Citizens Community Bancorp Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion sets forth management’s discussion and analysis of our results of operations for the year ended December 31, 2020 and December 31, 2019, and our financial position as of December 31, 2020 and December 31, 2019, respectively. The MD&A should be read in conjunction with our consolidated financial statements, related notes, the selected financial data and the statistical information presented elsewhere in this Annual Report on Form 10-K for a more complete understanding of the following discussion and analysis. Unless otherwise noted, years refer to the Company’s fiscal years ended December 31, 2020 and December 31, 2019. PERFORMANCE SUMMARY The following is a brief summary of some of the significant factors that affected our operating results for the twelve months ended December 31, 2020 and 2019. In 2020, net interest income was favorably impacted by the following: (1) higher accretion of discounts associated with paydown of purchased credit impaired loans, (2) income realized from the origination of the Small Business Administration Paycheck Protection Program (“SBA PPP”) loans, (3) lower deposit costs due to the lower 2020 interest rate environment, (4) an additional six months of net interest income on the F&M acquisition, partially offset by (5) lower interest income on loans, securities and cash and cash equivalents due to the lower interest rate environment and (6) a partial year of interest expense on the Company’s issuance of subordinated debt in August 2020. The Company recorded higher provision for loan losses in 2020 largely due to organic loan growth along with qualitative factor increases to reflect uncertainty in current general economic conditions. In 2020’s lower interest rate environment, the Company realized higher mortgage loans originated for sale, which increased gain on sale and income recorded in loan servicing income from the capitalization of mortgage servicing rights, partially offset by higher mortgage servicing rights impairment and an increase in variable compensation tied to mortgage loan production. On July 1, 2019, we closed on the F&M acquisition. As a result, fiscal 2019 was positively impacted by six months of F&M income, which was more than offset by merger charges. Total related merger and acquisition charges were $3.9 million in fiscal 2019. Fiscal 2019 operating results were positively impacted by the net gain on sale of the Michigan branch totaling $2.3 million. Fiscal 2019 also included $0.4 million of professional fees related to the change in our fiscal year end. When comparing, year over year results, changes in net interest income, provision for loan losses, non-interest income and non-interest expense are primarily due to the items discussed above. See the remainder of this section for a more thorough discussion. 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. On July 1, 2019, the Company completed its previously announced acquisition (the “Acquisition”) of F. & M. Bancorp. of Tomah Inc. (“F&M”), which enhanced the composition of commercial and agricultural loans and increased our market presence in Wisconsin. In connection with the acquisition, the Company merged F&M with and into the Bank, with the Bank surviving the merger. See Note 2, “Acquisition” for additional information. We reported net income of $12.73 million for the twelve months ended December 31, 2020, compared to net income of $9.46 million for the twelve months ended December 31, 2019. Diluted earnings per share were $1.14 for the twelve months ended December 31, 2020 compared to $0.85 for the twelve months ended December 31, 2019. Return on average assets for the twelve months ended December 31, 2020 was 0.80%, compared to 0.68% for the twelve months ended December 31, 2019. The return on average equity was 8.29% for the twelve months ended December 31, 2020 and 6.59% for the comparable period in 2019. 28 CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“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 the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. Below is a discussion of our critical accounting estimates. 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 and Other Intangible Assets. 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 December 31, 2020 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. In March 2020, the Company determined that a quarterly review of goodwill impairment should be performed, and this review was performed in each quarter of 2020. These quarterly reviews determined that goodwill was not impaired at any 2020 quarter-end, or as of December 31, 2020. 29 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, 5, 6, 7, 14 and 15 of 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 December 31, 2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary. Business Combinations. Business combinations are accounted for by applying the acquisition method of accounting. As of acquisition date, the identifiable assets acquired and liabilities assumed are measured at fair value and recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of operations from the date of acquisition. The calculation of intangible assets, including core deposit intangibles, and the fair value of loans are based on significant judgments. Core deposit intangibles are calculated using a discounted cash flow model, based on various factors including, among others, discount rate, attrition rate, interest rate and cost of alternative funds. Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflects only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be collected). Determining the fair value of the acquired loans involves estimating the cash flows expected to be collected from both principal and interest on acquired 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, among others, the remaining life of the loans, delinquency status, estimated prepayments, internal risk ratings, estimated value of underlying collateral and interest rate environment. 30 STATEMENT OF OPERATIONS ANALYSIS Twelve months ended December 31, 2020 vs. Twelve months ended December 31, 2019 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 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 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. Net interest income was $50.3 million for 2020 compared to $43.5 million for 2019. The increase in average balances is largely the reason for the increase in net interest income, due to both a full year of F&M balances and SBA PPP loan origination growth, with originated loan growth muted by acquired loan shrinkage. The net interest margin for 2020 was 3.40% compared to 3.37% for 2019. This increase in the net interest margin percentage was due to the following factors: (1) increase in accretion of discounts associated with paydown of purchased credit impaired loans; (2)income realized from the origination of the SBA PPP loans; (3) lower deposit costs due to the lower 2020 interest rate environment; (4) an additional six months of net interest income on the F&M acquisition. These increases were partially offset by: (1) lower interest income on loans, securities and cash and equivalents due to the lower interest rate environment and (2) a partial year of interest expense on the Company’s issuance of subordinated debt in August 2020. Accretion on purchased credit impaired loans recognized due to loan payoffs or significant reductions in loan balances was $2.7 million in 2020, which was an increase of $2.3 million from accretion recognized in 2019 or $0.4 million. In 2020, the SBA PPP program was initiated, and the Bank recognized $2.1 million of accretion of the net origination fees and contractual interest income of $0.973 million. Remaining deferred SBA PPP fees were approximately $3 million at December 31, 2020. Interest expense on liabilities decreased $2.6 million in 2020 due to the lower interest rate environment and actions taken by the Bank to reduce interest rates paid. The Bank has approximately $207 million of certificates of deposit maturing in 2021, at a blended interest cost of approximately 1.38%. These favorable items were offset by the negative impacts of a lower interest rate environment resulting in lower yields on loans, investments and cash and cash equivalents. Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows 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. Also presented is the weighted average yield on interest earning assets on a tax-equivalent basis, rates paid on interest bearing liabilities and the resultant spread at December 31, 2020 and December 31, 2019. Non-accruing loans average balances are included in the table with the loans carrying a zero yield. 31 Twelve months ended December 31, 2020 Twelve months ended December 31, 2019 Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate Average interest earning assets: Cash and cash equivalents $ 52,016 $ 162 0.31 % $ 29,948 $ 672 2.24 % Loans 1,234,732 59,763 4.84 % 1,074,952 54,647 5.08 % Interest-bearing deposits 3,914 96 2.45 % 5,841 137 2.35 % Investment securities (1) 174,396 3,789 2.17 % 171,747 4,332 2.60 % Other investments 15,081 717 4.75 % 12,442 635 5.10 % Total interest earning assets (1) $ 1,480,139 $ 64,527 4.36 % $ 1,294,930 $ 60,423 4.68 % Average interest bearing liabilities: Savings accounts $ 174,184 $ 435 0.25 % $ 155,848 $ 651 0.42 % Demand deposits 268,311 1,065 0.40 % 204,296 1,677 0.82 % Money market 244,632 1,446 0.59 % 182,103 1,988 1.09 % CD’s 316,264 6,325 2.00 % 352,924 7,114 2.02 % IRA’s 42,039 729 1.73 % 42,134 744 1.77 % Total deposits $ 1,045,430 $ 10,000 0.96 % $ 937,305 $ 12,174 1.30 % FHLB Advances and other borrowings 186,724 4,272 2.29 % 156,885 4,736 3.02 % Total interest bearing liabilities $ 1,232,154 $ 14,272 1.16 % $ 1,094,190 $ 16,910 1.55 % Net interest income $ 50,255 $ 43,513 Interest rate spread 3.20 % 3.13 % Net interest margin (1) 3.40 % 3.37 % Average interest earning assets to average interest bearing liabilities 1.20 % 1.18 % (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% for the twelve months ended December 31, 2020 and 2019. The FTE adjustment to net interest income included in the rate calculations totaled $1 thousand and $120 thousand for the twelve month periods ended December 31, 2020 and 2019, respectively. 