.

The MOU requires that EB submit plans and report to the Ohio Division of Financial Institutions and the FDIC regarding EB’s loan portfolio and profit plan, among other matters. The MOU also requires that the Bank maintain its Tier I Leverage Capital ratio at not less than 9 percent.

The following table sets forth the capital requirements for EB under the FDIC regulations and EB’s capital ratios at December 31, 2009 and 2008:

FDIC Regulations
							December 31,
Capital Ratios	Adequately Capitalized			Well Capitalized			2009			2008
Leverage		4.00	%		5.00	%(1)		10.29	%		12.91	%
Risk-Based Capital:
Tier 1		4.00			6.00			13.63			15.48
Total		8.00			10.00			14.91			16.73

(1) 9 percent required by MOU

2009 Annual Report     53

25. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	Three Months Ended
	March 31,		June 30,			September 30,			December 31,
	2009		2009			2009			2009
Total interest income	$	6,323,983	$	6,305,172		$	6,647,639		$	6,773,787
Total interest expense		3,110,539		2,934,633			2,861,258			2,876,395
Net interest income		3,213,444		3,370,539			3,786,381			3,897,392
Provision for loan losses		154,000		260,000			1,346,000			818,047
Net interest income after provision for loan losses		3,059,444		3,110,539			2,440,381			3,079,345
Total noninterest income		623,451		636,220			690,460			718,149
Total noninterest expense		2,995,788		3,302,997			3,039,951			3,310,841
Income before income taxes		687,107		443,762			90,890			486,653
Income taxes		84,000		(17,000	)		(122,574	)		(17,000	)
Net income	$	603,107	$	460,762		$	213,464		$	503,653
Per share data:
Net income
Basic	$	0.39	$	0.30		$	0.14		$	0.32
Diluted		0.39		0.30			0.14			0.32
Average shares outstanding
Basic		1,536,930		1,541,960			1,551,056			1,547,239
Diluted		1,541,247		1,543,538			1,551,069			1,547,979

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2008		2008		2008		2008
Total interest income	$	6,588,203	$	6,512,636	$	6,550,445	$	6,386,529
Total interest expense		3,757,986		3,513,850		3,398,663		3,387,585
Net interest income		2,830,217		2,998,786		3,151,782		2,998,944
Provision for loan losses		75,000		95,000		187,000		251,000
Net interest income after provision for loan losses		2,755,217		2,903,786		2,964,782		2,747,944
Total noninterest income		637,451		637,217		680,247		271,591
Total noninterest expense		2,515,672		2,578,974		2,729,581		2,772,126
Income before income taxes		876,996		962,029		915,448		247,409
Income taxes		140,000		179,000		211,000		(142,997	)
Net income	$	736,996	$	783,029	$	704,448	$	390,406
Per share data:
Net income
Basic	$	0.48	$	0.51	$	0.46	$	0.26
Diluted		0.47		0.51		0.46		0.25
Average shares outstanding
Basic		1,548,043		1,530,255		1,523,044		1,530,686
Diluted		1,568,380		1,548,607		1,525,373		1,532,597

Middlefield Banc Corp.     54

Board of Directors and Stockholders
Middlefield Banc Corp.

We have audited the accompanying consolidated balance sheet of Middlefield Banc Corp. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Middlefield Banc Corp. and subsidiaries as of December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 and 2008, included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

S. R. Snodgrass, A. C.
Wexford, PA
March 12, 2010

2009 Annual Report     55

Overview

The consolidated review and analysis of Middlefield Banc Corp. (“Company”) is intended to assist the reader in evaluating the performance of the Company for the years ended December 31, 2009, 2008, and 2007. This information should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements.

The Company is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio. On April 19, 2007, the Company acquired Emerald Bank (“EB”), an Ohio-chartered commercial bank headquartered in Dublin, Ohio. The Company and its two banking subsidiaries derive substantially all of their income from banking and bank-related services, which includes interest earnings on residential real estate, commercial mortgage, commercial and consumer financings as well as interest earnings on investment securities and deposit services to its customers through five locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Banks are subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions. MBC and EB are members of the Federal Home Loan Bank (FHLB) of Cincinnati, which is one of the twelve regional banks comprising the FHLB System.

This Management’s Discussion and Analysis section of the Annual Report contains forward-looking statements. Forward-looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. Although the Company believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a representation by the Company or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.

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

Significant Financial Events in 2009

On October 23, 2009, Middlefield received from the Federal Reserve Bank of Cleveland approval to establish an asset resolution subsidiary. Organized as an Ohio corporation under the name EMORECO, Inc. and wholly owned by the Company, the purpose of the asset resolution subsidiary is to maintain, manage, and ultimately dispose of non-performing loans and real estate acquired by subsidiary banks as the result of borrower default on real-estate-secured loans. EMORECO’s assets consist of 26 non-performing loans and three real estate development properties consisting of 18 lots transferred by EB. EMORECO paid to EB a total of approximately $4.6 million for the non-performing loans and real estate, using funds contributed by the Company, which were borrowed under its lines of credit. According to Federal law governing bank holding companies the real estate must be disposed of within two years after the properties were originally acquired by EB, which occurred in May and June of 2008, although limited extensions may be granted by the Federal Reserve Bank. Federal law governing bank holding companies also provides that a holding company subsidiary has limited real estate investment powers. EMORECO may only manage and maintain property and may not improve or develop property without advance approval of the Federal Reserve Bank.

At December 31, 2009, EMORCO had assets totaling $4.5 million and a net operating loss of $156,000.

Middlefield Banc Corp.     56

Critical Accounting Policies

Allowance for loan losses

Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.

Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment, which is affected by changing economic conditions and various external factors and which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged off and reduced by loans charged off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of “Notes to Consolidated Financial Statements” commencing on the previous pages of this Annual Report.

The allowance for loan loss balance as of December 31, 2009 totaled $4.9 million representing a $1.4 million increase from the end of 2008. For the year of 2009, the provision for loan losses was $2.6 million, which represented an increase of $2.0 million from the $608,000 allocated during 2008. This level of provision during 2009 is reflective of the changing economic conditions adversely impacting the market areas served by the Company’s affiliate banks, which have caused non-performing loans to increase. Asset quality is a high-priority in our overall business plan as it relates to long-term asset growth projections. During 2009, net charge offs increased by $872,000 compared to 2008. Two key ratios to monitor asset quality performance are net charge offs/average loans and the allowance for loan losses/non-performing loans. At year-end 2009, these ratios were .36% and 30.3%, respectively, compared to .11% and 41.9% in 2008.

