Citizens Community Bancorp (CZWI) 10-Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q  

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number 001-33003

CITIZENS COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	20-5120010
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

2174 EastRidge Center

Eau Claire, WI 54701

(Address and Zip Code of principal executive offices)

715-836-9994

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	CZWI	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐ No  ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At May 6, 2021 there were 10,888,553 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

March 31, 2021

INDEX

			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020	5
		Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2021 and 2020	6
		Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2021 and 2020	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2021 and the year ended December 31, 2020	8
		Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2021 and 2020	10
		Condensed Notes to Consolidated Financial Statements (Unaudited)	12
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71
	Item 4.	Controls and Procedures	73
Part II – OTHER INFORMATION			73
	Item 1.	Legal Proceedings	73
	Item 1A.	Risk Factors	74
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
	Item 3.	Defaults Upon Senior Securities	74
	Item 4.	Mine Safety Disclosures	74
	Item 5.	Other Information	74
	Item 6.	Exhibits	75
SIGNATURES			76

3

PART 1 – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

4

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

March 31, 2021 (unaudited) and December 31, 2020

(derived from audited financial statements)

(in thousands, except share and per share data)

	March 31, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	196,039	$	119,440
Other interest bearing deposits	2,016		3,752
Securities available for sale "AFS"	185,160		144,233
Securities held to maturity "HTM"	57,419		43,551
Equity securities with readily determinable fair value	297		200
Other investments	15,069		14,948
Loans receivable	1,192,126		1,237,581
Allowance for loan losses	(16,860)		(17,043)
Loans receivable, net	1,175,266		1,220,538
Loans held for sale	2,267		3,075
Mortgage servicing rights, net	3,999		3,252
Office properties and equipment, net	21,081		21,165
Accrued interest receivable	5,464		5,652
Intangible assets	5,095		5,494
Goodwill	31,498		31,498
Foreclosed and repossessed assets, net	85		197
Bank owned life insurance ("BOLI")	23,837		23,684
Other assets	7,702		8,416
TOTAL ASSETS	$	1,732,294	$	1,649,095
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,380,202	$	1,295,256
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) advances	115,481		123,498
Other borrowings	58,354		58,328
Other liabilities	17,595		11,449
Total liabilities	1,571,632		1,488,531
Stockholders’ Equity:
Common stock—$0.01 par value, authorized 30,000,000; 10,893,872 and 11,056,349 shares issued and outstanding, respectively	109		111
Additional paid-in capital	125,005		126,704
Retained earnings	35,783		32,809
Unearned deferred compensation	(1,239)		(550)
Accumulated other comprehensive income	1,004		1,490
Total stockholders’ equity	160,662		160,564
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,732,294	$	1,649,095

See accompanying condensed notes to unaudited consolidated financial statements.

5

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three Months Ended March 31, 2021 and 2020

(in thousands, except per share data)

	Three Months Ended
	March 31, 2021		March 31, 2020
Interest and dividend income:
Interest and fees on loans	$	14,517	$	15,459
Interest on investments	1,103		1,449
Total interest and dividend income	15,620		16,908
Interest expense:
Interest on deposits	1,714		3,180
Interest on FHLB and FRB borrowed funds	411		508
Interest on other borrowed funds	731		549
Total interest expense	2,856		4,237
Net interest income before provision for loan losses	12,764		12,671
Provision for loan losses	0		2,000
Net interest income after provision for loan losses	12,764		10,671
Non-interest income:
Service charges on deposit accounts	398		560
Interchange income	530		464
Loan servicing income	893		685
Gain on sale of loans	1,595		780
Loan fees and service charges	278		477
Insurance commission income	0		279
Net gains on investment securities	235		73
Other	247		285
Total non-interest income	4,176		3,603
Non-interest expense:
Compensation and related benefits	5,596		5,435
Occupancy	1,316		1,374
Data processing	1,342		1,192
Amortization of intangible assets	399		412
Mortgage servicing rights expense, net	(450)		736
Advertising, marketing and public relations	163		239
FDIC premium assessment	165		68
Professional services	521		604
Gain on repossessed assets, net	(117)		(68)
Other	554		739
Total non-interest expense	9,489		10,731
Income before provision for income tax	7,451		3,543
Provision for income taxes	1,945		937
Net income attributable to common stockholders	$	5,506	$	2,606
Per share information:
Basic earnings	$	0.50	$	0.23
Diluted earnings	$	0.50	$	0.23
Cash dividends paid	$	0.23	$	0.21

See accompanying condensed notes to unaudited consolidated financial statements.

6

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (unaudited)

Three months ended March 31, 2021 and 2020

(in thousands)

	Three Months Ended
	March 31, 2021		March 31, 2020
Net income attributable to common stockholders	$	5,506	$	2,606
Other comprehensive loss, net of tax:
Securities available for sale
Net unrealized losses arising during period	(486)		(1,191)
Reclassification adjustment for net gains included in net income, net of tax	0		53
Other comprehensive loss	(486)		(1,138)
Comprehensive income	$	5,020	$	1,468

See accompanying condensed notes to unaudited consolidated financial statements.

7

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Three Months Ended March 31, 2021

(in thousands, except shares and per share data)

				Additional Paid-In Capital		Retained Earnings		Unearned Deferred Compensation		Accumulated Other Comprehensive Income (loss)		Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance, January 1, 2021	11,056,349	$	111	$	126,704	$	32,809	$	(550)	$	1,490	$	160,564
Net income	—	—		—		5,506		—		—		5,506
Other comprehensive loss, net of tax	—	—		—		—		—		(486)		(486)
Forfeiture of unvested shares	(1,500)	—		(16)		—		16		—		0
Surrender of restricted shares of common stock	(895)	—		(10)		—		—		—		(10)
Restricted common stock awarded under the equity incentive plan	64,399	—		876		—		(876)		—		0
Common stock repurchased - canceled/retired	(224,481)	(2)		(2,552)		(21)		—		—		(2,575)
Stock option expense	—	—		3		—		—		—		3
Amortization of restricted stock	—	—		—		—		171		—		171
Cash dividends ($0.23 per share)	—	—		—		(2,511)		—		—		(2,511)
Balance at March 31, 2021	10,893,872	$	109	$	125,005	$	35,783	$	(1,239)	$	1,004	$	160,662

See accompanying condensed notes to unaudited consolidated financial statements.

8

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Twelve Months Ended December 31, 2020

(in thousands, except shares and per share data)

				Additional Paid-In Capital		Retained Earnings		Unearned Deferred Compensation		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance, January 1, 2020	11,266,954	$	113	$	128,856	$	22,517	$	(462)	$	(471)	$	150,553
Net income	—	—		—		2,606		—		—		2,606
Other comprehensive income, net of tax	—	—		—		—		—		(1,138)		(1,138)
Surrender of restricted shares of common stock	(1,746)	—		(21)		—				—		(21)
Restricted common stock awarded under the equity incentive plan	41,507	—		669		—		(669)		—		0
Common stock fractional share audit adjustment	(40)	—		—		—		—		—		—
Common stock repurchased	(155,666)	(1)		(1,776)		(61)		—		—		(1,838)
Stock option expense	—	—		4		—		—		—		4
Amortization of restricted stock	—	—		—		—		139		—		139
Cash dividends ($0.21 per share)	—	—		—		(2,372)		—		—		(2,372)
Balance at March 31, 2020	11,151,009	$	112	$	127,732	$	22,690	$	(992)	$	(1,609)	$	147,933
Net income	—	—		—		3,069		—		—		3,069
Other comprehensive income, net of tax	—	—		—		—		—		1,628		1,628
Surrender of restricted shares of common stock	(314)	—		(2)		—		—		—		(2)
Stock option expense	—	—		4		—		—		—		4
Amortization of restricted stock	—	—		—		—		158		—		158
Balance at June 30, 2020	11,150,695	$	112	$	127,734	$	25,759	$	(834)	$	19	$	152,790
Net income	—	—		—		3,480		—		—		3,480
Other comprehensive income, net of tax	—	—		—		—		—		885		885
Surrender of restricted shares of common stock	(50)	—		—		—		—		—		0
Restricted common stock awarded under the equity incentive plan	4,000	—		41		—		(41)		—		0
Stock option expense	—	—		3		—		—		—		3
Amortization of restricted stock	—	—		—		—		165		—		165
Balance, September 30, 2020	11,154,645	$	112	$	127,778	$	29,239	$	(710)	$	904	$	157,323
Net income	—	—		—		3,570		—		—		3,570
Other comprehensive income, net of tax	—	—		—		—		—		586		586
Unrealized performance-based restricted common stock awards	—	—		(92)		—		92		—		0
Surrender of restricted shares of common stock	(531)	—		(4)		—		—		—		(4)
Common stock repurchased	(97,765)	(1)		(981)		—		—		—		(982)
Stock option expense	—	—		3		—		—		—		3
Amortization of restricted stock	—	—		—		—		68		—		68
Balance, December 31, 2020	11,056,349	$	111	$	126,704	$	32,809	$	(550)	$	1,490	$	160,564

See accompanying condensed notes to unaudited consolidated financial statements.

9

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31, 2021 and 2020

(in thousands)

	Three Months Ended
	March 31, 2021		March 31, 2020
Cash flows from operating activities:
Net income attributable to common stockholders	$	5,506	$	2,606
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization, net of discount accretion on investment securities	23		111
Depreciation expense	530		463
Provision for loan losses	0		2,000
Net realized (gain) loss on equity securities	(235)		83
Net realized gain on debt securities	0		(156)
Increase in MSR assets resulting from transfers of financial assets	(297)		(182)
Mortgage servicing rights expense, net	(450)		736
Amortization of intangible assets	399		412
Amortization of restricted stock	171		139
Net stock based compensation expense	3		4
Loss on sale of office properties and equipment	6		0
Deferred income taxes	765		(150)
Increase in cash surrender value of life insurance	(153)		(142)
Net gain from disposals of foreclosed and repossessed assets	(117)		(68)
Gain on sale of loans held for sale, net	(1,595)		(780)
Net change in loans held for sale	2,403		3,392
Decrease in accrued interest receivable and other assets	322		1,131
Increase (decrease) in other liabilities	6,248		(340)
Total adjustments	8,023		6,653
Net cash provided by operating activities	13,529		9,259
Cash flows from investing activities:
Net decrease in other interest-bearing deposits	1,736		738
Purchase of available for sale securities	(50,956)		(9,985)
Purchase of held to maturity securities	(16,530)		(8,063)
Proceeds from principal payments and sale of available for sale securities	9,368		25,149
Proceeds from principal payments and maturities of held to maturity securities	2,629		142
Net purchases (sales) of other investments	17		6
Proceeds from sales of foreclosed and repossessed assets	312		997
Net decrease (increase) in loans	45,189		(4,957)
Net capital expenditures	(462)		(423)
Proceeds from disposal of office properties and equipment	10		0
Net cash (used in) provided by investing activities	(8,687)		3,604

Cash flows from financing activities:
Net decrease in short-term Federal Home Loan Bank advances	0		(64,994)
Long-term Federal Home Loan Bank advances	0		57,500
Federal Home Loan Bank advance termination payments	(8,119)		0
Amortization of debt issuance costs	26		16
Net increase (decrease) in deposits	84,946		(15,647)
Repurchase shares of common stock	(2,575)		(1,838)
Surrender of restricted shares of common stock	(10)		(21)
Cash dividends paid	(2,511)		(2,372)
Net cash provided by (used in) financing activities	71,757		(27,356)
Net increase (decrease) in cash and cash equivalents	76,599		(14,493)
Cash and cash equivalents at beginning of period	119,440		55,840
Cash and cash equivalents at end of period	$	196,039	$	41,347

10

Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	1,658	$	3,238
Interest on borrowings	$	1,391	$	1,029
Income taxes	$	0	$	0
Supplemental noncash disclosure:
Transfers from loans receivable to other real estate owned ("OREO")	$	45	$	879

See accompanying condensed notes to unaudited consolidated financial statements. 

11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

(UNAUDITED)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Citizens Community Federal N.A. (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.

The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. Wells Insurance Agency (“WIA”) was a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers and was sold on June 30, 2020. F&M Investment Corp. of Tomah was a wholly owned subsidiary of the Bank that was formerly utilized by F. & M. Bancorp. of Tomah, Inc. (“F & M”) to manage its municipal bond portfolio, and was dissolved in February 2020. The U.S. Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.

The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 25 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Mankato and Twin Cities markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages.

The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.

In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the March 31, 2021 balance sheet date and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.

The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates –Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 8, 2021; the matters described in “Risk Factors” in Item 1A of this Form 10-Q; external market factors such as market interest rates and unemployment rates; changes to operating policies and procedures and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

12

Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to: the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.

Equity securities with readily determinable fair value - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, which is readily determinable. Changes in fair value are recognized as net gains (losses) on investment securities in the consolidated Statement of Operations.

Other Investments - As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as other income in the consolidated statement of operations.

Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.

Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $15,069 at March 31, 2021 consisted of $8,041 of FHLB stock, $5,181 of Federal Reserve Bank stock and $1,847 of Bankers’ Bank stock. Other investments totaling $14,948 at December 31, 2020 consisted of $8,103 of FHLB stock and $5,170 of Federal Reserve Bank stock and $1,675 of Bankers’ Bank stock.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of: deferred loan fees and costs, accretable yield on acquired loans and non-accretable discount on purchased credit impaired (PCI) loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method with no prepayment assumptions. Late charge fees are recognized into income when collected.

Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:

•Commercial/agricultural real estate loans past due 90 days or more;

•Commercial and industrial/agricultural operating loans past due 90 days or more;

•Closed end consumer installment loans past due 120 days or more; and

•Residential mortgage loans and open ended consumer installment loans past due 180 days or more.

13

Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. Interest on accruing troubled debt restructured (“TDR”), less than 90 days delinquent, is recognized as income as it accrues, based on the revised terms of the loan over an established period of continued payment.

