Middlefield Banc (MBCN) Risk Analysis

The Company and its subsidiaries are and will remain subject to extensive state and federal government supervision and regulation. Supervision and regulation affect many aspects of the banking business, including permissible activities, lending, investments, payment of dividends, the geographic locations in which our services can be offered, and numerous other matters. State and federal supervision and regulation are intended principally to protect depositors, the public, and the deposit insurance fund administered by the FDIC. Protection of stockholders is not a goal of banking regulation. The burdens of federal and state banking regulation place banks in general at a competitive disadvantage compared to less regulated competitors. Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies have undergone significant changes, and could change significantly again. Compliance with regulations can be difficult and costly, and changes to regulations often impose additional compliance costs. Federal and state banking agencies also require banks and bank holding companies to maintain adequate capital. Failure to maintain adequate capital or to comply with applicable laws, regulations, and supervisory agreements could subject a bank or bank holding company to federal or state enforcement actions, including termination of deposit insurance, imposition of fines and civil penalties, and, in the most severe cases, appointment of a conservator or receiver for a depositary institution. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or the Company in particular. The Company gives you no assurance that we will be able to adapt successfully to industry changes caused by governmental actions.

Material breaches in security of bank systems may have a significant effect on the Company's business. Financial institutions are under continuous threat of loss due to cyber-attacks, especially as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. A material breach of our systems may result from actions by our employees, vendors, third-party administrators, or unknown third parties or through cyber-attacks and can occur whether the applications are in our or third party data centers or cloud-based software services. The most significant cyber–attack risks that we face are e-fraud, denial of service, and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers or our accounts. Loss can occur as a result of negative customer experience in the event of a successful denial of service attack that disrupts availability of our on-line banking services. The breach of sensitive customer data, such as account numbers and social security numbers, could present significant operational, reputational, legal and regulatory costs to us. We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both banks and third-party service providers. We have security, backup and recovery systems in place, as well as a business continuity plan to ensure systems will not be inoperable. We also have security to prevent unauthorized access to the system. In addition, we require third-party service providers to maintain similar controls. However, we cannot be certain that these measures will be successful. A security breach in the system and loss of confidential information could result in losing customers' confidence and thus the loss of their business as well as additional significant costs for credit monitoring activities. We face indirect technology, cybersecurity, and operational risks relating to the customers, and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators, and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence, and complexity of financial entities and technology systems, a technology failure, cyber-attack, or other information or security breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity, and complexity increases the risk of operational failure. Any third-party technology failure, cyber-attack, or other information or security breach, termination, or constraint could, among other things, adversely affect our ability to effect transactions, service our customers, manage our exposure to risk, or expand our business. The Company may be exposed not only to a systems failure or cyber-attack that may be experienced by a vendor or market infrastructure with which the Company is directly connected, but also to a systems breakdown or cyber-attack involving another party to which such a vendor or infrastructure is connected. The Company increasingly faces the risk of operational failure or cyber-attacks with respect to the systems of those parties. Security breaches affecting the Company's customers, employees, agents, or suppliers, or systems breakdowns or failures, security breaches or human error or misconduct affecting other external parties, may require the Company to take steps to protect the integrity of its own operational systems or to safeguard confidential information, including restricting the access of customers to their accounts. These actions can increase the Company's operational costs and potentially diminish customer satisfaction and confidence in the Company. Furthermore, the widespread and expanding interconnectivity among financial institutions, clearing banks, payment processors, financial technology companies, securities exchanges, clearing houses and other financial market infrastructures increases the risk that the disruption of an operational system involving one institution or entity, including due to a cyber-attack, may cause industry-wide operational disruptions that could materially affect the Company's ability to conduct business. In addition, the risks associated with the disruption of an operational system of a third party could be exacerbated to the extent that the services provided by that system are used by a significant number or proportion of market participants. The ineffectiveness, failure or other disruption of operational systems upon which the Company depends, including due to a systems malfunction, cyber incident or other systems failure, could result in unfavorable ripple effects in the financial markets and for the Company and its customers.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

The Company faces significant competition both in making loans and in attracting deposits. Competition is based on interest rates and other credit and service charges, the quality of services rendered, the convenience of banking facilities, the range and type of products offered and, in the case of loans to larger commercial borrowers, lending limits, among other factors. Competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, insurance companies, and other financial service companies. The Company's most direct competition for deposits has historically come from commercial banks, savings banks, and savings and loan associations. Technology has also lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. The wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. Our profitability depends upon our continued ability to successfully compete in our market areas. Larger competitors may be able to achieve economies of scale and, as a result, offer a broader range of products and services. The Company's ability to compete successfully depends on a number of factors, including, among other things: - the ability to develop, maintain, and build long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;- the ability to expand the Company's market position;- the scope, relevance, and pricing of products and services offered to meet customer needs and demands;- the rate at which the Company introduces new products and services relative to its competitors;- customer satisfaction with the Company's level of service; and - industry and general economic trends Failure to perform in any of these areas could significantly weaken the Company's competitive position, which could adversely affect growth and profitability.

As economic conditions relating to the COVID-19 pandemic have improved, the Federal Reserve has shifted its focus to limiting inflationary and other potentially adverse effects of the extensive pandemic-related government stimulus, which signals the potential for a continued period of economic uncertainty even though the pandemic has subsided. In addition, there are continuing concerns related to, among other things, the level of U.S. government debt and fiscal actions that may be taken to address that debt, a potential resurgence of economic and political tensions with China and the Russian invasion of Ukraine, all of which may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes in consumer and business spending, borrowing and savings habits. These economic conditions or other negative developments in the domestic or international credit markets or economies may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. As the result of the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: - declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio;- decreases in office occupancy following the COVID-19 pandemic could negatively impact the future cash flows and market values of the affected properties that leads to an increased provision for credit losses and adversely affect our operating results and financial condition;- collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;- the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;- a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;- cyber security risks are increased as the result of an increase in the number of employees working remotely; and - Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs for bank failures. Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.