Valuation of Securities

Securities are classified as held-to-maturity or available-for-sale on the date of purchase. Only those securities classified as held-to-maturity are reported at amortized cost. Available-for-sale and trading securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income, net of related deferred income taxes, on the Consolidated Balance Sheets and noninterest income in the Consolidated Statements of Income, respectively. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Realized securities gains or losses are reported within noninterest income in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Available-for-sale securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Banc Corp.’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the Consolidated Statements of Income. The Company believes the price movements in these securities are dependent upon the movement in market interest rates. The Company’s management also maintains the intent and ability to hold securities in an unrealized loss position to the earlier of the recovery of losses or maturity.

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

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

2009 Annual Report     57

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for more than 85% of the total available-for-sale portfolio as of December 31, 2009 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company’s assessment was concentrated mainly on private-label collateralized mortgage obligations of approximately $20.4 million for which the Company evaluates credit losses on a quarterly basis. Gross unrealized gain and loss positions related to these private-label collateralized mortgage obligations amounted to $687,000 and $984,000 million, respectively. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

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

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

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

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

As of December 31, 2009, there were two available-for-sale debt securities with an unrealized loss that had suffered OTTI which resulted in an $88,000 non-cash charge against noninterest income.

Refer to Note 5 in the consolidated financial statements.

Income Taxes

The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Company conducts business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Consolidated Statements of Income.

Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in accrued taxes, interest, and expenses in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management’s judgment that realization is more-likely-than-not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest, and expenses in the Consolidated Balance Sheets. The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent, and other information, and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities, and changes to statutory, judicial, and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current period’s income tax expense and can be significant to the operating results of the Company.

Middlefield Banc Corp.     58

Changes in Financial Condition

General.The Company’s total assets increased $90.8 million or 19.4% to $558.7 million at December 31, 2009 from $467.8 million at December 31, 2008. This increase was composed of a net increase in investment securities of $32.4 million, net loans receivable of $30.6 million and cash and cash equivalents of $23.7 million.

The increase in the Company’s total assets reflects a corresponding increase in total liabilities of $89.2 million or 20.6% to a total balance of $522.0 million at December 31, 2009 from $432.8 million at December 31, 2008. The Company also experienced an increase in total stockholders’ equity of $1.6 million to a new balance of $36.7 million as of December 31, 2009 from $35.1 million at December 31, 2008.

The increase in total liabilities was primarily due to deposit growth for the year. Total deposits increased $92.3 million or 23.4% to $487.1 million at December 31, 2009 from $394.8 million as of December 31, 2008. The net increase in total stockholders’ equity can be attributed to an increase in common stock, accumulated other comprehensive income, and net income.

Cash on hand, Interest-earning deposits and Federal funds sold.Cash and due from banks, interest-earning deposits, and Federal funds sold represent cash equivalents which increased a combined $23.7 million or 135.8% to $41.2 million at December 31, 2009 from $17.5 million at December 31, 2008. Deposits from customers into savings and checking accounts, loan and security repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases, and repayments of borrowed funds. The net increase in 2009 can be attributed principally to an increase in Federal funds sold balances.

Securities.Management’s goal in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. Maturing securities have historically provided sufficient liquidity. The balance of total securities increased $32.4 million, or 31.1%, as compared to 2008, with the ratio of securities to total assets also increasing to 24.5% at December 31, 2009, compared to 22.3% at December 31, 2008. This trend of higher security investments was driven by an increase in U.S. government agency securities of $13.8 million, or 307.0%, as compared to year-end 2008. The growth in this segment of investments was the result of attractive yield opportunities and a desire to increase diversification within the Company’s securities portfolio. This growth was supported by an increase in mortgage-backed securities and obligations of state and political subdivisions securities of $6.2 million and $9.7 million from year-end 2008.

The Company continues to benefit from the advantages of mortgage-backed securities, which totaled $60.7 million or 44.4% of the Company’s total investment portfolio at December 31, 2009. The primary advantage of mortgage-backed securities has been the increased cash flows due to the more rapid (monthly) repayment of principal as compared to other types of investment securities, which deliver proceeds upon maturity or call date. The weighted average federal tax equivalent (FTE) yield on securities at year-end 2009 was 6.03%, as compared to 5.48% at year-end 2008 and 5.28% at year-end 2007. While the Company’s focus is to generate interest revenue primarily through loan growth, management will continue to invest excess funds in securities when opportunities arise.

The majority of all of the Company’s securities are valued based on prices compiled by third party vendors using observable market data. However, certain securities are less actively traded and do not always have quoted market prices. The determination of their fair value, therefore, requires judgment, as this determination may require benchmarking to similar instruments or analyzing default and recovery rates. Examples include certain collateralized mortgage and debt obligations and high-yield debt securities.

Loans receivable.The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers’ businesses or to finance investor-owned rental properties and commercial loans to finance the business operations and to a lesser extent, construction and consumer loans. Net loans receivable increased $30.6 million or 9.6% to $348.7 million at December 31, 2009 from $318.0 million at December 31, 2008. Included in this growth were increases in residential and commercial real estate loans of $5.7, and $35.9 million, respectively.

2009 Annual Report     59

The product mix in the loan portfolio includes commercial loans comprising 16.1%, construction loans 2.2%, residential real estate loans 58.0%, commercial real estate loans 22.3% and consumer loans 1.4% at December 31, 2009 compared with 20.7%, 2.5%, 62.0%, 13.3% and 1.5%, respectively, at December 31, 2008.

Loans contributed 77.8% of total interest income in 2009 and 82.3% in 2008. The loan portfolio yield of 6.04% in 2009 was 19 basis points greater than the average yield for total interest earning assets. Management recognizes that while the loan portfolio holds some of the Company’s highest yielding assets, it is inherently the most risky portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the approval process. To minimize risks associated with changes in the borrower’s future repayment capacity, the Company generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

The Company will continue to monitor the relatively mild pace of its loan portfolio growth during 2010. The Company’s lending markets remain challenging and have impacted loan growth due to increased payoffs and a flat to declining level of loan originations during 2009. The Company anticipates total loan growth to be marginal, with volume to continue at a flat to moderate pace throughout 2010. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio.