Residential mortgage loans and open ended consumer installment loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed ended consumer installment loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate, commercial and industrial and agricultural operating loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.

Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off.

A loan is impaired when full payment under the loan terms is not expected. Impaired loans consist of all TDRs, as well as individual loans not considered a TDR, that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which are impaired at the time of acquisition. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. All TDRs are individually evaluated for impairment. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For TDR’s or substandard loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90+ days past due, and certain substandard loans that are less than 90+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, are collectively evaluated for ALL purposes, and accordingly, are not separately identified for ALL disclosures.

Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for loan losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that no longer are expected to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including: the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include, but are not limited to: loans 90 days or more past due, loans with an

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internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable discount is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect.

Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable discount to be subsequently recognized in interest income on a prospective basis over the loan’s remaining life.

Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.

For all acquired loans, the outstanding loan balances less any related accretable discount and/or non-accretable difference is referred to as the loans’ carrying amount.

Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. Such gains and losses are included in non-interest income in the consolidated statements of operations. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.

Transfers of financial assets—Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Mortgage Servicing Rights— Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed for impairment at least annually; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations.

The valuation of MSRs and related amortization, included in mortgage servicing rights expense in the consolidated statements of operations, thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

Servicing fee income, which is reported on the consolidated statements of operations in non-interest income as Loan servicing fee income, is recorded for fees earned for servicing loans. The fee are based on a contractual percentage of outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Goodwill and other intangible assets—The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.”  The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets

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may be impaired. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as any distinct, separately identifiable component of the Company’s 1 operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has 1 reporting unit as of March 31, 2021 which is related to its banking activities. The impairment testing process is conducted by assigning net assets and goodwill to the Company’s reporting unit. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of the Company’s reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the Company’s reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of the company’s reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the Company’s reporting unit’s goodwill to the implied fair value of goodwill. An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2020. The Company performed a goodwill impairment analysis as of March 31, 2021 and determined that goodwill was not impaired.

Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the consolidated statements of operations.

Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets. Lease expense is included in non-interest expense, occupancy in the consolidated statements of operations.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.

Debt and equity issuance costs—Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheet. Debt issuance costs are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statement of operations. Specific costs associated with the issuance of shares of the Company’s common or preferred stock are netted against proceeds and recorded in stockholders’ equity, as additional paid in capital, on the consolidated balance sheet, in the period of the share issuance.

    Advertising, Marketing and Public Relations Expense—The Company expenses all advertising, marketing and public relations costs as they are incurred.

Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods,

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any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.

Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes fees from deposit accounts, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company. Contingent commissions from insurance companies are recognized when determinable. Commission revenue is included in other non-interest income in the consolidated statement of operations.

Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company’s stock price on the reporting date.

Loss Contingencies—Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of loss can be reasonably estimated.

Other Comprehensive Income —Accumulated and other comprehensive income or loss is comprised of the unrealized and realized gains and losses on securities available for sale and pension liability adjustments, net of tax, and is shown on the accompanying consolidated statements of other comprehensive income.

Operating Segments—While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in 1 reportable operating segment.

Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation.

Recent Accounting Pronouncements—The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have potentially significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

Recent Accounting Pronouncements—Adopted

ASU 2018-13, Fair Value Measurement (Topic 820)—The ASU modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose, (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and (2) the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that, disclosure regarding measurement uncertainty, is intended to communicate information about the uncertainty in measurement, as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU, in the first quarter of 2020. The amendments on (1) changes in unrealized gains and losses, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and (3) the narrative description of measurement uncertainty, are being applied prospectively. All other amendments have been applied retrospectively for all periods presented. Adoption of this ASU had no material impact on its consolidated financial position or results of operations.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)—The ASU was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with similar costs to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance became

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effective for the Company beginning in the first quarter of 2020. Adoption of this ASU had no material impact on its consolidated financial statements.

ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting--These ASUs provide optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 and ASU 2021-01 are effective for the Company immediately and through December 31, 2022. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.

Recently Issued, But Not Yet Effective Accounting Pronouncements

ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments--The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. In November, 2019, the FASB issued ASU-2019-10, which delayed the effective date for ASU 2016-13 for smaller reporting companies, resulting in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be January 1, 2023.

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NOTE 2 – INVESTMENT SECURITIES

The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of March 31, 2021 and December 31, 2020, respectively, were as follows:

Available for sale securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2021
U.S. government agency obligations	$	31,474	$	303	$	65	$	31,712
Obligations of states and political subdivisions	140		0		0		140
Mortgage-backed securities	71,448		1,009		401		72,056
Corporate debt securities	27,752		446		285		27,913
Corporate asset-based securities	35,664		159		114		35,709
Trust preferred securities	17,298		342		10		17,630
Total available for sale securities	$	183,776	$	2,259	$	875	$	185,160
December 31, 2020
U.S. government agency obligations	$	33,048	$	387	$	70	$	33,365
Obligations of states and political subdivisions	140		0		0		140
Mortgage-backed securities	39,454		1,537		0		40,991
Corporate debt securities	17,199		372		109		17,462
Corporate asset-based securities	36,039		104		316		35,827
Trust preferred securities	16,297		189		38		16,448
Total available for sale securities	$	142,177	$	2,589	$	533	$	144,233

Held to maturity securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2021
U.S. government agency obligations	$	3,500	$	0	$	17	$	3,483
Obligations of states and political subdivisions	4,600		2		9		4,593
Mortgage-backed securities	49,319		200		1,809		47,710
Total held to maturity securities	$	57,419	$	202	$	1,835	$	55,786
December 31, 2020
Obligations of states and political subdivisions	$	600	$	2	$	0	$	602
Mortgage-backed securities	42,951		265		34		43,182
Total held to maturity securities	$	43,551	$	267	$	34	$	43,784

As of March 31, 2021, the Bank has pledged U.S. Government Agency securities with a carrying value of $548 and mortgage-backed securities with a carrying value of $2,655 as collateral against specific municipal deposits. At March 31,

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2021, the Bank has pledged mortgage-backed securities with a carrying value of $1,121 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2021, there were 0 borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2021, the Bank also has mortgage-backed securities with a carrying value of $402 pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2020, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $1,209 as collateral to secure a line of credit with the Federal Reserve Bank. As of December 31, 2020, there were 0 borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2020, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $576 and mortgage-backed securities with a carrying value of $3,028 as collateral against specific municipal deposits. As of December 31, 2020, the Bank also has mortgage-backed securities with a carrying value of $468 pledged as collateral to the Federal Home Loan Bank of Des Moines.

For the three month period ended March 31, 2020 gross sales of available for sale securities were $10,841. There were 0 sales of available for sale securities for the three month period ended March 31, 2021. Gross gains on sale of available for sale securities for the three months ended March 31, 2020 were $157. Gross losses on sale of available for sale securities for the three months ended March 31, 2020 were $1.

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The estimated fair value of securities at March 31, 2021 and December 31, 2020, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature.

	March 31, 2021				December 31, 2020
Available for sale securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	140	$	140	$	0	$	0
Due after one year through five years	4,949		5,207		3,833		4,095
Due after five years through ten years	47,962		48,488		44,405		44,880
Due after ten years	59,277		59,269		54,485		54,267
Total securities with contractual maturities	$	112,328	$	113,104	$	102,723	$	103,242
Mortgage backed securities	71,448		72,056		39,454		40,991
Total available for sale securities	$	183,776	$	185,160	$	142,177	$	144,233

	March 31, 2021				December 31, 2020
Held to maturity securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	0	$	0	$	0	$	0
Due after one year through five years	4,300		4,300		200		200
Due after five years through ten years	3,800		3,776		400		402
Total securities with contractual maturities	8,100		8,076		600		602
Mortgage backed securities	49,319		47,710		42,951		43,182
Total held to maturity securities	$	57,419	$	55,786	$	43,551	$	43,784

Securities with unrealized losses at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

	Less than 12 Months				12 Months or More				Total
Available for sale securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2021
U.S. government agency obligations	$	0	$	0	$	13,088	$	65	$	13,088	$	65
Mortgage backed securities	39,035		401		0		0		39,035		401
Corporate debt securities	9,335		203		1,418		82		10,753		285
Corporate asset-based securities	5,947		19		11,829		95		17,776		114
Trust preferred securities	945		10		0		0		945		10
Total	$	55,262	$	633	$	26,335	$	242	$	81,597	$	875
December 31, 2020
U.S. government agency obligations	$	7,654	$	17	$	6,834	$	53	$	14,488	$	70
Corporate debt securities	3,447		27		1,418		82		4,865		109
Corporate asset-based securities	0		0		24,310		316		24,310		316
Trust preferred securities	5,612		38		0		0		5,612		38
Total	$	16,713	$	82	$	32,562	$	451	$	49,275	$	533

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	Less than 12 Months				12 Months or More				Total
Held to maturity securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2021
U.S. government agency obligations	$	3,483	$	17	$	0	$	0	$	3,483	$	17
Obligations of states and political subdivisions	500		9		0		0		500		9
Mortgage-backed securities	42,342		1,809		0		0		42,342		1,809
Total	$	46,325	$	1,835	$	0	$	0	$	46,325	$	1,835
December 31, 2020
Mortgage-backed securities	$	16,538	$	34	$	0	$	0	$	16,538	$	34
Total	$	16,538	$	34	$	0	$	0	$	16,538	$	34

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded as separate components of shareholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur.

NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

Portfolio Segments:

    Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75%.

Commercial and industrial (“C&I”) loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural operating loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets or other business assets, as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be

22

affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields. SBA PPP loan balances are 100% guaranteed under the Small Business Association’s Paycheck Protection Program and may be forgiven in full, depending on use of funds and eligibility. These SBA-backed loans helped businesses keep their workforce employed during the COVID-19 crisis. Eligible borrowers, who qualify for full loan forgiveness during the eight to twenty four week period following loan disbursement, can apply for forgiveness, once all proceeds for which the borrower requested forgiveness has been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan.

Residential mortgage loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential mortgage portfolio due to relatively small loan account balances spread across many individual borrowers. Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.

Consumer installment loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles and other consumer loans secured primarily by automobiles and other personal assets. The Bank ceased new originations of indirect paper loans in early fiscal 2017. Consumer loan underwriting terms often depend on the collateral type, debt to income ratio and the borrower’s creditworthiness as evidenced by their credit score. In the event of a consumer installment loan default, collateral value alone may not provide an adequate source of repayment of the outstanding loan balance. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.

23

Credit Quality/Risk Ratings:

    Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.

Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio ratings are presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

1 through 4 - Pass. A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.

5 - Watch. A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.

6 - Special Mention. A “Special Mention” loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.

7 - Substandard. A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

8 - Doubtful. A “Doubtful” loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

9 - Loss. Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.

24

Below is a summary of originated and acquired loans by type and risk rating as of March 31, 2021:

	1 to 5		6		7		8		9		TOTAL
Originated Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	363,758	$	764	$	1,081	$	0	$	0	$	365,603
Agricultural real estate	36,439		522		1,179		0		0		38,140
Multi-family real estate	111,199		304		0		0		0		111,503
Construction and land development	80,458		0		3,478		0		0		83,936
C&I/Agricultural operating:
Commercial and industrial	72,355		317		4,021		0		0		76,693
Agricultural operating	20,003		1,045		101		0		0		21,149
Residential mortgage:
Residential mortgage	78,764		0		3,521		0		0		82,285
Purchased HELOC loans	5,057		0		234		0		0		5,291
Consumer installment:
Originated indirect paper	23,024		0		162		0		0		23,186
Other consumer	10,906		0		45		0		0		10,951
Originated loans before SBA PPP loans	801,963		2,952		13,822		0		0		818,737
SBA PPP loans	118,931		0		0		0		0		118,931
Total originated loans	$	920,894	$	2,952	$	13,822	$	0	$	0	$	937,668
Acquired Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	135,059	$	10,494	$	4,033	$	0	$	0	$	149,586
Agricultural real estate	27,041		0		5,386		0		0		32,427
Multi-family real estate	7,485		0		0		0		0		7,485
Construction and land development	6,553		204		39		0		0		6,796
C&I/Agricultural operating:
Commercial and industrial	18,865		9		366		0		0		19,240
Agricultural operating	6,754		0		347		0		0		7,101
Residential mortgage:
Residential mortgage	37,982		0		2,064		0		0		40,046
Consumer installment:
Other consumer	906		0		7		0		0		913
Total acquired loans	$	240,645	$	10,707	$	12,242	$	0	$	0	$	263,594
Total Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	498,817	$	11,258	$	5,114	$	0	$	0	$	515,189
Agricultural real estate	63,480		522		6,565		0		0		70,567
Multi-family real estate	118,684		304		0		0		0		118,988
Construction and land development	87,011		204		3,517		0		0		90,732
Commercial/Agricultural non-real estate:
Commercial and industrial	91,220		326		4,387		0		0		95,933
Agricultural operating	26,757		1,045		448		0		0		28,250
Residential mortgage:
Residential mortgage	116,746		0		5,585		0		0		122,331
Purchased HELOC loans	5,057		0		234		0		0		5,291
Consumer installment:
Originated indirect paper	23,024		0		162		0		0		23,186
Other Consumer	11,812		0		52		0		0		11,864
Gross loans before SBA PPP Loans	1,042,608		13,659		26,064		0		0		1,082,331
SBA PPP loans	118,931		0		0		0		0		$	118,931
Gross loans	$	1,161,539	$	13,659	$	26,064	$	0	$	0	$	1,201,262
Less:
Unearned net deferred fees and costs and loans in process											(4,487)
Unamortized discount on acquired loans											(4,649)
Allowance for loan losses											(16,860)
Loans receivable, net											$	1,175,266

25

Below is a summary of originated and acquired loans by type and risk rating as of December 31, 2020:

	1 to 5		6		7		8		9		TOTAL
Originated Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	349,482	$	543	$	1,088	$	0	$	0	$	351,113
Agricultural real estate	30,041		446		1,254		0		0		31,741
Multi-family real estate	112,423		308		0		0		0		112,731
Construction and land development	87,763		0		3,478		0		0		91,241
C&I/Agricultural operating:
Commercial and industrial	91,474		20		3,796		0		0		95,290
Agricultural operating	22,462		934		1,061		0		0		24,457
Residential mortgage:
Residential mortgage	82,097		7		4,179		0		0		86,283
Purchased HELOC loans	5,959		0		301		0		0		6,260
Consumer installment:
Originated indirect paper	25,616		0		235		0		0		25,851
Other Consumer	11,986		0		70		0		0		12,056
Originated loans before SBA PPP loans	819,303		2,258		15,462		0		0		837,023
SBA PPP loans	123,702		0		0		0		0		123,702
Total originated loans	$	943,005	$	2,258	$	15,462	$	0	$	0	$	960,725
Acquired Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	148,303	$	4,274	$	3,985	$	0	$	0	$	156,562
Agricultural real estate	31,147		0		5,907		0		0		37,054
Multi-family real estate	9,273		0		148		0		0		9,421
Construction and land development	7,237		0		39		0		0		7,276
C&I/Agricultural operating:
Commercial and industrial	20,918		9		336		0		0		21,263
Agricultural operating	7,838		0		490		0		0		8,328
Residential mortgage:
Residential mortgage	42,805		131		2,167		0		0		45,103
Consumer installment:
Other Consumer	1,150		0		7		0		0		1,157
Total acquired loans	$	268,671	$	4,414	$	13,079	$	0	$	0	$	286,164
Total Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	497,785	$	4,817	$	5,073	$	0	$	0	507,675
Agricultural real estate	61,188		446		7,161		0		0		68,795
Multi-family real estate	121,696		308		148		0		0		122,152
Construction and land development	95,000		0		3,517		0		0		98,517
C&I/Agricultural operating:
Commercial and industrial	112,392		29		4,132		0		0		116,553
Agricultural operating	30,300		934		1,551		0		0		32,785
Residential mortgage:
Residential mortgage	124,902		138		6,346		0		0		131,386
Purchased HELOC loans	5,959		0		301		0		0		6,260
Consumer installment:
Originated indirect paper	25,616		0		235		0		0		25,851
Other Consumer	13,136		0		77		0		0		13,213
Gross loans before SBA PPP loans	1,087,974		6,672		28,541		0		0		1,123,187
SBA PPP loans	123,702		0		0		0		0		123,702
Gross loans	$	1,211,676	$	6,672	$	28,541	$	0	$	0	$	1,246,889
Less:
Unearned net deferred fees and costs and loans in process											(4,245)
Unamortized discount on acquired loans											(5,063)
Allowance for loan losses											(17,043)
Loans receivable, net											$	1,220,538

26

The following table summarizes SBA PPP loans by round at March 31, 2021 and December 31, 2020 and includes additional round 2 activity in April 2021:

(Dollars in Millions)

	Balance		Net Deferred Fee Income
SBA PPP Loans - Round 1	$	124	$	3.0
SBA PPP Loans - Round 2	0		0
Total SBA PPP Loans, December 31, 2020	124		3.0
SBA PPP Loans - Round 1	$	72	$	1.3
SBA PPP Loans - Round 2	47		1.7
Total SBA PPP Loans, March 31, 2021	119		3.0
Net deferred fees collected after March 31, 2021 from Q1 SBA PPP loan originations	—		0.9
	119		3.9
SBA PPP Pipeline Round 2, April 2021	8		0.8
March 31, 2021 plus SBA PPP Pipeline - Round 2, April 2021	$	127	$	4.7

Allowance for Loan Losses - The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.

There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations.

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Changes in the ALL by loan type for the periods presented below were as follows:

	Commercial/Agriculture Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Three months ended March 31, 2021
Allowance for Loan Losses:
Beginning balance, January 1, 2021	$	10,271	$	2,112	$	1,041	$	489	$	906	$	14,819
Charge-offs	0		0		0		(25)		0		(25)
Recoveries	5		8		7		10		0		30
Provision	833		(487)		(107)		(24)		(11)		204
Total Allowance on originated loans	11,109		1,633		941		450		895		15,028
Purchased credit impaired loans	0		0		0		0		0		0
Other acquired loans:
Beginning balance, January 1, 2021	1,684		141		335		64		0		2,224
Charge-offs	(200)		0		0		0		0		(200)
Recoveries	0		7		1		4		0		12
Provision	(183)		(54)		52		(19)		0		(204)
Total Allowance on other acquired loans	1,301		94		388		49		0		1,832
Total Allowance on acquired loans	1,301		94		388		49		0		1,832
Ending balance, March 31, 2021	$	12,410	$	1,727	$	1,329	$	499	$	895	$	16,860
Allowance for Loan Losses at March 31, 2021:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	1,094	$	10	$	157	$	0	$	0	$	1,261
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	11,316	$	1,717	$	1,172	$	499	$	895	$	15,599
Loans Receivable as of March 31, 2021											—
Ending balance of originated loans	$	599,182	$	216,773	$	87,576	$	34,137	$	0	$	937,668
Ending balance of purchased credit-impaired loans	14,856		1,367		1,218		0		0		17,441
Ending balance of other acquired loans	181,438		24,974		38,828		913		0		246,153
Ending balance of loans	$	795,476	$	243,114	$	127,622	$	35,050	$	0	$	1,201,262
Ending balance: individually evaluated for impairment	$	24,948	$	6,197	$	8,843	$	255	$	0	$	40,243
Ending balance: collectively evaluated for impairment	$	770,528	$	236,917	$	118,779	$	34,795	$	0	$	1,161,019

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	Commercial/Agriculture Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Three months ended March 31, 2020
Allowance for Loan Losses:
Beginning balance, January 1, 2020	$	6,205	$	1,643	$	879	$	467	$	357	$	9,551
Charge-offs	0		(307)		0		(49)		0		(356)
Recoveries	0		0		5		20		0		25
Provision	1,072		323		40		92		103		1,630
Total Allowance on originated loans	$	7,277	$	1,659	$	924	$	530	$	460	$	10,850
Purchased credit impaired loans	0		0		0		0		0		0
Other acquired loans
Beginning balance, January 1, 2020	526		27		163		53		0		769
Charge-offs	0		(135)		(27)		(2)		0		(164)
Recoveries	0		0		8		2		0		10
Provision	139		268		(29)		(8)		0		370
Total Allowance on other acquired loans	665		160		115		45		0		985
Total Allowance on acquired loans	665		160		115		45		0		985
Ending balance, March 31, 2020	$	7,942	$	1,819	$	1,039	$	575	$	460	$	11,835
Allowance for Loan Losses at March 31, 2020:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	733	$	92	$	181	$	27	$	0	$	1,033
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	7,209	$	1,727	$	858	$	548	$	460	$	10,802
Loans Receivable as of March 31, 2020:
Ending balance of originated loans	$	519,958	$	107,949	$	110,455	$	51,494	$	0	$	789,856
Ending balance of purchased credit-impaired loans	25,452		3,845		1,934		0		0		31,231
Ending balance of other acquired loans	257,059		48,152		61,023		2,104		0		368,338
Ending balance of loans	$	802,469	$	159,946	$	173,412	$	53,598	$	0	$	1,189,425
Ending balance: individually evaluated for impairment	$	36,470	$	8,759	$	10,226	$	496	$	0	$	55,951
Ending balance: collectively evaluated for impairment	$	765,999	$	151,187	$	163,186	$	53,102	$	0	$	1,133,474

29

	Commercial/Agriculture Real Estate			C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Allowance for Loan Losses at December 31, 2020:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	698		$	190	$	226	$	1	$	0	$	1,115
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	11,257		$	2,063	$	1,150	$	552	$	906	$	15,928
Loans Receivable as of December 31, 2020:
Ending balance of originated loans	$	586,826		$	243,449	$	92,543	$	37,907	$	0	$	960,725
Ending balance of purchased credit-impaired loans	15,100			1,534		1,312		0		0		17,946
Ending balance of other acquired loans	195,213			28,057		43,791		1,157		0		268,218
Ending balance of loans	$	797,139	797139000	$	273,040	$	137,646	$	39,064	$	0	$	1,246,889
Ending balance: individually evaluated for impairment	$	26,303		$	7,115	$	9,621	$	358	$	0	$	43,397
Ending balance: collectively evaluated for impairment	$	770,836		$	265,925	$	128,025	$	38,706	$	0	$	1,203,492

Loans receivable by loan type as of the end of the periods shown below were as follows:

	Commercial/Agriculture Real Estate Loans				C&I/Agricultural Operating				Residential Mortgage				Consumer Installment				Totals
	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Performing loans
Performing TDR loans	$	4,472	$	4,695	$	4,042	$	3,836	$	3,195	$	3,142	$	43	$	49	$	11,752	$	11,722
Performing loans other	785,733		786,533		237,917		266,975		121,746		131,470		34,899		38,856		1,180,295		1,223,834
Total performing loans	790,205		791,228		241,959		270,811		124,941		134,612		34,942		38,905		1,192,047		1,235,556
Nonperforming loans (1)
Nonperforming TDR loans	4,184		4,691		758		1,287		742		777		6		0		5,690		6,755
Nonperforming loans other	1,087		1,220		397		942		1,939		2,257		102		159		3,525		4,578
Total nonperforming loans	5,271		5,911		1,155		2,229		2,681		3,034		108		159		9,215		11,333
Total loans	$	795,476	$	797,139	$	243,114	$	273,040	$	127,622	$	137,646	$	35,050	$	39,064	$	1,201,262	$	1,246,889

(1)Nonperforming loans are either 90+ days past due or nonaccrual.

As of March 31, 2021, the Company had $209,511 in unused commitments, compared to $247,324 in unused commitments as of December 31, 2020.

30

An aging analysis of the Company’s commercial/agricultural real estate, C&I, agricultural operating, residential mortgage, consumer installment and purchased third party loans as of March 31, 2021 and December 31, 2020, respectively, was as follows:

	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 89 Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual Loans		Total Past Due Accruing and Nonaccrual Loans		Current		Total Loans
March 31, 2021
Commercial/Agricultural real estate:
Commercial real estate	$	1,788	$	1,430	$	0	$	3,218	$	760	$	3,978	$	511,211	$	515,189
Agricultural real estate	361		0		0		361		4,511		4,872		65,695		70,567
Multi-family real estate	0		0		0		0		0		0		118,988		118,988
Construction and land development	0		204		0		204		0		204		90,528		90,732
C&I/Agricultural operating:
Commercial and industrial	592		145		0		737		391		1,128		94,805		95,933
C&I SBA PPP loans	0		0		0		0		0		0		118,931		118,931
Agricultural operating	2,506		379		0		2,885		764		3,649		24,601		28,250
Residential mortgage:
Residential mortgage	1,974		246		514		2,734		1,933		4,667		117,664		122,331
Purchased HELOC loans	0		0		0		0		234		234		5,057		5,291
Consumer installment:
Originated indirect paper	20		33		0		53		64		117		23,069		23,186
Other Consumer	40		1		22		63		22		85		11,779		11,864
Total	$	7,281	$	2,438	$	536	$	10,255	$	8,679	$	18,934	$	1,182,328	$	1,201,262
December 31, 2020
Commercial/Agricultural real estate:
Commercial real estate	$	9,568	$	467	$	0	$	10,035	$	679	$	10,714	$	496,961	$	507,675
Agricultural real estate	411		48		0		459		5,084		5,543		63,252		68,795
Multi-family real estate	308		0		0		308		148		456		121,696		122,152
Construction and land development	3,898		0		0		3,898		0		3,898		94,619		98,517
C&I/Agricultural operating:
Commercial and industrial	436		491		0		927		357		1,284		115,269		116,553
SBA PPP loans	0		0		0		0		0		0		123,702		123,702
Agricultural operating	1,499		200		0		1,699		1,872		3,571		29,214		32,785
Residential mortgage:
Residential mortgage	2,238		372		516		3,126		2,217		5,343		126,043		131,386
Purchased HELOC loans	338		94		67		499		234		733		5,527		6,260
Consumer installment:
Originated indirect paper	90		37		0		127		133		260		25,591		25,851
Other Consumer	100		14		3		117		23		140		13,073		13,213
Total	$	18,886	$	1,723	$	586	$	21,195	$	10,747	$	31,942	$	1,214,947	$	1,246,889

31

At March 31, 2021, the Company has identified impaired loans of $40,243, consisting of $17,442 TDR loans, the carrying amount of purchased credit impaired loans of $16,475 and $6,326 of substandard non-TDR loans. The $40,243 total of impaired loans includes $11,752 of performing TDR loans. At December 31, 2020, the Company has identified impaired loans of $43,397, consisting of $18,477 TDR loans, the carrying amount of purchased credit impaired loans of $16,859 and $8,061 of substandard non-TDR loans. The $43,397 total of impaired loans includes $11,752 of performing TDR loans. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis.

