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Note 15 - Commitments and Contingent Liabilities

12 Months Ended

Dec. 31, 2024

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

15.

COMMITMENTS AND CONTINGENT LIABILITIES

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

Commitments to Extend Credit which were composed of the following:

(Dollar amounts in thousands)		December 31, 2024				December 31, 2023

Commitments to extend credit		$	468,006			$	418,952
Standby letters of credit			798				5,884

Total		$	468,804			$	424,836

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically one year, with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. The collateral is typically bank deposit instruments or customer business assets for secured letters of credit.

Commitments to Fund

We have an investment in a low-income housing tax credit operating partnership. As a limited partner, we are allocated tax credits and deductions associated with the underlying properties. Our maximum exposure to loss in connection with the partnership consists of the unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. The investment at December 31, 2024 and 2023 was $1.8 million and $2.0 million, respectively, and recorded in the Consolidated Balance Sheet in "accrued interest receivable and other assets". We do not have any loss reserves recorded since we believe the likelihood of loss is remote. The investment is amortized over the period that we expect to receive the tax benefits using the proportional amortization method. In 2024 and 2023, we recognized $127,000 and $35,000 of amortization, respectively. At December 31, 2024 and 2023, we had an unfunded commitment of $1.5 million and $1.7 million, respectively, which is recorded in the Consolidated Balance Sheet in "accrued interest payable and other liabilities".

Cannabis Industry

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

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

Litigation

As previously disclosed, a cyber-attack occurred in April 2023 that resulted in a temporary disruption to our computer systems. A cybersecurity firm investigated the nature and scope of the incident, evaluated our systems, and confirmed that nonpublic information relating to current and former employees, customers, and others was obtained from our systems.

On January 8, 2024, a customer filed a lawsuit against The Middlefield Banking Company in the U.S. District Court for the Northern District of Ohio related to the cyber-attack incident. A similar lawsuit was filed on January 10, 2024, against The Middlefield Banking Company in the Court of Common Pleas for Cuyahoga County, Ohio. The plaintiffs and class members in the two cases, who are current and former customers of the Bank, claim to have been harmed by alleged actions or inactions by the Bank in connection with the incident. The plaintiffs assert a variety of common law and statutory claims regarding the compromised nonpublic information and seek monetary damages, equitable and injunctive relief, pre-judgment and post-judgment interest, awards of actual and punitive damages, costs and attorneys’ fees, and other related relief. On March 28, 2024, the plaintiff in the case before the U.S. District Court for the Northern District of Ohio voluntarily dismissed their lawsuit against The Middlefield Banking Company without prejudice. The plaintiff in the Cuyahoga County lawsuit filed an amended complaint on August 8, 2024, to add an additional plaintiff. The amendment made no change to the relief sought in the original complaint.

On October 31, 2024, the plaintiffs filed with the Court of Common Pleas a motion for preliminary approval of class action settlement, with the Court granting preliminary approval of the class action settlement on November 6, 2024. On February 4, 2025, the plaintiffs submitted a motion for attorneys’ fees for class counsel. The Court of Common Pleas has scheduled a final approval hearing for April 1, 2025, to confirm the preliminary approval of the class action settlement and to determine the requested attorneys’ fee award.

Losses attributable to the April 2023 incident are within the coverage limits of the cyber risk insurance policy in place at that time. The policy has an aggregate limit of $3 million and a deductible of $50,000. The policy includes coverage for business loss, breach response, and liabilities that could occur as a result of a cyber event. Although we believe that our insurance policy will fully cover the losses associated with the lawsuit, it is possible that the losses could exceed the policy limit. We expect that any costs associated with the lawsuit, including attorney fees, adverse judgment or settlement, will be billed to and paid by the insurance company in accordance with the terms of the policy.

Leasing Commitments

The Company leases six of its branch locations. As of December 31, 2024, net assets recorded under leases amounted to $3.6 million and have remaining lease terms of 2 years to 17 years. As of December 31, 2024, finance lease assets included in "premises and equipment, net" on the Consolidated Balance Sheet totaled $3.2 million and $3.5 million as of December 31, 2023, and operating lease assets included in "accrued interest receivable and other assets" on the Consolidated Balance Sheet totaled $400,000 and $560,000 as of December 31, 2024, and 2023, respectively. As of December 31, 2024, finance lease obligations included in "other borrowings" on the Consolidated Balance Sheet totaled $3.4 million, and operating lease obligations included in "accrued interest payable and other liabilities" on the Consolidated Balance Sheet totaled $406,000.

Lease costs incurred are as follows for the years ended December 31 (in thousands):

		2024				2023
Finance lease cost:
Amortization of right-of-use asset		$	248			$	248
Interest Expense			106				112
Other			43				47
Operating lease cost			218				216
Total lease cost		$	615			$	623

The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of December 31, 2024:

		2024								2023
		Operating				Finance				Operating				Finance
Weighted-average term (years)			3.6				13.6				4.2				14.6
Weighted-average discount rate			2.1	%			3.0	%			1.9	%			3.0	%

The following table displays the undiscounted cash flows due related to operating and finance leases as of December 31, 2024, along with a reconciliation to the discounted amount recorded on the December 31, 2024 Consolidated Balance Sheet (in thousands):

		Operating				Finance
Undiscounted cash flows due within:
2025		$	169			$	314
2026			134				320
2027			27				320
2028			27				320
2029			27				320
2030 and thereafter			41				2,566
Total undiscounted cash flows			425				4,160

Impact of present value discount			(19	)			(748	)

Total		$	406			$	3,412