FHLB stock.FHLB stock increased $14,000 or .8% to $1.9 million at December 31, 2009 primarily as a result of increased asset size of both affiliates that is used to calculate the minimum stock requirement.

Goodwill.Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed annually for impairment and any such impairment is recognized in the period identified by a charge to earnings. In assessing goodwill for impairment, management estimates the fair value of the Company’s banking subsidiary to which the goodwill relates. To arrive at fair value estimates, management considers prices received upon sale of other banking institutions of similar size and with similar operating results. Purchase prices as a multiple of earnings, book value, tangible book value, and deposits are considered and applied to the Company’s banking subsidiary. The process of evaluating goodwill for impairment requires management to make significant estimates and judgments. The use of different estimates, judgments or approaches to estimate fair value could result in a different conclusion regarding impairment of goodwill. Based on the analysis, management has determined that there is no goodwill impairment.

The Company routinely utilizes the services of an independent third party that is regarded in the banking industry as an expert in valuing core deposits and monitoring the ongoing value of core deposit intangibles and goodwill on an annual basis. Goodwill balances were unchanged in 2009.

Bank-owned life insurance.Bank owned life insurance (BOLI) is universal life insurance, purchased by the Company, on the lives of the Company’s officers. The beneficial aspects of these universal life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by the Company as the owner of the policies. BOLI increased by $266,000 to $7.7 million as of December 31, 2009 from $7.4 million at the end of 2008 as a result of the earnings of the underlying insurance policies.

Deposits.Interest-earning assets are funded generally by both interest-bearing and noninterest-bearing core deposits. Deposits are influenced by changes in interest rates, economic conditions, and competition from other banks. The Company considers various sources when evaluating funding needs including, but not limited to, deposits, which represented 93.7% of the Company’s total funding sources at December 31, 2009. The deposit base consists of demand deposits, savings, money market accounts, and time deposits. Total deposits increased $92.3 million or 23.4% to $487.1 million at December 31, 2009 from $394.8 million at December 31, 2008.

Middlefield Banc Corp.     60

Time deposits, particularly certificates of deposit (“CD’s”), remain the most significant source of funding for the Company’s earning assets, making up 49.4% of total deposits. During 2009, time deposits increased $11.5 million, or 5.0%, from year-end 2008. This increase was primarily due to customers’ fleeing to safety from the volatility of the stock market. As market rates have declined over the past year, the Company has seen the cost of its retail CD balances re-price downward to reflect current deposit rates.

Complementing the increase in time deposits was the increase in the Company’s savings balances, which were up $38.4 million, or 55.7%, to finish at $107.4 million at year-end 2009 as compared to $69.0 million at year-end 2008. Also adding to the Company’s deposit growth for the year was the increase in money market accounts which were up $28.6 million, or 102.7%, from year-end 2008. The Company will continue to experience increased competition for deposits in its market areas, which should challenge net growth in its deposit balances. The Company will continue to evaluate its deposit portfolio mix to properly utilize both retail and wholesale funds to support earning assets and minimize interest costs.

Borrowed funds.The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, lines of credit from other banks, and repurchase agreement borrowings. Borrowed funds decreased $3.1 million or 8.7% to $32.7 million at December 31, 2009 from $35.8 million at December 31, 2008. FHLB advances declined $8.0 million with short-term borrowings increasing $4.9 million.

Stockholders’ equity.The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. All of the capital ratios exceeded the regulatory well capitalized guidelines. Shareholders’ equity totaled $36.7 million at December 31, 2009, compared to $35.1 million at December 31, 2008, which represents growth of 4.7%. Contributing most to this increase was year-to-date net income of $1.8 million. Offsetting the growth in capital were cash dividends paid of $1.6 million, or $1.04 per share, year-to-date. Cash dividends paid for 2009 represents a 0.9% increase as compared to 2008.

The Company maintains a dividend reinvestment and stock purchase plan. The plan allows shareholders to purchase additional shares of company stock. A benefit of the plan is to permit the shareholders to reinvest cash dividends as well as make supplemental purchases without the usual payment of brokerage commissions. During 2009, shareholders invested more than $554,000 through the dividend reinvestment and stock purchase plan. These proceeds resulted in the issuance of 28,731 new shares.

Average balance sheet and yield/rate analysis.The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread, and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%.

2009 Annual Report     61

	For The Year Ended December 31,
	2009							2008							2007
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
	(Dollars in thousands)							(Dollars in thousands)							(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	335,714	$	20,271		6.04	%	$	317,226	$	21,426		6.75	%	$	288,022	$	21,063		7.31	%
Investments securities (3)		110,142		5,676		6.03	%		96,277		4,349		5.48	%		74,820		3,040		5.28	%
Interest-bearing deposits with other banks		16,078		104		0.64	%		7,701		263		3.41	%		13,829		770		5.57	%
Total interest-earning assets		461,934		26,051		5.85	%		421,204		26,038		6.40	%		376,671		24,873		6.85	%
Noninterest-earning assets		33,777							29,658							21,307
Total assets		495,711							450,862							397,979
Interest-bearing liabilities:
Interest-bearing demand deposits	$	32,609		318		0.98	%	$	24,178		297		1.23	%	$	15,541		359		2.31	%
Money market deposits		37,200		760		2.04	%		25,042		783		3.13	%		25,057		1,026		4.09	%
Savings deposits		87,295		1,371		1.57	%		70,868		1,363		1.92	%		68,882		1,695		2.46	%
Certificates of deposit		225,821		7,847		3.47	%		216,732		9,912		4.57	%		172,552		8,581		4.97	%
Borrowings		32,071		1,486		4.63	%		36,229		1,702		4.70	%		36,639		1,870		5.10	%
Total interest-bearing liabilities		414,996		11,783		2.84	%		373,049		14,058		3.77	%		318,671		13,531		4.25	%
Noninterest-bearing liabilities
Other liabilities		44,358							44,762							45,769
Stockholders’ equity		36,357							33,051							33,539
Total liabilities and stockholders’ equity	$	495,711						$	450,862						$	397,979
Net interest income			$	14,268						$	11,980						$	11,342
Interest rate spread (1)						3.01	%						2.63	%						2.60	%
Net yield on interest-earning assets (2)						3.30	%						3.06	%						3.25	%
Ratio of average interest-earning assets to average interest-bearing liabilities						111.31	%						112.91	%						118.20	%

(1)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(2)	Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
(3)	Tax equivalent adjustments to interest income for tax-exempt securities were $969, $932, and $931 for 2009, 2008, and 2007 respectively.