A summary of the Company’s impaired loans as of March 31, 2021, December 31, 2020 and March 31, 2020 was as follows:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2021
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	19,714	$	19,714	$	—	$	21,864	$	239
C&I/Agricultural operating	6,118		6,118		—		6,226		70
Residential mortgage	8,191		8,191		—		8,367		80
Consumer installment	255		255		—		306		3
Total	$	34,278	$	34,278	$	—	$	36,763	$	392
With An Allowance Recorded:
Commercial/agriculture real estate	$	5,234	$	5,234	$	1,094	$	3,762	$	62
C&I/Agricultural operating	79		79		10		430		0
Residential mortgage	652		652		157		866		8
Consumer installment	0		0		0		1		0
Total	$	5,965	$	5,965	$	1,261	$	5,059	$	70
March 31, 2021 Totals:
Commercial/agriculture real estate	$	24,948	$	24,948	$	1,094	$	25,626	$	301
C&I/Agricultural operating	6,197		6,197		10		6,656		70
Residential mortgage	8,843		8,843		157		9,233		88
Consumer installment	255		255		0		307		3
Total	$	40,243	$	40,243	$	1,261	$	41,822	$	462

32

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2020
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	24,013	$	24,013	$	—	$	32,264	$	1,894
C&I/Agricultural operating	6,334		6,334		—		7,906		284
Residential mortgage	8,542��		8,542		—		8,619		450
Consumer installment	356		356		—		368		30
Total	$	39,245	$	39,245	$	—	$	49,157	$	2,658
With An Allowance Recorded:
Commercial/agriculture real estate	$	2,290	$	2,290	$	698	$	2,217	$	100
C&I/Agricultural operating	781		781		190		636		22
Residential mortgage	1,079		1,079		226		1,255		54
Consumer installment	2		2		1		35		1
Total	$	4,152	$	4,152	$	1,115	$	4,143	$	177
December 31, 2020 Totals
Commercial/agriculture real estate	$	26,303	$	26,303	$	698	$	34,481	$	1,994
C&I/Agricultural operating	7,115		7,115		190		8,542		306
Residential mortgage	9,621		9,621		226		9,874		504
Consumer installment	358		358		1		403		31
Total	$	43,397	$	43,397	$	1,115	$	53,300	$	2,835

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2020
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	33,959	$	33,959	$	—	$	37,237	$	563
C&I/Agricultural operating	8,343		8,343		—		8,910		119
Residential mortgage	7,966		7,966		—		8,330		116
Consumer installment	397		397		—		388		8
Total	$	50,665	$	50,665	$	—	$	54,865	$	806
With An Allowance Recorded:
Commercial/agriculture real estate	$	2,511	$	2,511	$	733	$	2,327	$	6
C&I/Agricultural operating	416		416		92		453		5
Residential mortgage	2,260		2,260		181		1,846		30
Consumer installment	99		99		27		83		1
Total	$	5,286	$	5,286	$	1,033	$	4,709	$	42
March 31, 2020 Totals:
Commercial/agriculture real estate	$	36,470	$	36,470	$	733	$	39,564	$	569
C&I/Agricultural operating	8,759		8,759		92		9,363		124
Residential mortgage	10,226		10,226		181		10,176		146
Consumer installment	496		496		27		471		9
Total	$	55,951	$	55,951	$	1,033	$	59,574	$	848

33

Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty, and the Bank grants a concession to that borrower that the Bank would not otherwise consider, except for the borrower’s financial difficulties. Concessions may include: extension of the loan’s term, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There was 1 delinquent accruing TDR greater than 60 days past due with a recorded investment of $17 at March 31, 2021, compared to 1 such loans with a recorded investment of $20 at December 31, 2020.

Following is a summary of TDR loans by accrual status as of March 31, 2021 and December 31, 2020.

	March 31, 2021		December 31, 2020
Troubled debt restructure loans:
Accrual status	$	11,752	$	11,742
Non-accrual status	5,690		6,735
Total	$	17,442	$	18,477

There were 0 loan commitments meeting our TDR criteria as of March 31, 2021 and December 31, 2020. There were unused lines of credit totaling $42 and $15 meeting our TDR criteria as of March 31, 2021 and December 31, 2020, respectively.

The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the three months ended March 31, 2021 and March 31, 2020:     

	Number of Contracts	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Three months ended March 31, 2021
TDRs:
Commercial/agriculture real estate	2	$	38	$	81	$	0	$	0	$	119	$	119	$	0
C&I/Agricultural operating	1	0		0		240		0		240		240		0
Residential mortgage	2	66		0		14		0		80		80		0
Consumer installment	1	6		0		0		0		6		6		0
Totals	6	$	110	$	81	$	254	$	0	$	445	$	445	$	0

34

	Number of Contracts	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Three months ended March 31, 2020
TDRs:
Commercial/agriculture real estate	3	$	248	$	0	$	17	$	0	$	265	$	265	$	0
C&I/Agricultural operating	0	0		0		0		0		0		0		0
Residential mortgage	1	0		0		85		0		85		85		0
Consumer installment	2	3		0		4		0		7		7		0
Totals	6	$	251	$	0	$	106	$	0	$	357	$	357	$	0

A summary of loans by loan segment modified in a troubled debt restructuring as of March 31, 2021 and March 31, 2020, was as follows:

	March 31, 2021			March 31, 2020
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	30	$	8,656	28	$	6,415
C&I/Agricultural operating	14	4,800		14	2,065
Residential mortgage	52	3,937		42	3,539
Consumer installment	9	49		8	69
Total troubled debt restructurings	105	$	17,442	92	$	12,088

The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the three months ended March 31, 2021 and March 31, 2020, as well as the recorded investment in these restructured loans as of March 31, 2021 and March 31, 2020:

	March 31, 2021			March 31, 2020
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	0	$	0	5	$	1,892
C&I/Agricultural operating	0	0		0	0
Residential mortgage	1	19		0	0
Consumer installment	0	0		0	0
Total troubled debt restructurings	1	$	19	5	$	1,892

35

All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:

	March 31, 2021		December 31, 2020
Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans)
Outstanding balance	$	17,441	$	17,946
Carrying amount	$	16,475	$	16,859
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	246,153	$	268,218
Carrying amount	$	242,470	$	264,242
Total acquired loans
Outstanding balance	$	263,594	$	286,164
Carrying amount	$	258,945	$	281,101

The following table provides changes in accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality:

	March 31, 2021		March 31, 2020
Balance at beginning of period	$	3,976	$	3,201
Acquisitions	0		0
Reduction due to unexpected early payoffs	(90)		0
Reclass from non-accretable difference	63		669
Accretion	(266)		(233)
Balance at end of period	$	3,683	$	3,637

The following table provides changes in non-accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality:

	March 31, 2021		December 31, 2020
Balance at beginning of period	$	1,087	$	6,290
Additions to non-accretable difference for acquired purchased credit impaired loans	0		0
Non-accretable difference realized as interest from payoffs of purchased credit impaired loans	(58)		(1,693)
Transfers from non-accretable difference to accretable discount	(63)		(2,754)
Non-accretable difference used to reduce loan principal balance	0		(505)
Non-accretable difference transferred to OREO due to loan foreclosure	0		(251)
Balance at end of period	$	966	$	1,087

36

NOTE 4 – MORTGAGE SERVICING RIGHTS

Mortgage servicing rights--Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of March 31, 2021 and December 31, 2020 were $551,622 and $553,655, respectively, and consisted of one to four family residential real estate loans. These loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and the Federal National Mortgage Association. The current period valuation allowance is included as amortization of mortgage servicing rights in non-interest expense on the consolidated statement of operations.

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $4,979 and $2,890, at March 31, 2021 and December 31, 2020, respectively. Mortgage servicing rights activity for the three month period ended March 31, 2021 and twelve months ended December 31, 2020 were as follows:

	As of and for the Three Months Ended			As of and for the Twelve Months Ended
Mortgage servicing rights:	March 31, 2021			December 31, 2020
Mortgage servicing rights, beginning of period	$	5,266		$	4,541
Increase in mortgage servicing rights resulting from transfers of financial assets	297			2,020
Amortization during the period	(439)			(1,295)
	5,124			5,266
Valuation allowance:
Valuation allowance, beginning of period	(2,014)			(259)
Additions	0			(1,755)
Recoveries	889			0
Valuation allowance, end of period	(1,125)			(2,014)
Mortgage servicing rights, net	$	3,999		$	3,252
Fair value of mortgage servicing rights; end of period	$	4,005		$	3,285
Residential mortgage loans serviced for others	$	551,622		$	553,655
Net book value of mortgage servicing rights to loans serviced for others	0.73		%	0.59		%

Servicing fees totaled $352 and $339 for the three months ended March, 31 2021 and March 31, 2020, respectively. Late fees and ancillary fees related to loan servicing are not material.

To estimate the fair value of the MSR asset, a valuation model is applied at the loan level to calculate the present value of the expected future cash flows. The valuation model incorporates various assumptions that would impact market participants’ estimations of future servicing income. Central to the valuation model is the discount rate. Fair value at March 31, 2021 was determined using discount rates ranging from 9% to 12%. Fair value at December 31, 2020 was determined using discount rates ranging from 9% to 12%. Other assumptions utilized in the valuation model include, but are not limited to, prepayment speed, servicing costs, delinquencies, costs of advances, foreclosure costs, ancillary income, and income earned on float and escrow.

37

NOTE 5 – LEASES

We have operating leases for our corporate offices (1) and bank branch offices (5). Our leases have remaining lease terms ranging from approximately 2 to 7.08 years, some of which include options to extend the leases for up to 5 additional years. As of March 31, 2021, we have no additional lease commitments that have not yet commenced. The Company also leases a portion of some of its facilities and receives rental income from such lease agreements, all of which are considered operating leases.

	Three Months Ended
	March 31, 2021			March 31, 2020
The components of total lease cost were as follows:
Operating lease cost	$	139		$	161
Variable lease cost	7			2
Total lease cost	$	146		$	163
The components of total lease income were as follows:
Operating lease income	$	7		$	3
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	138		$	159
	March 31, 2021			December 31, 2020
Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	2,539		$	2,657
Operating lease liabilities	$	2,606		$	2,762
Weighted average remaining lease term in years; operating leases	6.18			6.32
Weighted average discount rate; operating leases	2.7		%	2.7		%

Cash obligations and receipts under lease contracts are as follows:

Fiscal years ending December 31,	Payments		Receipts
2021	$	415	$	25
2022	558		34
2023	505		27
2024	419
2025	403
Thereafter	826
Total	3,126		$	86
Less: effects of discounting	(520)
Lease liability recognized	$	2,606

38

NOTE 6 – DEPOSITS

The following is a summary of deposits by type at March 31, 2021 and December 31, 2020, respectively: 

	March 31, 2021		December 31, 2020
Non-interest bearing demand deposits	$	257,042	$	238,348
Interest bearing demand deposits	352,302		301,764
Savings accounts	222,448		196,348
Money market accounts	258,942		245,549
Certificate accounts	289,468		313,247
Total deposits	$	1,380,202	$	1,295,256
Brokered deposits included above:	$	2,516	$	2,516

At March 31, 2021, the scheduled maturities of time deposits were as follows:

March 31, 2022	$	217,364
March 31, 2023	61,638
March 31, 2024	6,975
March 31, 2025	2,814
March 31, 2026	677
After March 31, 2026	0
Total	$	289,468

Time deposits of $250 or more were $42,992 and $46,660 at March 31, 2021 and December 31, 2020, respectively.

39

NOTE 7 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS

A summary of Federal Home Loan Bank advances and other borrowings at March 31, 2021 and December 31, 2020 is as follows:

		March 31, 2021						December 31, 2020
	Stated Maturity	Amount		Range of Stated Rates				Amount		Range of Stated Rates
Federal Home Loan Bank advances (1), (2), (3), (4)	2021	$	4,000	0	%	0	%	$	8,000	0	%	2.16	%
	2022	11,000		2.45	%	2.45	%	15,000		2.34	%	2.45	%
	2023	20,000		1.43	%	1.44	%	20,000		1.43	%	1.44	%
	2024	20,530		0	%	1.45	%	20,530		0	%	1.45	%
	2025	5,000		1.45	%	1.45	%	5,000		1.45	%	1.45	%
	2029	42,500		1.00	%	1.13	%	42,500		1.00	%	1.13	%
	2030	12,500		0.52	%	0.86	%	12,500		0.52	%	0.86	%
Subtotal		115,530						123,530
Unamortized discount on acquired notes		(49)						(32)
Federal Home Loan Bank advances, net		$	115,481					$	123,498
Senior Notes (5)	2031	$	28,856	3.50	%	3.50	%	$	28,856	3.25	%	3.50	%
Subordinated Notes (6)	2027	$	15,000	6.75	%	6.75	%	$	15,000	6.75	%	6.75	%
	2030	15,000		6.00	%	6.00	%	15,000		6.00	%	6.00	%
		$	30,000					$	30,000
Unamortized debt issuance costs		$	(502)					$	(528)
Total other borrowings		$	58,354					$	58,328
Totals		$	173,835					$	181,826

(1)    The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $720,008 and $723,862 at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $122,791 compared to $118,391 as of December 31, 2020.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $123,530 and $162,530, during the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively.

(3) The weighted-average interest rates on FHLB borrowings maturing within twelve months as of March 31, 2021 and December 31, 2020 were 1.80% and 0.50%, respectively.

(4)    FHLB term notes totaling $55,000, with various maturity dates in 2029 and 2030, can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months after the initial advance.

(5)    Senior notes, entered into by the Company in June 2019 consist of the following:

(a) A term note, which was subsequently refinanced in October 2020, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate with a floor rate of 3.25%.

(b) A $5,000 line of credit, maturing in August 2021, that remains undrawn upon.

40

(6)    Subordinated notes resulted from the following:

(a) The Company’s private sale in August 2017, which bears a fixed interest rate of 6.75% for five years. In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter. Interest-only payments are due quarterly.

(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

Federal Home Loan Bank Letters of Credit

The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest bearing deposit balances. These balances were $179,725 and $179,400 at March 31, 2021 and December 31, 2020, respectively.

Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program

The Bank has originated Small Business Association’s Paycheck Protection Program (“SBA PPP”) loans and has complied with the requirements to pledge these loans to the FRB PPPLF program which provides 100% funding for SBA PPP loans upon request. At March 31, 2021 the Bank had $118,931 of borrowing capacity under the Federal Reserve SBA PPP facility, which the Federal Reserve established in 2020. The Bank has 0 outstanding loan balances under this facility at March 31, 2021 and December 31, 2020. Maximum month-end borrowed amounts outstanding under this agreement were $0 and $25,136, during the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively.