32 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). Twelve months ended December 31, 2020 v. 2019 Increase (decrease) due to Volume (1) Rate (1) Total Increase / (Decrease) Interest income: Cash and cash equivalents $ 354 $ (864) $ (510) Loans 7,839 (2,723) 5,116 Interest-bearing deposits (47) 6 (41) Investment securities 68 (611) (543) Other investments 128 (46) 82 Total interest earning assets $ 8,342 $ (4,238) $ 4,104 Interest expense: Savings accounts $ 70 $ (286) $ (216) Demand deposits 440 (1,052) (612) Money market accounts 571 (1,113) (542) CD’s (734) (55) (789) IRA’s (2) (13) (15) Total deposits 345 (2,519) (2,174) FHLB Advances and other borrowings 814 (1,278) (464) Total interest bearing liabilities 1,159 (3,797) (2,638) Net interest income $ 7,183 $ (441) $ 6,742 (1) the change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each. Provision for Loan Losses. We determine our provision for loan losses (“provision”, or “PLL”) to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio. We recorded provisions for loan losses of $7.8 million for 2020 compared to $3.5 million for 2019. In 2020, the provision allocated for originated loan growth was approximately $1.2 million compared to approximately $2.0 million for 2019. In 2020, approximately $1.2 million of provision was related to charge-offs and changes in specific reserves compared to $1.4 million in 2019. The remaining increase in provision related to qualitative factor increases to reflect uncertainty in current general economic conditions and a modest increase in unallocated ALL. There was no provision on approximately $5.5 million lines of credit drawn in late December and subsequently repaid on January 4, 2021. Management believes that the provision taken for the year ended December 31, 2020 and 2019, respectively is adequate in view of the present condition of the Bank’s loan portfolio and the sufficiency of collateral supporting non-performing loans. We are continually monitoring non-performing loan relationships and will make provisions, as necessary, if the facts and circumstances change. 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 other factors 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 PLL in the future. See Note 1, “Nature of Business and Summary of Significant Accounting Policies - Allowance for Loan Losses ” of “Notes to Consolidated Financial Statements and Supplementary Data” to this Form 10-K, for further analysis of the provision for loan losses. 33 Non-Interest Income . The following table reflects the various components of non-interest income for 2020 and 2019, respectively. Twelve months ended December 31, Change from prior year 2020 2019 2020 over 2019 Non-interest Income: Service charges on deposit accounts $ 1,832 $ 2,368 (22.64)% Interchange income 2,029 1,735 16.95% Loan servicing income 4,158 2,674 55.50% Gain on sale of loans 6,693 2,462 171.85% Loan fees and service charges 1,383 1,145 20.79% Insurance commission income 475 734 (35.29)% Net gains on investment securities 110 271 (59.41)% Net gain on sale of branch — 2,295 N/M Net gain on sale of acquired business lines 432 — N/M Settlement proceeds 131 — N/M Other 1,205 1,291 (6.66)% Total non-interest income $ 18,448 $ 14,975 23.19% N/M means not meaningful The higher level of non-interest income primarily relates to the full-year impact of F&M on 2020 non-interest income since F&M’s, July 1, 2019 acquisition, unless noted below. Service charges on deposit accounts decreased $536 thousand due to the impact of higher average balances in retail checking accounts. Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination sold volumes. The increase in gain on sale of loans in 2020 is due to higher mortgage loan origination and sale volumes. Net gains on investment securities reflects the 2020 sale of higher premium mortgage-backed securities and the 2019 municipal bond sale discussed in more detail in the balance sheet analysis section. The Company sold the Rochester Hills, Michigan branch in the second quarter of 2019 for a $2.3 million gain, recorded in the gain on sale of branch line item above. In addition to the merger activity increases in other non-interest income, we recorded the receipt of a one-time payment of approximately $0.2 million on a loan charged-off prior to the Company’s acquisition. The net gain on sale of acquired business lines reflects the sale of Wells Insurance Agency in June 2020 at a net gain of $252 thousand and the Bank’s acquired wealth management business partner exercising their contractual call, which originated prior to the acquisition, resulting in the sale of the Bank’s right to receive income from the wealth management business. The Company recognized $131 thousand of non-interest income related to a cash receipt related to a private mortgage-backed security claim. The cash received represents a supplement to the proceeds received in fiscal 2015 from the private mortgage-backed security, previously owned by the Bank and sold in 2011. 34 Non-Interest Expense. The following table reflects the various components of non-interest expense for 2020 and 2019. Twelve months ended December 31, % Change From prior year 2020 2019 2020 over 2019 Non-interest Expense: Compensation and related benefits $ 22,321 $ 20,325 9.82% Occupancy 3,915 3,697 5.90% Office 2,152 2,188 (1.65)% Data processing 4,375 3,938 11.10% Amortization of intangible assets 1,622 1,496 8.42% Mortgage servicing rights expense 3,050 1,108 175.27% Advertising, marketing and public relations 967 1,214 (20.35)% FDIC premium assessment 584 258 126.36% Professional services 1,829 2,457 (25.56)% Gains on repossessed assets, net (259) (125) 107.20% Other 3,117 6,130 (49.15)% Total non-interest expense $ 43,673 43673000 $ 42,686 2.31% Non-interest expense (annualized) / Average assets 2.74 % 3.05 % The higher level of non-interest expense primarily relates to the full-year impact of F&M on 2020 non-interest expense since F&M’s, July 1, 2019 acquisition, unless noted below. Compensation expense increased in 2020 primarily due to the impact of the F&M acquisition and higher variable mortgage