Middlefield Banc Corp.     62

	2009 versus 2008									2008 versus 2007
	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Total			Volume			Rate			Total
	(Dollars in thousands)									(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	1,249		$	(2,404	)	$	1,155		$	2,136		$	(1,773	)	$	363
Investments securities		760			567			1,327			1,133			176			1,309
Interest-bearing deposits with other banks		286			(445	)		(159	)		(341	)		(166	)		(507	)
Total interest-earning assets		2,294			(2,281	)		13			2,928			(1,763	)		1,165
Interest-bearing liabilities:
Interest-bearing demand deposits		104			(83	)		21			200			(262	)		(62	)
Money market deposits		381			(403	)		(23	)		(1	)		(242	)		(243	)
Savings deposits		315			(307	)		8			49			(381	)		(332	)
Certificates of deposit		415			(2,481	)		(2,065	)		2,197			(866	)		1,331
Borrowings		(195	)		(20	)		(216	)		(21	)		(147	)		(168	)
Total interest-bearing liabilities		1,020			(3,294	)		(2,275	)		2,424			(1,898	)		527
Net interest income	$	1,274		$	1,013		$	2,288		$	504		$	134		$	638

Changes in Results of Operations

2009 Results Compared to 2008 Results

General.The Company posted net income of $1.8 million, compared to $2.6 million for the year-ended December 31, 2008. On a per share basis, 2009 earnings were $1.15 per diluted share, representing a decrease from the $1.69 per diluted share for the year-ended December 31, 2008. The return on average equity for the year-ended December 31, 2009 was 4.90% and its return on average assets was 0.36%. The $834,000 or 31.9% decline in net income between 2009 and 2008 can primarily be attributed to an increase in total noninterest expense of $2.1 million and provision for loan losses of $2.0 million. This decrease was partially offset by a reduction of interest expense of $2.3 million and an increase of $442,000 in noninterest income.

Net interest income.Net interest income, which is the Company’s largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest earning assets and interest bearing liabilities. Net interest income increased by $2.3 million in 2009 to $14.3 million compared to $12.0 million for 2008. This increase is the net result of a $13,000 rise in interest income which was supported by a major decline in interest expense of $2.3 million. Interest-earning assets averaged $461.9 million during 2009 representing a $40.7 million or 9.7% increase since year-end 2008. The Company’s average interest-bearing liabilities increased 11.2% from $373.1 million in 2008 to $415.0 million in 2009.

The Company finances its earning assets with a combination of interest-bearing and interest-free funds. The interest-bearing funds are composed of deposits, short-term borrowings, and long-term debt. Interest paid for the use of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits and stockholders’ equity, require no interest expense and, therefore, contribute significantly to net interest income.

The profit margin, or spread, on invested funds is a key performance measure. The Company monitors two key performance indicators — net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 2009 the net interest margin, measured on a fully taxable equivalent basis, increased to 3.30%, compared to 3.06% in 2008.

2009 Annual Report     63

Interest income.Interest income increased $13,000 to $26.1 million for 2009 which was attributed to a $1.2 million decline in interest and fees on loans which was offset by an increase in interest on investment securities. The change in interest income on securities was primarily attributable to an increase in the average balance of investment securities of $13.9 million or 14.4% to $110.1 million for the year-ended December 31, 2009 as compared to $96.3 million for the year-ended December 31, 2008. In addition to growth, there was also an increase in the investment security yield to 6.03% for 2009, compared to 5.48% for 2008.

Interest and fees on loans declined $1.1 million to $20.3 million for 2009, compared to $21.4 million for 2008. This decrease was primarily attributable to the growth of the average balance of loans of $18.5 million to $335.7 million for the year-ended December 31, 2009 as compared to $317.2 million for the year-ended December 31, 2008 which was offset by a decline in the loan yield to 6.04% for 2009, compared to 6.75% for 2008. This decline was due to the fact that a large percentage of the loan portfolio uses the prime rate as its index. The prime rate averaged 3.25% in 2009 as compared to 5.09% in 2008.

Interest expense.Interest expense decreased $2.3 million or 16.2% to $11.8 for 2009, compared with $14.1 million for 2008. This change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities which was more than offset by a 93 basis point decline in the rate paid on these liabilities. For the year-ended December 31, 2009, the average balance of interest-bearing liabilities grew by $42.0 million to $415.0 million as compared to $373.1 million for the year-ended December 31, 2008. Interest incurred on deposits declined by $2.1 million for the year from $12.4 million in 2008 to $10.3 million for year-end 2009. The change in deposit expense was due to both an increase in the average balance of $46.1 million in 2009 which was more than offset by a 98 basis point decline during the year. Interest incurred on FHLB advances, repurchase agreements, junior subordinated debt, and other borrowings declined $216,000 or 12.7% to $1.5 million for 2009, compared to $1.7 million for 2008. The decline was also attributable to a 7 basis point decrease in the rate paid on these borrowings during the year.

Loan loss provision.The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses at December 31, 2009 was $2,578,000 compared to $608,000 in 2008. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of non-performing loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management’s judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations.

Our asset quality numbers reflect the continued environment of sustained economic weakness, including continued high unemployment, increased levels of under-employment, and lower real estate values. In our northeastern Ohio markets, credit issues are tied to owner occupied residential properties. In contrast, our central Ohio market is reporting delinquencies tied to non-owner occupied residential properties. We believe that it is prudent, in light of the increased amount of non-performing loans, to operate with higher levels of general loan loss reserves. During 2010, we will continue to provide a higher than historic level of provision to address credit quality issues.

The increased loan loss provision, which has significantly outpaced loan charge-offs, has substantially strengthened the allowance for loan losses. The ratio of the allowance for loan losses to total loans increased to 1.40% of total loans at December 31, 2009 compared to the 1.28% reported at September 30, 2009 and 1.11% at December 31, 2008. During the fourth quarter of 2009, the Company created a new entity, EMORECO, Inc., which is designed to aid in troubled asset resolution. During November 2009, EMORECO purchased $4.6 million of non-performing assets from EB.