NOTE 8 - CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2021, the Bank was categorized as “Well Capitalized”, under Prompt Corrective Action Provisions.

The Bank’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2021 and December 31, 2020, respectively, are presented below:

41

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2021
Total capital (to risk weighted assets)	$	174,424	15.5	%	$	89,877	> =	8.0	%	$	112,347	> =	10.0	%
Tier 1 capital (to risk weighted assets)	160,344		14.3	%	$	67,408	> =	6.0	%	89,877		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	160,344		14.3	%	$	50,556	> =	4.5	%	73,025		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	160,344		9.8	%	65,595		> =	4.0	%	81,993		> =	5.0	%
As of December 31, 2020
Total capital (to risk weighted assets)	$	171,702	14.7	%	$	93,381	> =	8.0	%	$	116,726	> =	10.0	%
Tier 1 capital (to risk weighted assets)	157,081		13.5	%	70,035		> =	6.0	%	93,381		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	157,081		13.5	%	52,527		> =	4.5	%	75,872		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	157,081		9.9	%	63,718		> =	4.0	%	79,647		> =	5.0	%

The Company’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2021 and December 31, 2020, respectively, are presented below:

	Actual				For Capital Adequacy Purposes
	Amount		Ratio		Amount			Ratio
As of March 31, 2021
Total capital (to risk weighted assets)	$	167,145	14.9	%	89,877		> =	8.0	%
Tier 1 capital (to risk weighted assets)	123,065		11.0	%	67,408		> =	6.0	%
Common equity tier 1 capital (to risk weighted assets)	123,065		11.0	%	50,556		> =	4.5	%
Tier 1 leverage ratio (to adjusted total assets)	123,065		7.5	%	65,595		> =	4.0	%
As of December 31, 2020
Total capital (to risk weighted assets)	$	166,703	14.3	%	$	93,381	> =	8.0	%
Tier 1 capital (to risk weighted assets)	122,082		10.5	%	70,035		> =	6.0	%
Common equity tier 1 capital (to risk weighted assets)	122,082		10.5	%	52,527		> =	4.5	%
Tier 1 leverage ratio (to adjusted total assets)	122,082		7.7	%	63,718		> =	4.0	%

-

42

NOTE 9 – STOCK-BASED COMPENSATION

On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of March 31, 2021, 163,974 restricted shares had been granted under this plan. As of March 31, 2021, 0 stock options had been granted under this plan.

In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan for a term of 10 years. Due to the plan’s expiration, no new awards can be granted under this plan. As of March 31, 2021,there are 3,619 remaining unvested restricted shares and 71,700 unexercised options. Restricted shares granted under the 2008 Equity Incentive Plan were awarded at no cost to the employee and vest pro rata over a two to five-year period from the grant date. Options granted to date under this plan vest pro rata over a five-year period from the grant date. Unexercised incentive stock options expire within 10 years of the grant date.

Net compensation expense related to restricted stock awards from these plans was $171 for the three months ended March 31, 2021, compared to $139 for the three months ended March 31, 2020.

Restricted Common Stock Award

	March 31, 2021			December 31, 2020
	Number of Shares	Weighted Average Grant Price		Number of Shares	Weighted Average Grant Price
Restricted Shares
Unvested and outstanding at beginning of year	57,242	$	12.23	43,457	$	12.76
Granted	64,399	10.78		45,507	11.79
Vested	(11,413)	12.40		(31,722)	12.32
Forfeited	(1,500)	10.78		0	0
Unvested and outstanding at end of year	108,728	$	11.37	57,242	$	12.23

The Company accounts for stock-based employee compensation related to the Company’s 2008 Equity Incentive Plan and 2018 Equity Incentive Plan using the fair-value-based method. Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award. The compensation cost recognized for stock-based employee compensation related to these plans for the three month period ended March 31, 2021 was $3. The compensation cost recognized for stock-based employee compensation related to these plans for the three month period ended March 31, 2020 was $4.

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Common Stock Option Awards

	Option Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
March, 31, 2021
Outstanding at beginning of year	72,300	$	11.05
Exercised	0	0
Forfeited or expired	(600)	13.76
Outstanding at end of year	71,700	$	11.02	5.23
Exercisable at end of year	57,100	$	10.69	5.06	$	98
Fully vested and expected to vest	71,700	$	11.02	5.23	$	99
December 31, 2020
Outstanding at beginning of year	78,100	$	11.18
Exercised	0	0
Forfeited or expired	(5,800)	11.95
Outstanding at end of year	72,300	$	11.05	5.49
Exercisable at end of year	54,100	$	10.82	5.37	$	4
Fully vested and expected to vest	72,300	$	11.05	5.49	$	0

Information related to the 2008 Equity Incentive Plan for the respective periods follows:

	Three months ended March 31, 2021		Twelve months ended December 31, 2020
Intrinsic value of options exercised	$	0	$	0
Cash received from options exercised	$	0	$	0
Tax benefit realized from options exercised	$	0	$	0

NOTE 10 – FAIR VALUE ACCOUNTING

ASC Topic 820-10, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:

Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, we utilize independent third party valuation analysis to support our own estimates and judgments in determining fair value (Level 3 inputs).

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Assets Measured on a Recurring Basis

The following tables present the financial instruments measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:

	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2021
Investment securities:
U.S. government agency obligations	$	31,712	$	0	$	31,712	$	0
Obligations of states and political subdivisions	140		0		140		0
Mortgage-backed securities	72,056		0		72,056		0
Corporate debt securities	27,913		0		27,913		0
Corporate asset-backed securities	35,709		0		35,709		0
Trust preferred securities	17,630		0		17,630		0
Total	$	185,160	$	0	$	185,160	$	0
December 31, 2020
Investment securities:
U.S. government agency obligations	$	33,365	$	0	$	33,365	$	0
Obligations of states and political subdivisions	140		0		140		0
Mortgage-backed securities	40,991		0		40,991		0
Corporate debt securities	17,462		0		17,462		0
Corporate asset backed securities	35,827		0		35,827		0
Trust preferred securities	16,448		0		16,448		0
Total	$	144,233	$	0	$	144,233	$	0

Assets Measured on Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2021 and December 31, 2020:

	Carrying Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2021
Foreclosed and repossessed assets, net	$	85	$	0	$	0	$	85
Impaired loans with allocated allowances	4,704		0		0		4,704
Mortgage servicing rights	3,999		0		0		4,005
Total	$	8,788	$	0	$	0	$	8,794
December 31, 2020
Foreclosed and repossessed assets, net	$	197	$	0	$	0	$	197
Impaired loans with allocated allowances	3,037		0		0		3,037
Mortgage servicing rights	3,252		0		0		3,285
Total	$	6,486	$	0	$	0	$	6,519

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The fair value of impaired loans referenced above was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans.

The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned.

The fair value of mortgage servicing rights was estimated using discounted cash flows based on current market rates and other factors.

The following table represents additional quantitative information about assets measured at fair value on a

recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at

March 31, 2021.

	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
March 31, 2021
Foreclosed and repossessed assets, net	$	85	Appraisal value	Estimated costs to sell	10% - 15%
Impaired loans with allocated allowances	$	4,704	Appraisal value	Estimated costs to sell	10% - 15%
Mortgage servicing rights	$	4,005	Discounted cash flows	Discounted rates	9% - 12%
December 31, 2020
Foreclosed and repossessed assets, net	$	197	Appraisal value	Estimated costs to sell	10% - 15%
Impaired loans with allocated allowances	$	3,037	Appraisal value	Estimated costs to sell	10% - 15%
Mortgage servicing rights	$	3,285	Discounted cash flows	Discounted rates	9% - 12%

(1)     Fair value is generally determined through independent third-party appraisals of the underlying

    collateral, which generally includes various level 3 inputs which are not observable.

(2)     The fair value basis of impaired loans and real estate owned may be adjusted to reflect management

    estimates of disposal costs including, but not limited to, real estate brokerage commissions, legal fees,

    and delinquent property taxes.

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The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company’s financial instruments as of the dates indicated below were as follows:

		March 31, 2021				December 31, 2020
	Valuation Method Used	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	(Level I)	$	196,039	$	196,039	$	119,440	$	119,440
Other interest-bearing deposits	(Level II)	2,016		2,062		3,752		3,818
Securities available for sale “AFS”	(Level II)	185,160		185,160		144,233		144,233
Securities held to maturity “HTM”	(Level II)	57,419		55,786		43,551		43,784
Equity securities with readily determinable fair value	(Level I)	297		297		200		200
Other investments	(Level II)	15,069		15,069		14,948		14,948
Loans receivable, net	(Level III)	1,175,266		1,198,049		1,220,538		1,239,692
Loans held for sale	(Level II)	2,267		2,267		3,075		3,075
Mortgage servicing rights	(Level III)	3,999		4,005		3,252		3,285
Accrued interest receivable	(Level 1)	5,464		5,464		5,652		5,652
Financial liabilities:
Deposits	(Level III)	$	1,380,202	$	1,360,333	$	1,295,256	$	1,292,104
FHLB advances	(Level II)	115,481		118,996		123,498		128,282
Other borrowings	(Level I)	58,354		58,354		58,328		58,328
Accrued interest payable	(Level I)	603		603		796		796

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NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)

The following tables show the tax effects allocated to each component of other comprehensive loss for the

three months ended March 31, 2021 and 2020:

	Three months ended
	March 31, 2021						March 31, 2020
	Before-Tax Amount		Tax Expense		Net-of-Tax Amount		Before-Tax Amount		Tax Expense		Net-of-Tax Amount
Unrealized gains on securities:
Net unrealized losses arising during the period	$	(672)	$	186	$	(486)	$	(1,643)	$	452	$	(1,191)
Reclassification adjustment for gains included in net income	0		0		0		73		(20)		53
Other comprehensive loss	$	(672)	$	186	$	(486)	$	(1,570)	$	432	$	(1,138)

The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the twelve months ended December 31, 2020 and the three months ended March 31, 2021 were as follows:

	Unrealized Gains (Losses) on Securities		Other Accumulated Comprehensive Income (Loss), net of tax
Beginning Balance, January 1, 2020	$	(649)	$	(471)
Current year-to-date other comprehensive income	2,705		1,961
Ending balance, December 31, 2020	$	2,056	$	1,490
Current year-to-date other comprehensive loss	(672)		(486)
Ending balance, March 31, 2021	$	1,384	$	1,004

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2021 were as follows:

	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended March 31, 2021		(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	0		Net gains on investment securities
Tax Effect	0			Provision for income taxes
Total reclassifications for the period	$	0		Net gain attributable to common shareholders

(1)    Amounts in parentheses indicate decreases to income/loss.

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Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2020 were as follows:

	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended March 31, 2020		(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	73		Net gains on investment securities
Tax Effect	(20)			Provision for income taxes
Total reclassifications for the period	$	53		Net gain attributable to common shareholders

(1)    Amounts in parentheses indicate decreases to profit/loss.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “estimates”, “intend,” “may,” “preliminary,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 8, 2021 (“2020 10-K”), the matters described in “Risk Factors” in Item 1A of our Form 10Q and the following:

•conditions in the financial markets and economic conditions generally;

•adverse impacts to the Company or Bank arising from the COVID-19 pandemic;

•the possibility of a deterioration in the residential real estate markets;

•interest rate risk;

•lending risk;

•the impact of changing long-term interest rates on the fair market value of the Company’s mortgage servicing rights (MSR );

•the sufficiency of loan allowances;

•changes in the fair value or ratings downgrades of our securities;

•competitive pressures among depository and other financial institutions;

•our ability to maintain our reputation;

•our ability to realize the benefits of net deferred tax assets;

•our ability to maintain or increase our market share;

•acts of terrorism and political or military actions by the United States or other governments;

•legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;

•increases in FDIC insurance premiums or special assessments by the FDIC;

•disintermediation risk;

•our inability to obtain needed liquidity;

•our ability to successfully execute our acquisition growth strategy;

•risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;

•our ability to raise capital needed to fund growth or meet regulatory requirements;

•the possibility that our internal controls and procedures could fail or be circumvented;

•our ability to attract and retain key personnel;

•our ability to keep pace with technological change;

•cybersecurity risks;

•changes in federal or state tax laws;

•changes in accounting principles, policies or guidelines and their impact on financial performance;

•restrictions on our ability to pay dividends; and

•the potential volatility of our stock price.

Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

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GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of March 31, 2021, and our consolidated results of operations for the three months ended March 31, 2021, compared to the same period in the prior fiscal year for the three months ended March 31, 2020. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2020 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and their related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2020 10-K, our critical accounting estimates are as follows:

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in our loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC). We believe that the Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.

Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on fair value of the underlying collateral relative to the unpaid principal balance of individually impaired loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios, which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

Goodwill.

We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of March 31, 2021 which is related to its banking activities. The Company performed the required goodwill

51

impairment test and determined that goodwill was not impaired as of December 31, 2020. The Company performed a goodwill impairment analysis as of March 31, 2021 and determined that goodwill was not impaired.

Fair Value Measurements and Valuation Methodologies.

We apply various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit intangible assets, other assets and liabilities obtained or assumed in business combinations, and certain other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations, financial condition or disclosures of fair value information.

In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of income. Examples include but are not limited to; loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others. Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of financial condition and results of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements.

Income Taxes.

Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and if necessary, tax planning strategies in making this assessment.

The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings. We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As of March 31, 2021, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

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STATEMENT OF OPERATIONS ANALYSIS

Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions (including those of the Bank) are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin for the three-month periods ended March 31, 2021 and March 31, 2020, respectively.

