NOTE

–

RISKS AND UNCERTAINTIES

COVID-

Update

The following table provides information with respect to our commercial loans by type at

March 31, 2020.

At Risk

Type	Number of Loans		Balance (in thousands)		% of Total Loans
Residential non-owner occupied		337	$	142,725		14.30	%
Retail		220		197,073		19.75	%
Restaurant/food service/bar		48		16,868		1.69	%
Hospitality and tourism		32		45,225		4.53	%
Self-storage facility		29		25,622		2.57	%
Other		121		14,218		1.42	%
Total		787	$	441,731		44.26	%

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on

March 27, 2020,

and provides over

$2.0

trillion in emergency economic relief to individuals and businesses impacted by the COVID-

pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new

(a) loan program called the Paycheck Protection Program (“PPP”).

As a qualified SBA lender, we were automatically authorized to originate PPP loans.

An eligible business can apply for a PPP loan up to the greater of: (

)

2.5

times its average monthly payroll costs; or (

)

$10.0

million. PPP loans will have: (a) an interest rate of

1.0%,

(b) a

two

-year loan term to maturity; and (c) principal and interest payments deferred for

six

months from the date of disbursement. The SBA will guarantee

100%

of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and

75%

of the loan proceeds are used for payroll expenses, with the remaining

25%

of the loan proceeds used for other qualifying expenses.

As of

May 3, 2020,

we approved

1,048

applications for up to

$138.1

million of loans under the PPP.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. Middlefield Bank

may

be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against Middlefield Bank and is

not

resolved in a manner favorable to Middlefield Bank, it

may

result in significant financial liability or adversely affect Middlefield Bank’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

Middlefield Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by Middlefield Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which

may

not

be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Middlefield Bank, the SBA

may

deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Middlefield Bank.

Owner-Occupied Residential Mortgage & Consumer Loans.

For residential mortgage and consumer loans, CARES Act Section

4013

forbearance agreements are available to qualified borrowers. As of

May 1, 2020,

we received inquiries from

loan borrowers with aggregate outstanding loan balances of

$7.8

million concerning the availability of some form of payment relief. Of these requests, there are

borrowers related to single-family non-owner-occupied loans. Due to the widespread impact of the State of Ohio Stay At Home order, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements in the

second

quarter of

2020.

Deferrals

As of

May 1, 2020,

we received requests to modify

606

loans aggregating

$333.2

million. As of

April 21, 2020,

we modified

252

loans aggregating

$147.0

million primarily consisting of the deferral of principal and interest payments and the extension of the maturity date. The remaining modifications are in process and are expected to be completed.

Details with respect to actual loan modifications are as follows:

COVID-

Loan Forbearance Programs.

Section

4013

of the CARES Act provides that banks

may

elect

not

to categorize a loan modification as a TDR if the loan modification is (

) related to COVID-

19;

(

) executed on a loan that was

not

more than

days past due as of

December 31, 2019;

and (

) executed between

March 1, 2020,

and the earlier of (A)

days after the date on which the national emergency concerning the novel coronavirus disease (

COVID–19

) outbreak declared by the President on

March 13, 2020,

under the National Emergencies Act terminates, or (B)

December 31, 2020.

According to the

Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)

issued by the federal bank regulatory agencies on

April 7, 2020,

short-term loan modifications

not

otherwise eligible under Section

4013

that are made on a good faith basis in response to COVID-

to borrowers who were current prior to any relief are

not

TDRs. This includes short-term (e.g.,

six

months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note

of the financial statements for additional disclosure of TDRs at

March 31, 2020.

Type	Number of Loans		Balance (in thousands)		% of Total Loans
Residential non-owner occupied		9	$	2,297		0.23	%
Office		9		1,776		0.18	%
Retail		41		52,443		5.25	%
Restaurant/food service/bar		8		3,320		0.33	%
Hospitality and tourism		8		4,638		0.46	%
Other		113		42,547		4.26	%
Total		188	$	107,021		10.71	%