Middlefield Banc Corp.     64

Noninterest income.Noninterest income increased $442,000 or 19.8% to $2.7 million for 2009 compared to $2.2 million for 2008. Earnings on bank-owned life insurance were lower, reflective of the current interest rate environment. During 2008, the Company recognized a charge for other-than-temporary impairment on securities of $376,000. A similar charge, in the amount of $88,000, was recognized in 2009. Management has concluded that it is probable that there has been an adverse change in estimated cash flows for those securities, which management deemed to be other-than-temporarily impaired in accordance with generally accepted accounting principles.

Noninterest expense.Operating expenses increased $2.0 million, or 19.4% to $12.6 million for 2009 compared to $10.6 million for 2008. Expense increases in salaries and employee benefits of $1.0 million, occupancy expense of $43,000, and data processing costs of $114,000 during 2009 are all directly related to the growth of the Company. MBC opened its Cortland office in June 2008, while EB acquired an office in Westerville in November 2008. Both of these actions, while expanding the Company’s footprint, contributed to the higher expense levels. The premium for FDIC insurance increased 276.5% in 2009 to $707,000 compared to $188,000 for 2008.

Provision for income taxes.The provision for income taxes declined $460,000 or 118.8% to a benefit of ($73,000) for 2009, compared to $387,000 for 2008. This decrease was primarily the result of a decline in income before taxes of $1.3 million or 43.1% to $1.7 million for 2009, compared to $3.0 million for 2008. The Company’s effective federal income tax rate in 2009 was (4.25%) compared to 12.9% in 2008.

2008 Results Compared to 2007 Results

General.The Company posted net income of $2.6 million, compared to $3.4 million for the year-ended December 31, 2007. On a per share basis, 2008 earnings were $1.69 per diluted share, representing a decrease from the $2.14 per diluted share for the year-ended December 31, 2007. The return on average equity for the year-ended December 31, 2008 was 7.91% and its return on average assets was 0.58%. The $760,000 or 22.5% decline in net income between 2008 and 2007 can primarily be attributed to an increase in total noninterest expense of $1.2 million.

Net interest income.Net interest income, which is the Company’s largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest earning assets and liabilities. Net interest income increased by $638,000 in 2008 to $12.03 million compared to $11.3 million for 2007. This increase is the net result of a $1.2 million rise in interest income which was partially offset by a rise in interest expense of $527,000. Interest-earning assets averaged $421.2 million during 2008 representing a $44.5 million or 11.8% increase since year-end 2007. The Company’s average interest-bearing liabilities increased 54.4% from $318.6 million in 2007 to $373.1 million in 2008.

The Company finances its earning assets with a combination of interest-bearing and interest-free funds. The interest-bearing funds are composed of deposits, short-term borrowings, and long-term debt. Interest paid for the use of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits and stockholders’ equity, require no interest expense and, therefore, contribute significantly to net interest income.

The profit margin, or spread, on invested funds is a key performance measure. The Company monitors two key performance indicators — net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 2008 the net interest margin, measured on a fully taxable equivalent basis, decreased to 3.06% compared to 3.25% in 2007.

2009 Annual Report     65

Interest income.Interest income increased $1.2 million or 4.7% to $26.0 million for 2008, compared to $24.9 million for 2007. The increase in interest income can be attributed to the growth of interest earned investment securities of $1.3 million or 43.1%. This change was primarily attributable to an increase in the average balance of investment securities of $21.5 million or 28.7% to $96.3 million for the year-ended December 31, 2008 as compared to $74.8 million for the year-ended December 31, 2007. In addition to growth, there was also an increase in the investment security yield to 5.48% for 2008, compared to 5.28% for 2007.

Interest earned on loans increased $363,000 to $21.4 million for 2008, compared to $21.1 million for 2007. This increase was primarily attributable to the growth of the average balance of loans of $29.2 million to $317.2 million for the year-ended December 31, 2008 as compared to $288.0 million for the year-ended December 31, 2007. In addition to growth there was also a decline in the loan yield to 6.75% for 2008, compared to 7.31% for 2007. This decline was due to the fact that a large percentage of the loan portfolio uses the prime rate as its index. The prime rate declined by 400 basis points from 7.25% to 3.25% in 2008.

Interest expense.Interest expense increased by $527,000 or 3.9% to $14.1 for 2008, compared with $13.5 million for 2007. This change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities which was partially offset by a 48 basis point decline in the rate paid on these liabilities. For the year-ended December 31, 2008, the average balance of interest-bearing liabilities grew by $54.4 million to $373.1 million as compared to $318.7 million for the year-ended December 31, 2007. Interest incurred on deposits grew by $719,000 for the year from $11.6 million in 2007 to $12.4 million for year-end 2008. The change in deposit expense was due to both an increase in the average balance of $54.8 million in 2008 which was partially offset by a 43 basis point decline during the year. Interest incurred on FHLB advances, repurchase agreements, junior subordinated debt, and other borrowings declined $192,000 or 10.1% to $1.7 million for 2008, compared to $1.9 million for 2007. The decline was primarily attributable to a 40 basis point decrease in the rate paid on these borrowings during the year.

Loan loss provision.The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses was $608,000 in 2008 as compared to $429,000 in 2007. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of non-performing loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management’s judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations. This level of provision during 2008 is reflective of the changing economic conditions adversely impacting the market areas served by the Company’s affiliate banks, which have caused charge offs and non-performing loans to increase. Net charge offs for 2008 was $351,000, which was below the $423,000 of net charged offs during 2007. The allowance for loan losses at December 31, 2008 stood at $3,557,000 or 1.11% of total loans.

Noninterest income.Noninterest income, exclusive of other than temporary charges of $376,000, decreased $29,000 for the twelve-month period ending December 31, 2008 over the equal reporting period of 2007. The decreases were primarily the result of a decline in deposit service charges, which corresponds to a reduction in overdraft fees and statement service charges at MBC. These reductions were driven, in part, by a wider acceptance of the free checking account product in that market. The other-than-temporary impairment charge relates to two mortgage backed securities held by one of the Company’s subsidiary banks. Management has concluded that it is probable that there has been an adverse change in estimated cash flows for those securities, which management deemed to be other-than-temporarily impaired in accordance with generally accepted accounting principles.