Net interest income was $12.8 million for the three months ended March 31, 2021, compared to $12.7 million for the three months ended March 31, 2020. For the three months ended March 31, 2021, net interest income benefited from the accretion of $1.75 million of deferred fees related to SBA Paycheck Protection Program (“PPP”) loans and organic loan growth from March 31, 2020, partially offset by lower accretion associated with reductions in purchase credit impaired loans. In addition, net interest income for the quarter ended March 31, 2021 was negatively impacted by: (1) Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 6 days; and (2) market reactions to decreasing longer-term interest rates on loans, investments and cash and cash equivalents security yields; partially offset by lower deposit rates due to management action to reduce interest rates.

The net interest margin for the three-month period ended March 31, 2021 was 3.31%, compared to 3.64% for the three-month period ended March 31, 2020. The decrease in net interest margin was largely due to: (1) the impact of the Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 6 days (2) market reactions to decreasing longer-term interest rates on loans, investments and cash and cash equivalents security yields, (3) 26 basis points of lower accretion associated with reduction in purchase credit impaired loans and (4) the impact of higher cash and cash equivalents balances decreased the interest margin percentage by 21 basis points. These were partially offset by lower deposit rates due to management action to reduce interest rates and 45 basis of higher SBA PPP accretion.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis. Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three month periods ended March 31, 2021 and March 31, 2020. Non-accruing loans have been included in the table as loans carrying a zero yield.

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NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Three months ended March 31, 2021 compared to the three months ended March 31, 2020:

	Three months ended March 31, 2021						Three months ended March 31, 2020
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)
Average interest earning assets:
Cash and cash equivalents	$	129,642	$	29	0.09	%	$	31,069	$	118	1.53	%
Loans	1,213,562		14,517		4.85	%	1,172,246		15,459		5.30	%
Interest-bearing deposits	3,437		20		2.36	%	4,362		27		2.49	%
Investment securities (1)	202,981		885		1.77	%	179,287		1,131		2.54	%
Other investments	15,038		169		4.56	%	15,006		173		4.64	%
Total interest earning assets (1)	$	1,564,660	$	15,620	4.05	%	$	1,401,970	$	16,908	4.85	%
Average interest-bearing liabilities:
Savings accounts	$	197,647	$	83	0.17	%	$	154,596	$	151	0.39	%
Demand deposits	330,674		251		0.31	%	234,822		375		0.64	%
Money market	254,120		202		0.32	%	236,470		609		1.04	%
CD’s	266,044		1,043		1.59	%	354,095		1,846		2.10	%
IRA’s	40,877		135		1.34	%	42,695		199		1.87	%
Total deposits	$	1,089,362	$	1,714	0.64	%	$	1,022,678	$	3,180	1.25	%
FHLB Advances and other borrowings	180,635		1,142		2.56	%	146,810		1,057		2.90	%
Total interest-bearing liabilities	$	1,269,997	$	2,856	0.91	%	$	1,169,488	$	4,237	1.46	%
Net interest income			$	12,764					$	12,671
Interest rate spread					3.14	%					3.39	%
Net interest margin (1)					3.31	%					3.64	%
Average interest earning assets to average interest-bearing liabilities					1.23						1.20

(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended March 31, 2021 and March 31, 2020. The FTE adjustment to net interest income included in the rate calculations totaled $1 and $0 thousand for the three months ended March 31, 2021 and March 31, 2020, respectively.

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Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously. For the three months ended March 31, 2021, compared to the three months ended March 31, 2020, the loan volume increase is primarily due to SBA PPP originations, and the impact of organic growth since March 31, 2020. The decrease in certificate volumes is due to planned runoff of brokered CD’s and to a lesser extent, retail CD’s, partially offset by growth in non-maturity deposits.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended March 31, 2021 compared to the three months ended March 31, 2020.

	Increase (decrease) due to
	Volume		Rate		Net
Interest income:
Cash and cash equivalents	$	215	$	(304)	$	(89)
Loans	527		(1,469)		(942)
Interest-bearing deposits	(5)		(2)		(7)
Investment securities	136		(382)		(246)
Other investments	—		(4)		(4)
Total interest earning assets	873		(2,161)		(1,288)
Interest expense:
Savings accounts	35		(103)		(68)
Demand deposits	124		(248)		(124)
Money market accounts	42		(449)		(407)
CD’s	(392)		(411)		(803)
IRA’s	(8)		(56)		(64)
Total deposits	(199)		(1,267)		(1,466)
FHLB Advances and other borrowings	224		(139)		85
Total interest bearing liabilities	25		(1,406)		(1,381)
Net interest income	$	848	$	(755)	$	93

Provision for Loan Losses. We determine our provision for loan losses (“provision”) based on our desire to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio. We continue to monitor adverse general economic conditions that could affect our commercial and agricultural portfolios in the future.

Total provision for loan losses expense for the three months ended March 31, 2021 was $0. The provision for loan losses was impacted by reductions in nonperforming and substandard assets, lower loan deferral balances associated with Section 4013 of the Cares Act, a smaller balance of loans receivable and low net loan charge offs. The provision for loans losses for the three months ended March 31, 2020 of $2 million was due to loan growth, the impact of net charge-offs and increase in Q-Factors due to uncertain market conditions, Pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” were beginning to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.

Management believes that the provision taken for the current year three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ALL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional provision in the future.

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Non-interest Income. The following table reflects the various components of non-interest income for the three month periods ended March 31, 2021 and 2020, respectively.

	Three months ended March 31,
	2021		2020		% Change
Non-interest Income:
Service charges on deposit accounts	$	398	$	560	(28.93)	%
Interchange income	530		464		14.22	%
Loan servicing income	893		685		30.36	%
Gain on sale of loans	1,595		780		104.49	%
Loan fees and service charges	278		477		(41.72)	%
Insurance commission income	—		279		(100.00)	%
Net gains on investment securities	235		73		221.92	%
Other	247		285		(13.33)	%
Total non-interest income	$	4,176	$	3,603	15.90	%

Service charges on deposit accounts decreased to $398 for the three months ended March 31, 2021, from $560 in the comparable prior year period. This decrease was due to higher average balances of retail checking accounts, which lowered service charges assessed.

Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination fees in the quarter ending March 31, 2021.

Gain on sale of loans increased in the current three period due to higher mortgage loan origination sold volumes.

The change in loan fees and service charges for the three months ended March 31, 2021, is largely due to decreases in commercial loan customer activity from the first quarter of 2020.

The decrease in insurance commission income is due to the sale of the Wells Insurance Agency change in June 2020.

The change in net gains on investment securities in March 31, 2021 is due to unrealized gains on equity securities with readily determinable fair value during the three months ended March 31, 2021, while the gains in the first quarter of 2020 were largely due to the sale of a $10.7 million of fixed-rate mortgage-backed certificates (“MBS”).

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Non-interest Expense. The following table reflects the various components of non-interest expense for the three month periods ended March 31, 2021 and 2020, respectively.

	Three months ended March 31,
	2021			2020			% Change
Non-interest Expense:
Compensation and related benefits	$	5,596		$	5,435		2.96	%
Occupancy	1,316			1,374			(4.22)	%
Data processing	1,342			1,192			12.58	%
Amortization of intangible assets	399			412			(3.16)	%
Mortgage servicing rights expense, net	(450)			736			(161.14)	%
Advertising, marketing and public relations	163			239			(31.80)	%
FDIC premium assessment	165			68			142.65	%
Professional services	521			604			(13.74)	%
Gains on repossessed assets, net	(117)			(68)			(72.06)	%
Other	554			760			(27.11)	%
Total non-interest expense	$	9,489		$	10,752		(11.75)	%
Non-interest expense (annualized) / Average assets	2.29		%	2.85		%	(19.72)	%

Compensation expense for the three-month period ended March 31, 2021 was higher than the comparable prior year period due primarily to higher variable mortgage production compensation related to higher mortgage loan origination activity, higher incentive compensation accrued based on improved performance, partially offset by the sale of Wells Insurance Agency in June 2020 and lower salaries paid due to fewer FTE’s.

Data processing expense increases were due primarily the impact of larger loans and deposit balances.

Mortgage servicing rights expense decreased during the three months ended March 31, 2021 by $1.2 million, compared to the comparable prior year period. The Company reversed previously recognized impairment charges of $0.9 million, largely due to the impact of lower forecasted prepayment rates. The remaining decrease is due to higher amortization based on the current interest rate environment.

FDIC insurance premium increased during the three months ended March 31, 2021 from the prior year comparable quarter due to the realization of the FDIC insurance credit in the first quarter of 2020 and the impact of higher assets, which increase the asset base.

The decrease in professional services expense was primarily due to lower audit fees, public accounting fees and lower costs to prepare Form 10-K.

Other expenses for the three-month period ended March 31, 2021 decreased compared to March 31, 2020, largely due to lower loan origination and collection expenses, partially offset by the debt termination cost of $0.1 million.

Income Taxes. Income tax expense was $1.9 million for the three months ended March 31, 2021 compared to $0.9 million for the three-month period ended March 31, 2020. The effective tax rate was 26.1% for the quarter ended March 31, 2021 compared to 26.4% for the quarter ended March 31, 2020.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents. Cash and cash equivalents increased to $196.0 million at March 31, 2021 from $119.4 million at December 31, 2020. Deposit levels grew, while interest earning assets remained flat as loans receivable reductions were offset by securities purchases. As a result, interest-bearing cash at the Federal Reserve increased.

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Investment Securities. We manage our securities portfolio to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity.

Securities available for sale, which represent the majority of our investment portfolio, were $185.2 million at March 31, 2021, compared with $144.2 million at December 31, 2020. The increase in the available for sale portfolio is due to purchases of mortgage-backed securities and corporate debt securities.

Securities held to maturity increased to $57.4 million at March 31, 2021, compared to $43.6 million at December 31, 2020. This increase was largely due to the purchase of agency mortgage-backed securities in the first quarter of 2021.

The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:

Available for sale securities	Amortized Cost		Fair Value
March 31, 2021
U.S. government agency obligations	$	31,474	$	31,712
Obligations of states and political subdivisions	140		140
Mortgage-backed securities	71,448		72,056
Corporate debt securities	27,752		27,913
Corporate asset-backed securities	35,664		35,709
Trust preferred securities	17,298		17,630
Totals	$	183,776	$	185,160
December 31, 2020
U.S. government agency obligations	$	33,048	$	33,365
Obligations of states and political subdivisions	140		140
Mortgage-backed securities	39,454		40,991
Corporate debt securities	17,199		17,462
Corporate asset-backed securities	36,039		35,827
Trust preferred securities	16,297		16,448
Totals	$	142,177	$	144,233

The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:

Held to maturity securities	Amortized Cost		Fair Value
March 31, 2021
U.S. government agency obligations	$	3,500	$	3,483
Obligations of states and political subdivisions	4,600		4,593
Mortgage-backed securities	49,319		47,710
Totals	$	57,419	$	55,786
December 31, 2020
Obligations of states and political subdivisions	$	600	$	602
Mortgage-backed securities	42,951		43,182
Totals	$	43,551	$	43,784

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The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:

	March 31, 2021				December 31, 2020
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	102,922	$	103,769	$	72,502	$	74,356
AAA	11,101		11,134		11,142		11,088
AA	24,703		24,715		25,037		24,879
A	13,519		13,666		8,713		8,925
BBB	31,531		31,877		24,783		24,985
Non-rated	—		—		—		—
Total available for sale securities	$	183,776	$	185,161	$	142,177	$	144,233

The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:

	March 31, 2021				December 31, 2020
Held to maturity securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	52,819	$	51,193	$	42,951	$	43,182
AA	4,000		4,002		600		602
Non-rated	—		—		—		—
Total	$	57,419	$	55,786	$	43,551	$	43,784

As of March 31, 2021, the Bank has pledged U.S. Government Agency securities with a carrying value $0.5 million and mortgage-backed securities with a carrying value of $2.7 million as collateral against specific municipal deposits. At March 31, 2021, the Bank has pledged mortgage-backed securities with a carrying value of $1.1 million as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2021, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2021, the Bank also has mortgage-backed securities with a carrying value of $0.4 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2020, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $1,209 as collateral to secure a line of credit with the Federal Reserve Bank. As of December 31, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2020, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $576 and mortgage-backed securities with a carrying value of $3,028 as collateral against specific municipal deposits. As of December 31, 2020, the Bank also has mortgage-backed securities with a carrying value of $468 pledged as collateral to the Federal Home Loan Bank of Des Moines

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Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $45.5 million, to $1.19 billion as of March 31, 2021, from $1.24 billion at December 31, 2020. The originated loan portfolio before SBA PPP loans decreased $18.3 million in the quarter. This decrease included the repayment of $5.5 million of draws on a Line credit originated the last business day of December and repaid on the first business day of January. Total SBA PPP loans decreased $4.8 million due to debt forgiveness of $55 million, offset by strong new SBA PPP second round loan originations of $47 million. Acquired loans decreased by $22.6 million. This decrease was partially due to reductions in agricultural real estate, due to borrowers requesting a long-term fixed-rate loan which the Bank facilitated using Farmer Mac financing. The following table reflects the composition, or mix of our loan portfolio at March 31, 2021 and December 31, 2020:

	March 31, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Real estate loans:
Commercial/agricultural real estate
Commercial real estate	$	515,189	43.3	%	$	507,675	40.9	%
Agricultural real estate	70,567		5.9	%	68,795		5.6	%
Multi-family real estate	118,988		10.0	%	122,152		9.9	%
Construction and land development	90,732		7.6	%	98,517		8.0	%
Residential mortgage
Residential mortgage	122,331		10.3	%	131,386		10.6	%
Purchased HELOC loans	5,291		0.4	%	6,260		0.5	%
Total real estate loans	923,098		77.5	%	934,785		75.5	%
C&I/Agricultural operating and Consumer Installment Loans:
C&I/Agricultural operating
Commercial and industrial (“C&I”)	95,933		8.0	%	116,553		9.4	%
Agricultural operating	28,250		2.4	%	32,785		2.6	%
Consumer installment							—	%
Originated indirect paper	23,186		1.9	%	25,851		2.1	%
Other Consumer	11,864		1.0	%	13,213		1.1	%
Total C&I/Agricultural operating and Consumer installment Loans	159,233		13.3	%	188,402		15.2	%
Gross loans before C&I SBA PPP loans	1,082,331		90.8	%	1,123,187		90.7	%
SBA PPP loans	118,931		10.0	%	123,702		10.0	%
Gross loans	$	1,201,262	100.8	%	$	1,246,889	100.7	%
Unearned net deferred fees and costs and loans in process	(4,487)		(0.4)	%	(4,245)		(0.3)	%
Unamortized discount on acquired loans	(4,649)		(0.4)	%	(5,063)		(0.4)	%
Total loans (net of unearned income and deferred expense)	1,192,126		100.0	%	1,237,581		100.0	%
Allowance for loan losses	(16,860)				(17,043)
Total loans receivable, net	$	1,175,266			$	1,220,538

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The following table summarizes SBA PPP loans by round at March 31, 2021 and December 31, 2020 and includes additional round 2 activity in April 2021:

	Balance		Net Deferred Fee Income
SBA PPP Loans - Round 1	$	124	$	3.0
SBA PPP Loans - Round 2	—		—
Total SBA PPP Loans, December 31, 2020	124		3.0
SBA PPP Loans - Round 1	$	72	$	1.3
SBA PPP Loans - Round 2	47		1.7
Total SBA PPP Loans, March 31, 2021	119		3.0
Net deferred fees collected after March 31, 2021 from Q1 SBA PPP loan originations	—		0.9
	119		3.9
SBA PPP Pipeline Round 2, April 2021	8		0.8
March 31, 2021 plus SBA PPP Pipeline - Round 2, April 2021	$	127	$	4.7

Allowance for Loan Losses. The loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as PLL. See “Provision for Loan Losses” earlier in this quarterly report. We attempt to control, monitor and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.