Middlefield Banc Corp.     66

Noninterest expense.Total noninterest expense for the full year of 2008 was 13.1% higher than the level of 2007. The factors that primarily led to the increase were costs associated with the operation of additional offices, increased staffing levels related to those offices, and associated higher levels of equipment depreciation. While The Middlefield Banking Company opened its office in Cortland, Ohio, in June of 2008, its Newbury, Ohio, office was completing its second year of operation in 2008. Emerald Bank expanded into Westerville, Ohio, with the purchase of a branch office in early November 2008. Deposit insurance premiums paid to the FDIC during the period ended December 31, 2008 increased $139,000 over the prior year, as that agency sought to maintain the legally prescribed coverage ratio. Audit and exam expense increased $101,000 during 2008 as the company continued its efforts to ensure compliance with the provisions of the Sarbanes-Oxley Act of 2002 and other regulatory mandates. Data processing costs for 2008 increased $104,000 over the prior year. This increased expense was driven by an increase in customer relationships and the expansion of product offerings.

Provision for income taxes.The provision for income taxes declined $409,000 or 51.4% to $387,000 for 2008, compared to $796,000 for 2007. This decrease was primarily the result of a decline in income before taxes of $1.2 million or 28.0% to $3.0 million for 2008, compared to $4.2 million for 2007. The Company’s federal rate in 2008 totaled 12.9% compared to 19.1% in 2007.

Asset and Liability Management

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives, and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets and the re-pricing or maturity of its interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while, at the same time, extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in strong asset/liability management in order to insulate the Company from material and prolonged increases in interest rates. As a result of this policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans in the form of mortgage-backed securities. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company.

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

Interest Rate Sensitivity Simulation Analysis

The Company utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Asset and Liability Management Committee of the Company believes that simulation modeling enables the Company to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve and different loan and mortgage-backed security prepayment, and deposit decay assumptions under various interest rate scenarios.

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

2009 Annual Report     67

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

Net interest income simulation.Given a 200 basis point parallel gradual increase or decrease in market interest rates, net interest income may not change by more than 10% for a one year period.

Portfolio equity simulation.Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity.

The following table presents the simulated impact of a 200 basis point upward or downward shift of market interest rates on net interest income and the change in portfolio equity. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2009 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the December 31, 2009 levels for net interest income, and portfolio equity. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2009 for portfolio equity:

	Increase			Decrease
	+200 BP			-200 BP
Net interest income—increase (decrease)		0.25	%		6.98	%
Portfolio equity—increase (decrease)		(25.75	)%		7.25	%

Allowance for loan losses.The allowance for loan losses represents the amount management estimates is adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses, which is charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan losses, taking into account the overall risk characteristics of the various portfolio segments, the Company’s loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a general allowance for homogeneous loan pools, and an unallocated allowance.

In 2009, the combination of sustained weakness in commercial real estate values and a recessionary economy continued to have an adverse impact on the financial condition of commercial borrowers. These factors resulted in the Company downgrading loan quality ratings of several commercial loans during the year. The distressed commercial real estate market also caused certain existing impaired commercial real estate loans to become under-collateralized during the year, resulting in the loans being charged down to the estimated net realizable value of the underlying collateral.

At December 31, 2009, the Company’s allowance for loan losses showed an increase of $1.3 million for a balance of $4.9 million compared to $3.6 million from December 31, 2008. The allowance now represents 1.40% of the gross loan portfolio as compared to 1.11% for the previous period. The increase in the allowance for loan losses was necessitated by loan downgrades and an increase to specific reserves for impaired commercial real estate loans discussed above, coupled with the impact of charge-offs remaining at an elevated level. Net loan charge-offs totaled $1.2 million, or 0.36% of average loans in 2009, compared to $351,000, or 0.11%, for 2008. To maintain the adequacy of the allowance for loan losses, the Company recorded a yearly provision for loan loss of $2.6 million versus $608,000 for 2008.

Middlefield Banc Corp.     68

The specific allowance incorporates the results of measuring impaired loans. The formula allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio, and consideration of historical loss experience.

The non-specific allowance is determined based upon management’s evaluation of existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends, collateral values, unique industry conditions within portfolio segments that existed as of the balance sheet date, and the impact of those conditions on the collectibility of the loan portfolio. Management reviews these conditions quarterly. The non-specific allowance is subject to a higher degree of uncertainty because it considers risk factors that may not be reflected in the historical loss factors.

Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses was adequate at December 31, 2009, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy and employment could result in increased levels of non-performing assets and charge-offs, increased loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review a Company’s loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

The following table sets forth information concerning the Company’s allowance for loan losses at the dates and for the periods presented.

	For the Years Ended December 31,
	2009			2008			2007
	(Dollars in thousands)
Allowance balance at beginning of period	$	3,557		$	3,299		$	2,849
Addition from acquisition		—			—			436
Loans charged off:
Commercial and industrial		(217	)		(278	)		(251	)
Real estate — construction		—			—			—
Real estate — mortgage:
Residential		(768	)		(2	)		(26	)
Commercial		(81	)		—			—
Consumer installment		(221	)		(135	)		(151	)
Total loans charged off		(1,287	)		(415	)		(428	)
Recoveries of loans previously charged off:
Commercial and industrial		33			30			—
Real estate — construction		—			—			—
Real estate — mortgage:
Residential		—			2			—
Commercial		—			—			—
Consumer installment		56			33			13
Total recoveries		89			65			13
Net loans charged off		(1,198	)		(350	)		(415	)
Provision for loan losses		2,578			608			429
Allowance balance at end of period	$	4,937		$	3,557		$	3,299
Loans outstanding:
Average	$	335,714		$	317,226		$	288,022
End of period		353,597			321,575			309,446
Ratio of allowance for loan losses to loans outstanding at end of period		1.40	%		1.11	%		1.07	%
Net charge offs to average loans		(0.36	)		(0.11	)		(0.14	)

2009 Annual Report     69

The following table illustrates the allocation of the Company’s allowance for probable loan losses for each category of loan for each reported period. The allocation of the allowance to each category is not necessarily indicative of future loss in a particular category and does not restrict our use of the allowance to absorb losses in other loan categories.