At least quarterly, we review the adequacy of the ALL. Based on an estimate computed pursuant to the requirements of ASC 450-10, “Accounting for Contingencies” and ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, the analysis of the ALL consists of three components: (i) specific credit allocation established for expected losses relating to specific impaired loans for which the recorded investment in the loan exceeds its fair value; (ii) general portfolio allocation based on historical loan loss experience for significant loan categories; and (iii) general portfolio allocation based on qualitative factors such as economic conditions and other relevant factors specific to the markets in which we operate. We continue to refine our ALL methodology by introducing a greater level of granularity to our loan portfolio. We currently segregate loans into pools based on common risk characteristics for purposes of determining the ALL. The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL. In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors. We believe that any modifications or changes to the ALL methodology would be to enhance the ALL. However, any such modifications could result in materially different ALL levels in future periods.

The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered impaired. In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral. At March 31, 2021, the Company had identified impaired loans of $40.2 million, consisting of $17.4. million TDR loans, the carrying amount of purchased credit impaired loans of $16.5 million and $6.3 million of substandard non-TDR loans. The $40.2 million total of impaired loans includes $11.8 million of performing TDR loans. At December 31, 2020, the Company had identified impaired loans of $43.4 million, consisting of $18.5 million TDR loans, the carrying amount of purchased credit impaired loans of $16.9 million and $8.0 million of substandard non-TDR loans. The $43.4 million total of impaired loans includes $11.7 million of performing TDR loans. At March 31, 2020 and December 31, 2020, we had 292 and 325 such impaired loans, respectively, all secured by real estate or personal property. Of the impaired loans, there were 12 individual loans where estimated fair value was less than their book value (i.e., we deemed impairment to exist) totaling $6.0 million for which $1.3 million in specific ALL was recorded as of March 31, 2021.

The allowance for loan and losses modestly decreased to $16.9 million at March 31, 2021 representing 1.57% of loans receivable, less the 100% SBA guaranteed PPP loans. A significant portion of the current loan portfolio includes loans

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purchased through whole bank acquisitions in recent years resulting in purchased credit impairments which are not included in the allowance for loan losses. The allowance for loan losses was $17.0 million at December 31, 2020, representing 1.53% of loans receivable, less the 100% SBA guaranteed PPP loans. The decrease in the allowance was due to loan payoffs, increases in unallocated, increases in specific reserves on impaired loans and continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.

Allowance for Loan Losses to Loans, net of SBA PPP Loans

(in thousands, except ratios)

	March 31, 2021			Decmber 31, 2020
Loans, end of period	$	1,192,126		$	1,237,581
SBA PPP loans, net of deferred fees	(115,920)			(120,711)
Loans, net of SBA PPP loans and deferred fees	$	1,076,206		$	1,116,870
Allowance for loan losses	$	16,860		$	17,043
ALL to loans net of SBA PPP loans and deferred fees	1.57		%	1.53		%
ALL to loans, end of period	1.41		%	1.38		%

All of the nine factors identified in the FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL. The impact of the factors in general categories are subject to change; thus, the allocations are management’s estimate of the loan loss categories in which the probable and inherent loss has occurred as of the date of our assessment. Of the nine factors, we believe the following have the greatest impact on our customers’ ability to repay loans and our ability to recover potential losses through collateral sales: (1) lending policies and procedures; (2) economic and business conditions; and (3) the value of the underlying collateral. As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allocated allowance. The general component covers non-impaired loans and is based on historical loss experience adjusted for these and other qualitative factors. In addition, management continues to refine the ALL estimation process as new information becomes available. These refinements could also cause increases or decreases in the ALL. See Provision for loan losses in the Consolidated Statements of Operations (unaudited) for further details. The unallocated portion of the ALL is intended to account for imprecision in the estimation process or relevant current information that may not have been considered in the process.

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of nonaccrual and problem loans in order to minimize the Bank’s risk of loss. Nonperforming loans are defined as nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule:

•Commercial/agricultural real estate loans, past due 90 days or more;

•C&I/Agricultural operating loans, past due 90 days or more;

•Closed ended consumer installment loans past due 120 days or more; and

•Residential mortgage loans and open-ended consumer installment loans past due 180 days or more.

When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. A TDR typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes. TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

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The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended:

	March 31, 2021 and Three Months Then Ended			December 31, 2020 and Twelve Months Then Ended
Nonperforming assets:
Nonaccrual loans
Commercial real estate	$	760		$	827
Agricultural real estate	4,511			5,084
Commercial and industrial	391			357
Agricultural operating	764			1,872
Residential mortgage	2,167			2,451
Consumer installment	86			156
Total nonaccrual loans	$	8,679		$	10,747
Accruing loans past due 90 days or more	536			586
Total nonperforming loans (“NPLs”)	9,215			11,333
Other real estate owned	85			156
Other collateral owned	—			41
Total nonperforming assets (“NPAs”)	$	9,300		$	11,530
Troubled Debt Restructurings (“TDRs”)	$	17,442		$	18,477
Accruing TDR's	$	11,752		$	11,742
Nonaccrual TDRs	$	5,690		$	6,735
Average outstanding loan balance	$	1,213,562		$	1,234,732
Loans, end of period	$	1,192,126		$	1,237,581
Total assets, end of period	$	1,732,294		$	1,649,095
ALL, at beginning of period	$	17,043		$	10,320
Loans charged off:
Commercial/Agricultural real estate	(200)			—
C&I/Agricultural operating	—			(1,091)
Residential mortgage	—			(78)
Consumer installment	(25)			(149)
Total loans charged off	(225)			(1,318)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate	5			150
C&I/Agricultural operating	15			44
Residential mortgage	8			20
Consumer installment	14			77
Total recoveries of loans previously charged off:	42			291
Net loans charged off (“NCOs”)	(183)			(1,027)
Additions to ALL via provision for loan losses charged to operations	—			7,750
ALL, at end of period	$	16,860		$	17,043
Ratios:
ALL to NCOs (annualized)	2,303.28		%	1,659.49		%
NCOs (annualized) to average loans	0.06		%	0.08		%
ALL to total loans	1.41		%	1.38		%
NPLs to total loans	0.77		%	0.92		%
NPAs to total assets	0.54		%	0.70		%

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The following table shows the detail of non-performing assets by originated and acquired portfolios:

Nonperforming Originated / Acquired Assets

(in thousands, except ratios)

	March 31, 2021			December 31, 2020
Nonperforming assets:
Originated nonperforming assets:
Nonaccrual loans	$	2,344		$	3,649
Accruing loans past due 90 days or more	391			415
Total originated nonperforming loans (“NPL”)	2,735			4,064
Other real estate owned (“OREO”)	—			63
Other collateral owned	28			41
Total originated nonperforming assets (“NPAs”)	$	2,763		$	4,168
Acquired nonperforming assets:
Nonaccrual loans	$	6,335		$	7,098
Accruing loans past due 90 days or more	145			171
Total acquired nonperforming loans (“NPL”)	6,480			7,269
Other real estate owned (“OREO”)	57			93
Other collateral owned	—			—
Total acquired nonperforming assets (“NPAs”)	$	6,537		$	7,362
Total nonperforming assets (“NPAs”)	$	9,300		$	11,530
Loans, end of period	$	1,192,126		$	1,237,581
Total assets, end of period	$	1,732,294		$	1,649,095
Ratios:
Originated NPLs to total loans	0.23		%	0.33		%
Acquired NPLs to total loans	0.54		%	0.59		%
Originated NPAs to total assets	0.16		%	0.25		%
Acquired NPAs to total assets	0.38		%	0.45		%

Nonperforming assets decreased by $2.2 million to $9.3 million at March 31, 2021 from December 31, 2020. This decrease is largely due to reductions in acquired non-performing loans. Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to nonperforming loans.

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Nonaccrual Loans Roll forward:

	Quarter Ended
	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Balance, beginning of period	$	10,747	$	13,154	$	14,787	$	16,090	$	19,056
Additions	430		912		716		1,907		1,811
Acquired nonaccrual loans	—		—		—		—		—
Charge offs	(205)		(2)		(141)		(175)		(452)
Transfers to OREO	(45)		—		(172)		—		(1,100)
Return to accrual status	(291)		—		(165)		(1,702)		(120)
Payments received	(1,935)		(3,317)		(1,744)		(1,292)		(2,887)
Other, net	(23)		—		(127)		(41)		(218)
Balance, end of period	$	8,678	$	10,747	$	13,154	$	14,787	$	16,090

Nonaccrual TDR loans decreased to $5.7 million at March 31, 2021 from $6.7 million at December 31, 2020.

	March 31, 2021			December 31, 2020
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings: Accrual Status
Commercial/Agricultural real estate	14	$	4,472	16	$	4,695
C&I/Agricultural operating	5	4,042		4	3,836
Residential mortgage	44	3,195		43	3,162
Consumer installment	8	43		8	49
Total loans	71	$	11,752	71	$	11,742

Classified assets decreased to $26.1 million at March 31, 2021, from $28.5 million at December 31, 2020 largely due to the reduction in nonperforming assets discussed above, with a modest increase in newly classified assets. Nonperforming assets decreased to $9.3 million or 0.54% of total assets at March 31, 2021 compared to $11.5 million or 0.70% of total assets at December 31, 2020. Included in nonperforming assets at March 31, 2021 are $6.5 million of nonperforming assets acquired during recent whole-bank acquisitions.

The table below shows a summary of the decrease in substandard loans by quarter since the first impact of the F&M acquisition on September 30, 2019 levels. While special mention loans increased in the first quarter of 2020 and more modestly in the second quarter of 2020, the balances decreased in the third quarter of 2020 due to resolution. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for additional information.

	(in thousands)
	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Special mention loan balances	$	13,659	$	6,672	$	7,777	$	19,958	$	19,387
Substandard loan balances	26,064		28,541		32,922		35,911		38,393
Criticized loans, end of period	$	39,723	$	35,213	$	40,699	$	55,869	$	57,780

Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the recent pandemic and related government actions. These sector loans totaled approximately $93 million and $39 million, respectively at March 31, 2021. The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry sector loans was 56% and 2.3 times. Approximately $24 million of restaurant sector loans are to franchise quick-service restaurants.

As of March 31, 2021 the Bank had $57.3 million of loan modifications remaining due to pandemic-related borrower requests. Approximately $39 million of modifications are scheduled to resume their regular principal and interest payments in the second quarter and 45% had made their contractual payment as of April 30, 2021. Hotel industry sector loans represent

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approximately $49 million of the approved deferrals projected at March 31, 2021. Of these, $49 million represent a second or third deferral under the CARES ACT, with the customer making an interest only payment and the Bank generally receives the reserve accounts pledge. While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current pandemic-affected environment has been considered. See “Allowance for Loan Losses” section above for discussion of pandemic-related qualitative factor, and related provision for loan losses.

Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset increased from $3.3 million at December 31, 2020 to $4.0 million at March 31, 2021, primarily due to $0.9 million of impairment reversal recorded on the MSR asset due to the impact of a lower projected prepayment rate. Higher long-term interest rates as of at March 31, 2021 compared to December 31, 2020 resulted in the reduction in projected prepayment rates.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of March 31, 2021 and December 31, 2020 were $551.6 million and $553.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at March 31, 2021 and December 31, 2020 was 0.73% and 0.59%, respectively.

Deposits. Deposits increased $84.9 million to $1.380 billion at March 31, 2021, from $1.295 billion at December 31, 2020. This growth is due to non-maturity deposit growth, split between both retail and commercial deposits. This growth was partially offset by retail certificates of deposit decreasing by $24 million, as the Company chose not to match higher rate local retail certificate competition.

The following is a summary of deposits by type at March 31, 2021 and December 31, 2020, respectively:

	March 31, 2021		December 31, 2020
Non-interest bearing demand deposits	$	257,042	$	238,348
Interest bearing demand deposits	352,302		301,764
Savings accounts	222,448		196,348
Money market accounts	258,942		245,549
Certificate accounts	289,468		313,247
Total deposits	$	1,380,202	$	1,295,256
Brokered deposits included above:	$	2,516	$	2,516

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Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings. A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at March 31, 2021 and December 31, 2020 is as follows:

		March 31, 2021						December 31, 2020
	Stated Maturity	Amount		Range of Stated Rates				Amount		Range of Stated Rates
Federal Home Loan Bank advances (1), (2), (3), (4)	2021	$	4,000	—	%	—	%	$	8,000	—	%	2.16	%
	2022	11,000		2.45	%	2.45	%	15,000		2.34	%	2.45	%
	2023	20,000		1.43	%	1.44	%	20,000		1.43	%	1.44	%
	2024	20,530		—	%	1.45	%	20,530		—	%	1.45	%
	2025	5,000		1.45	%	1.45	%	5,000		1.45	%	1.45	%
	2029	42,500		1.00	%	1.13	%	42,500		1.00	%	1.13	%
	2030	12,500		0.52	%	0.86	%	12,500		0.52	%	0.86	%
Subtotal		115,530						123,530
Unamortized discount on acquired notes		(49)						(32)
Federal Home Loan Bank advances, net		$	115,481					$	123,498
Senior Notes (5)	2031	$	28,856	3.50	%	3.50	%	$	28,856	3.25	%	3.50	%
Subordinated Notes (6)	2027	$	15,000	6.75	%	6.75	%	$	15,000	6.75	%	6.75	%
	2030	15,000		6.00	%	6.00	%	15,000		6.00	%	6.00	%
		$	30,000					$	30,000
Unamortized debt issuance costs		$	(502)					$	(528)
Total other borrowings		$	58,354					$	58,328
Totals		$	173,835					$	181,826

(1)    The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $720,008 and $723,862 at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $122,791 compared to $118,391 as of December 31, 2020.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $123,530 and $162,530, during the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively.

(3) The weighted-average interest rates on FHLB borrowings maturing within twelve months as of March 31, 2021 and December 31, 2020 were 1.80% and 0.50%, respectively.

(4)    FHLB term notes totaling $55,000, with various maturity dates in 2029 and 2030, can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months after the initial advance.

(5)    Senior notes, entered into by the Company in June 2019 consist of the following:

(a) A term note, which was subsequently refinanced in October 2020, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate with a floor rate of 3.25%.

(b) A $5,000 line of credit, maturing in August 2021, that remains undrawn upon.

(6)    Subordinated notes resulted from the following:

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(a) The Company’s private sale in August 2017, which bears a fixed interest rate of 6.75% for five years. In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter. Interest-only payments are due quarterly.

(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

FHLB advances decreased $8.0 million to $115.5 million as of March 31, 2021 compared to $123.5 million as of December 31, 2020. The Bank terminated $8.0 million of advances in the quarter, incurring a $0.1 million prepayment penalty, as we continue to utilize these advances, only as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to manage the Bank’s cost of funds. The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral as of March 31, 2021 is approximately $122.8 million.

The Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“PPPLF”), whereby the Bank can pledge SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at any time during the quarters ending March 31, 2021 and December 31, 2020, respectively. The Bank borrowing capacity was $118.9 million after pledging the underlying loans at March 31, 2021.

At both March 31, 2021 and December 31, 2020, the Bank had $55 million of 10-year, three-month callable advances.

See Note 7, “Federal Home Loan Bank and Federal Reserve Bank Advances and Other Borrowings” for more information.

At March 31, 2021, the Bank has pledged $720.0 million of loans to secure the current FHLB outstanding advances, letters of credit and to provide the unused borrowing capacity compared to $723.8 million of loans pledged at December 31, 2020.

Stockholders’ Equity.Total stockholders’ equity was $160.7 million at March 31, 2021 compared to $160.6 million at December 31, 20120. The Company’s net income of $5.5 million was largely offset by to the payment of the annual cash dividend paid in February to common stockholders of $0.23 per share, the first quarter repurchase of approximately 224,000 shares of its common stock at a weighted average price of $11.47 per share and decrease in the unrealized gain on sale of securities of approximately $0.5 million.

Under the December 2020 stock buyback program, the company has repurchased approximately 322,000 shares as of March 31, 2021 and is authorized to repurchase up to approximately 236,000 additional shares.

Liquidity and Asset / Liability Management. Our primary sources of funds are deposits; amortization, prepayments and maturities of outstanding loans; short-term investments; and borrowings. We use our sources of funds primarily to meet ongoing commitments, to pay non-renewing, maturing certificates of deposit and savings withdrawals, and to fund loan commitments. We have enhanced our liquidity monitoring and updated what we consider to be sources of on-balance sheet cash. We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity. At March 31, 2021, our on-balance sheet liquidity ratio was 23.3%. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are influenced by factors partially outside of the Bank’s control, including general interest rates, economic conditions and competition. Although $217.4 million of our $289.5 million (75.1%) CD portfolio as of March 31, 2021 will mature within the next 12 months, we have historically retained a majority of our maturing CD’s. However, due to strategic pricing decisions regarding rate matching based on currently liquidity levels, our retention rate may decrease in the future. At March 31, 2021, the Bank had approximately $160 million of certificate of deposit accounts maturing in 2021 with a weighted average cost of approximately 1.1% and approximately $110 million of certificate of deposit accounts maturing in 2022 with a weighted average cost of approximately 2.0%. The 2021 maturities are approximately evenly spread throughout the year, with approximately 85% of the 2022 maturities occurring in the first half of 2022. The approximate weighted average cost of new certificates in the first quarter of 2021 was below 0.5%.Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits. In our present interest rate environment, and based on maturing yields, this is intended to also reduce our cost of funds.

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We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank and correspondent banks. We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate loans and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. As of March 31, 2021, we had approximately $122.8 million available under this arrangement, supported by loan collateral, as compared to $118.4 million at December 31, 2020. In the quarter ended June 30, 2020, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve’s PPPLF facility, whereby the Bank can pledge SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at, or at any time during the quarters ended, March 31, 2021 and December 31, 2020, respectively. The Bank could borrow $123.7 million under this facility at March 31, 2021. As the SBA PPP loans are forgiven, the collateral will reduce and our borrowing capacity under this facility will be reduced.

We maintain a line of credit with the Federal Reserve Bank which has a $1.0 million capacity, based on our current pledged collateral position. Additionally, we have $25.0 million of uncommitted federal funds purchased lines of credit, as well as a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

In reviewing our adequacy of liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs. Management believes that our liquidity is adequate, and, to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.

Off-Balance Sheet Liabilities. Some of our financial instruments have off-balance sheet risk. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As of March 31, 2021, the Company had $209.5 million in unused commitments, compared to $247.3 million in unused commitments as of December 31, 2020.

Capital Resources. As of March 31, 2021, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

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Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank:

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2021 (Unaudited)
Total capital (to risk weighted assets)	$	174,424	15.5	%	$	89,877	> =	8.0	%	$	112,347	> =	10.0	%
Tier 1 capital (to risk weighted assets)	160,344		14.3	%	67,408		> =	6.0	%	89,877		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	160,344		14.3	%	50,556		> =	4.5	%	73,025		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	160,344		9.8	%	65,595		> =	4.0	%	81,993		> =	5.0	%
As of December 31, 2020 (Audited)
Total capital (to risk weighted assets)	$	171,702	14.7	%	$	93,381	> =	8.0	%	$	116,726	> =	10.0	%
Tier 1 capital (to risk weighted assets)	157,081		13.5	%	70,035		> =	6.0	%	93,381		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	157,081		13.5	%	52,527		> =	4.5	%	75,872		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	157,081		9.9	%	63,718		> =	4.0	%	79,647		> =	5.0	%

At March 31, 2021, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

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Below are the amounts and ratios for our capital levels as of the dates noted below for the Company:

	Actual				For Capital Adequacy Purposes
	Amount		Ratio		Amount			Ratio
As of March 31, 2021 (Unaudited)
Total capital (to risk weighted assets)	$	167,145	14.9	%	$	89,877	> =	8.0	%
Tier 1 capital (to risk weighted assets)	123,065		11.0	%	67,408		> =	6.0	%
Common equity tier 1 capital (to risk weighted assets)	123,065		11.0	%	50,556		> =	4.5	%
Tier 1 leverage ratio (to adjusted total assets)	123,065		7.5	%	65,595		> =	4.0	%
As of December 31, 2020 (Audited)
Total capital (to risk weighted assets)	$	166,703	14.3	%	$	93,381	> =	8.0	%
Tier 1 capital (to risk weighted assets)	122,082		10.5	%	70,035		> =	6.0	%
Common equity tier 1 capital (to risk weighted assets)	122,082		10.5	%	52,527		> =	4.5	%
Tier 1 leverage ratio (to adjusted total assets)	122,082		7.7	%	63,718		> =	4.0	%

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time and are not predictable or controllable. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and policies of regulatory authorities, including the monetary policies of the Federal Reserve. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk through several means including through the use of third party reporting software. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.

In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and re-pricing terms of our interest earning assets and interest bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank’s senior management and Board of Directors. The ALCO establishes guidelines for and monitors the volume and mix of our assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The Committee’s objectives are to manage assets and funding sources to produce results that are consistent with liquidity, cash flow, capital adequacy, growth, risk and profitability goals for the Bank. The ALCO meets on a regularly scheduled basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis. At each meeting, the Committee recommends strategy changes, as appropriate, based on this review. The Committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Bank’s Board of Directors on a regularly scheduled basis.

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In order to manage our assets and liabilities and achieve desired levels of liquidity, credit quality, cash flow, interest rate risk, profitability and capital targets, we have focused our strategies on:

•originating shorter-term secured commercial, agricultural and consumer loan maturities;

•originating variable rate commercial and agricultural loans;

•managing our exposure to changes in interest rates, including, but not limited to the sale of longer-term fixed-rate residential loans in the secondary market with retained servicing;

•originating balloon mortgage loans with a term of five years or less to minimize the impact of sudden rate changes;

•managing our funding needs by utilizing core deposits, brokered certificates of deposits and borrowings as appropriate to extend terms and lock in fixed interest rates;

•reducing non-interest expense and managing our efficiency ratio by implementing technologies to enhance customer service and increase employee productivity; and

•realigning supervision and control of our branch network by modifying their configuration, staffing, locations and reporting structure to focus resources on our most productive markets.

At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCO may determine to increase the Bank’s interest rate risk position somewhat in order to maintain or improve its net interest margin.

The following table sets forth, at March 31, 2021 and December 31, 2020 an analysis of our interest rate risk as measured by the estimated changes in Economic Value of Equity (“EVE”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 100 basis points). As of March 31, 2021 and December 31, 2020, due to the current level of interest rates, EVE estimates for decreases in interest rates greater than 100 basis points are not meaningful.

	Percent Change in Economic Value of Equity (EVE)
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At March 31, 2021		At December 31, 2020
+300 bp	1	%	15	%
+200 bp	1	%	11	%
+100 bp	1	%	7	%
-100 bp	3	%	—	%

(1)Assumes an immediate and parallel shift in the yield curve at all maturities.

Our overall interest rate sensitivity is demonstrated by net interest income shock analysis which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in our net interest income over the next 12 months in the event of an immediate and parallel shift in the yield curve (up 300 basis points and down 100 basis points). The table below presents our projected change in net interest income for the various rate shock levels at March 31, 2021 and December 31, 2020.

	Percent Change in Net Interest Income Over One Year Horizon
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At March 31, 2021		At December 31, 2020
+300 bp	—	%	3	%
+200 bp	—	%	3	%
+100 bp	—	%	2	%
-100 bp	2	%	(1)	%

(1)Assumes an immediate and parallel shift in the yield curve at all maturities.

Note: The table above may not be indicative of future results.

The assumptions used to measure and assess interest rate risk include interest rates, loan prepayment rates, deposit decay (runoff) rates, and the market values of certain assets under differing interest rate scenarios. Actual values may differ from those projections set forth above should market conditions vary from the assumptions used in preparing the analysis. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.

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ITEM 4.CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives. We carried out an evaluation as of March 31, 2021, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021 at reaching a level of reasonable assurance.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. On July 1, 2019, we completed our acquisition of F&M. In accordance with our integration efforts, we plan to incorporate F&M’s operations into our internal control over financial reporting structure within the time frame provided by applicable SEC rules and regulations.

PART II – OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

In the normal course of business, the Company and/or the Bank occasionally become involved in other various legal proceedings. In our opinion, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

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Item 1A.RISK FACTORS

The information in this Form 10-Q should be read in conjunction with the risk factors described in “Risk Factors” in Item 1A of our 2020 10-K and the information under “Forward-Looking Statements” in this Form 10-Q and in our 2020 10-K.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Not applicable.

(b)Not applicable.

(c)Issuer Purchases of Equity Securities.

On November 30, 2020, the Board of Directors approved a stock repurchase program. Under this program the Company may repurchase up to approximately 5% of the outstanding shares of its common stock as of November 30, 2020, or 557,728 shares, from time to time. The table below shows information about our repurchases of our common stock during the three months ended March 31, 2021.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2021 - January 31, 2021	—	$	—	—	459,963
February 1, 2021 - February 28, 2021	212,649	$	11.41	212,649	247,314
March 1, 2021 - March 31, 2021	11,832	$	11.56	11,832	235,482
Total	224,481	$	11.42	224,481

.

Item 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.MINE SAFETY DISCLOSURES

Not applicable.

Item 5.OTHER INFORMATION

Not applicable.

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Item 6.EXHIBITS

(a) Exhibits

31.1	Rule 13a-14(a) Certification of the Company’s Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Company’s Chief Financial Officer
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CITIZENS COMMUNITY BANCORP, INC.
Date: May 6, 2021	By:	/s/ Stephen M. Bianchi
		Stephen M. Bianchi
		Chief Executive Officer
Date: May 6, 2021	By:	/s/ James S. Broucek
		James S. Broucek
		Chief Financial Officer

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