	At December 31,
	2009					2008					2007
			Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars in thousands)					(Dollars in thousands)					(Dollars in thousands)
Type of Loans:
Commercial and industrial	$	864		16.1	%	$	961		20.7	%	$	1,060		21.7	%
Real estate — construction		—		2.2			—		2.5			99		2.2
Real estate — mortgage:
Residential		2,816		58.0			2,048		62.0			1,527		62.5
Commercial		1,198		22.3			521		13.3			512		11.9
Consumer installment		59		1.4			27		1.5			101		1.7
Unallocated		—		—			—		—			—		—
Total	$	4,937		100	%	$	3,557		100	%	$	3,299		100	%

Non-performing assets.Non-performing assets included non-accrual loans, renegotiated loans, loans 90 days or more past due, other real estate, and repossessed assets. A loan is classified as non-accrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Non-performing loans amounted to $16.3 million or 4.6% and $8.5 million or 2.6% of total loans at December 31, 2009 and December 31, 2008, respectively. The increase in non-performing assets has occurred primarily in commercial and one-to-four family real estate loans and other real estate owned. Non-performing loans secured by real estate totaled $12.9 million as of December 31, 2009, up $7.0 million from $5.9 million at December 31, 2008. The depressed state of the economy and rising levels of unemployment have contributed to this trend, as well as the decline in the housing market across our geographic footprint that reflected declining home prices and increasing inventories of houses for sale. Real estate owned is written down to fair value at its initial recording and continually monitored.

A major factor in determining the appropriateness of the allowance for loan losses is the type of collateral which secures the loans. Of the total non-performing loans at December 31, 2009, 79.0% were secured by real estate. Although this does not insure against all losses, the real estate provides substantial recovery, even in a distressed-sale and declining-value environment. In response to the poor economic conditions which have eroded the performance of the Company’s loan portfolio, additional resources have been allocated to the loan workout process. The Company’s objective is to work with the borrower to minimize the burden of the debt service and to minimize the future loss exposure to the Company.

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The following table summarizes nonperforming assets by category.

	At December 31,
	2009			2008			2007
	(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Commercial and industrial	$	2,960		$	1,530		$	1,231
Real estate — construction		248			469			643
Real estate — mortgage:
Residential		10,134			3,902			1,825
Commercial		1,175			351			33
Consumer installment		2			2			12
Total non-accrual loans		14,519			6,254			3,744
Accruing loans which are contractually past due 90 days or more:
Commercial and industrial		9			558			574
Real estate — construction		205			—			—
Real estate — mortgage:
Residential		441			1,659			1,333
Commercial		1,112			—			—
Consumer installment		—			9			11
Total accruing loans which are contractually past due 90 days or more		1,766			2,226			1,918
Total non-performing loans	$	16,285		$	8,480		$	5,662
Real estate owned		2,164			1,106			—
Total non-performing assets	$	18,450		$	9,586		$	5,662
Total non-performing loans to total loans		4.61	%		2.64	%		1.83	%
Total non-performing loans to total assets		2.92	%		1.81	%		1.30	%
Total non-performing assets to total assets		3.30	%		2.05	%		1.30	%

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Payments received on non-accrual loans are recorded as income or applied against principal according to management’s judgment as to the collectibility of principal.

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Management evaluates all loans identified as impaired individually. The Company estimates credit losses on impaired loans based on the present value of expected cash flows, or the fair value of the underlying collateral if loan repayment is expected to come from the sale or operation of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until that time, an allowance for loan losses is maintained for estimated losses.

Unless otherwise required by the loan terms, cash receipts on impaired loans are applied first to accrued interest receivable except when an impaired loan is also a non-accrual loan, in which case the portion of the payment related to interest is recognized as income.

2009 Annual Report     71

Interest income recognized on non-accrual loans during all of the periods was insignificant. Management is not aware of any trends or uncertainties related to any loans classified as doubtful or substandard that might have a material effect on earnings, liquidity, or capital resources. Management is not aware of any information pertaining to material credits that would cause it to doubt the ability of borrowers to comply with repayment terms.

Liquidity and Capital Resources

Liquidity.Liquidity management for the Company is measured and monitored on both a short and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to the Company. Both short and long-term liquidity needs are addressed by maturities and sales of investments securities, loan repayments and maturities, and liquidating money market investments such as Federal funds sold. The use of these resources, in conjunction with access to credit, provides the core ingredients for satisfying depositor, borrower, and creditor needs.

The Company’s liquid assets consist of cash and cash equivalents, which include investments in very short-term investments (i.e. Federal funds sold) and investment securities classified as available for sale. The level of these assets is dependent on the Company’s operating, investing, and financing activities during any given period. At December 31, 2009 cash and cash equivalents totaled $41.2 million or 7.4% of total assets while investment securities classified as available for sale totaled $136.7 million or 24.5% of total assets. Management believes that the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, junior subordinated debt, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.

Operating activities provided net cash of $1.1 million, $3.2 million, and $4.3 million for 2009, 2008, and 2007, respectively, generated principally from net income of $1.8 million, $2.6 million, and $3.4 million in each of these respective periods.

Investing activities consist primarily of loan originations and repayments and investment purchases and maturities. These cash usages primarily consisted of loan increases of $34.5 million, as well as investment purchases of $52.2 million. Partially offsetting the usage of investment activities is $20.7 million of proceeds from investment security maturities and repayments. For the same period ended 2008, investing activities used $34.1 million in funds, principally for the net origination of loans and the purchase of investment securities of $13.4 million and $39.1 million, respectively. During the same period ended 2007, cash usages primarily consisted of loan originations of $21.0 million as well as investment purchases of $32.9 million.

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, treasury stock activity, and the payment of dividends. During 2009, net cash provided by financing activities totaled $88.1 million, principally derived from an increase in deposit accounts. During 2008, net cash provided by financing activities totaled $30.6 million, principally derived from an increase in deposit accounts. During the same period ended 2007, net cash provided by financing activities was $47.7 million, principally derived from an increase in deposit accounts.

Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company’s commitment to make loans, as well as management’s assessment of the Company’s ability to generate funds. The Company anticipates that it will have sufficient liquidity to satisfy estimated short-term and long-term funding needs.

Middlefield Banc Corp.     72

Capital Resources.The Company’s primary source of capital has been retained earnings. Historically, the Company has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to not only ensure compliance with regulations, but also to ensure capital adequacy for future expansion.

The Company and its subsidiaries are subject to federal regulations imposing minimum capital requirements. Management monitors both the Company’s and banks’ Total risk-based, Tier I risk-based and Tier I leverage capital ratios to assess compliance with regulatory guidelines. At December 31, 2009, both the Company and its subsidiaries exceeded the minimum risk-based and leverage capital ratio requirements. The Company’s Total risk-based, Tier I risk-based and Tier I leverage ratios were 12.34%, 11.08%, and 7.99% at December 31, 2009. MBC’s Total risk-based, Tier I risk-based and Tier I leverage ratios were 11.47%, 10.41% and 7.45% and EB’s were 14.91%, 13.63%, and 10.29%, respectively, at December 31, 2009.

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

The Company had approximately 1,057 stockholders of record as of January 27, 2010. There is no established market for the Company’s common stock. The stock is traded very infrequently. Bid prices are quoted from time to time in the “pink sheets” under the symbol “MBCN.” The “pink sheets” is a quotation service for over-the-counter securities that is maintained by Pink OTC Markets Inc., a privately owned company. The following table shows the high and low bid prices of and cash dividends paid on the Company’s common stock in 2009 and 2008, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or commissions, and does not necessarily represent actual transactions.

					Cash
	High		Low		Dividends
	Bid		Bid		per share
2009
First Quarter	$	22.50	$	20.00	$	0.260
Second Quarter	$	23.00	$	19.50	$	0.260
Third Quarter	$	19.50	$	15.25	$	0.260
Fourth Quarter	$	24.00	$	14.99	$	0.260
2008
First Quarter	$	37.25	$	36.00	$	0.250
Second Quarter	$	37.00	$	30.00	$	0.260
Third Quarter	$	29.25	$	21.00	$	0.260
Fourth Quarter	$	28.00	$	20.00	$	0.260

2009 Annual Report     73

Corporate Headquarters

The Corporation’s headquarters is located at:

Middlefield Banc Corp.
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
888.801.1666• 440.632.1666
fax 440.632.1700

Form 10-K and 10-Q Availability

A copy of Middlefield Banc Corp.’s Annual Report on Form 10-K and Quarterly Reports on 10-Q filed with the Securities and Exchange Commission will be furnished to any shareholder, free of charge, upon written or e-mail request to:

Donald L. Stacy
Treasurer and CFO
Middlefield Banc Corp.
P.O. Box 35
Middlefield, Ohio 44062
or dstacy@middlefieldbank.com

Market Makers

The symbol for Middlefield Banc Corp. common stock is MBCN and the CUSIP is 596304204.

Sweney Cartwright & Co.
17 South High Street
Columbus, Ohio 43215
614.228.5391• 800.334.7481

Stifel, Nicolaus & Co., Inc.
18 Columbia Turnpike
Florham, NJ 07932
800.342.2325

Howe Barnes Hoefer & Arnett, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
312.655.3000

Notice of Annual Meeting

The Annual Meeting of Shareholders of Middlefield Banc Corp. will be held at 1:00 p.m. on Wednesday, May 12, 2010, at:

Sun Valley Banquet and Party Center
10000 Edwards Lane
Aurora, Ohio 44202

Transfer Agent and Registrar

American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
877.366.6443

Independent Auditors

S.R. Snodgrass, A. C.
2100 Corporate Drive, Suite 400
Wexford, Pennsylvania 15090-7647
724.934.0344

Internet Information

Information on the company and its subsidiary banks is available on the Internet at www.middlefieldbank.com and www.emeraldbank.com.

Dividend Payment Dates

Subject to action by the Board of Directors, Middlefield Banc Corp. will pay dividends in March, June, September, and December.

Middlefield Banc Corp.     74

Dividend Reinvestment and Stock Purchase Plan

Shareholders may elect to reinvest their dividends in additional shares of Middlefield Banc Corp.’s common stock through the company’s Dividend Reinvestment Plan. To arrange automatic purchase of shares with quarterly dividend proceeds, please call 888.801.1666.

Direct Deposit of Dividends

The direct deposit program, which is offered at no charge, provides for automatic deposit of quarterly dividends directly to a checking or savings account with The Middlefield Banking Company or Emerald Bank. For information regarding this program, please call 888.801.1666.

Market for Middlefield’s Common Equity & Related Stockholder Matters

Middlefield had approximately 1,057 stockholders of record as of February 9, 2010. There is no established market for Middlefield common stock. The stock is traded very infrequently. Bid prices are quoted from time to time on the National Quotation Bureau’s “pink sheets” under the symbol “MBCN.” The following table shows the high and low bid prices of and cash dividends paid on Middlefield common stock in 2009 and 2008, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or commissions, and does not necessarily represent actual transactions.

					Cash
	High		Low		Dividends
	Bid		Bid		per share
2009
First Quarter	$	22.50	$	20.00	$	0.260
Second Quarter	$	23.00	$	19.50	$	0.260
Third Quarter	$	19.50	$	15.25	$	0.260
Fourth Quarter	$	24.00	$	14.99	$	0.260
2008
First Quarter	$	37.25	$	36.00	$	0.250
Second Quarter	$	37.00	$	30.00	$	0.260
Third Quarter	$	29.25	$	21.00	$	0.260
Fourth Quarter	$	28.00	$	20.00	$	0.260

2009 Annual Report     75

Main Office 15985 East High Street 440.632.1666	Mantua Branch 10519 Main Street 330.274.0881	Newbury Branch 11110 Kinsman Road 440.564.7000
West Branch 15545 West High Street 440.632.1666	Chardon Branch 348 Center Street 440.286.1222	Cortland Branch 3450 Niles-Cortland Road 330.637.3208
Garrettsville Branch 8058 State Street 330.527.2121	Orwell Branch 30 South Maple Street 440.437.7200
Dublin Branch 6215 Perimeter Drive 614.793.4631	Westerville Branch 17 North State Street 614.890.7832

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 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 by management or employees in the normal course of performing their assigned functions.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2009, the Company’s internal control over financial reporting was effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

By:	/s/ Thomas G. Caldwell
	Thomas G. Caldwell
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: March 18, 2010

By:	/s/ Donald L. Stacy
	Donald L. Stacy
	Treasurer
	(Principal Financial & Accounting Officer)

Date: March 18, 2010