production compensation related to higher mortgage loan origination activity, partially offset by lower compensation from the reduction in Bank personnel throughout 2020. Data processing increases were due to higher loan balances and larger deposit balances. Mortgage servicing rights expense increased in 2020 from impairment charges of $1.755 million in 2020 compared to $259 thousand in 2019. This increase is due to the impact of higher actual and forecasted prepayment rates. The remaining increase is due to higher amortization based on the current interest rate environment and a modestly larger servicing book. Advertising, marketing and public relations decreased in 2020 reflecting the Company’s 2019 branding campaign for recently merged bank operations. Overall decreases were partially offset by higher contributions made to the communities in the Bank’s branch footprint to support community needs, due to increased economic pressures faced in 2020. The FDIC premium assessment increased in 2020, as 2019 reflected the FDIC application of the Small Bank Assessment Credits. Professional fees decreased in 2020 largely due to a reduction in merger expenses of $0.5 million. Other non-interest expense decreased in 2020 due to lower merger and branch closure costs in 2020 of $165 thousand, a decrease of $3.1 million from 2019. Income Taxes. Income tax provision was $4.6 million in 2020 compared to $2.8 million for 2019. Tax expense in 2019 was favorably impacted by a Department of Treasury ruling in the fourth quarter of 2019 related to the continued non-taxable nature of certain acquired bank owned life insurance. This resulted in a $0.3 million reduction in tax expense related to certain United Bank acquired bank owned life insurance contracts due to the elimination of previously established deferred tax liability on these contracts. The tax rate rose approximately 1% due to the impact of the 2019 sale of municipal securities. Income tax expense recorded in the accompanying Consolidated Statements of Operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy. We undergo examination by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or the amount of the valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. 35 BALANCE SHEET ANALYSIS Total assets increased $117.8 million to $1.65 billion at December 31, 2020 from $1.53 billion at December 31, 2019. This growth was primarily due to strong deposit growth, which funded the net loan portfolio growth from SBA PPP loans and increase in the Bank’s liquidity position. Cash and Cash Equivalents. Cash and cash equivalents increased from $55.8 million at December 31, 2019 to $119.4 million at December 31, 2020. This increase was due to strong deposit growth, which exceeded loan and security growth. Investment Securities. We manage our securities portfolio to provide liquidity, in an effort to improve interest rate risk, and enhance income. Our investment portfolio is comprised of securities available for sale (AFS) and securities held to maturity (HTM). Securities AFS (recorded at fair value), which represent the majority of our investment portfolio, decreased to $144.2 million at December 31, 2020 compared with $180.1 million at December 31, 2019. This decrease was primarily due to the increased principal repayment and runoff in mortgage-backed certificates, along with a $10.7 million sale of higher premium MBS. Additionally, during 2019, we sold the vast majority of our obligations of state and local government agency (municipal) portfolio. The proceeds from the sale, along with the growth in available for sale securities balances, were largely reinvested in mortgage-backed securities, corporate debt securities and investments in trust preferred securities, resulting in their respective increases. The trust preferred securities reprice based on LIBOR plus a spread, and current issuers of these securities are bank holding companies with assets of $50 billion or more. In 2020, the Bank purchased additional trust preferred securities with similar characteristics as those purchased in 2019. In 2020, the Bank purchased $45 million of HTM securities, consisting largely of U.S agency mortgage-backed securities which offset the decrease in the AFS portfolio and resulted in a modest growth of the net balance of the AFS and HTM portfolios. The amortized cost and market values of our investment securities by asset categories as of the dates indicated below were as follows: Available for sale securities Amortized Cost Fair Value 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 Total available for sale securities $ 142,177 $ 144,233 December 31, 2019 U.S. government agency obligations $ 52,020 $ 51,805 Obligations of states and political subdivisions 281 281 Mortgage-backed securities 70,806 71,331 Corporate debt securities 18,776 18,725 Corporate asset-backed securities 27,718 26,854 Trust preferred securities 11,167 11,123 Total available for sale securities $ 180,768 $ 180,119 36 Held to maturity securities Amortized Cost Fair Value December 31, 2020 Obligations of states and political subdivisions $ 600 $ 602 Mortgage-backed securities 42,951 43,182 Total held to maturity securities $ 43,551 $ 43,784 December 31, 2019 Obligations of states and political subdivisions $ 300 $ 302 Mortgage-backed securities 2,551 2,655 Total held to maturity securities $ 2,851 $ 2,957 The amortized cost and fair values of our investment securities by maturity, as of December 31, 2020 were as follows: Available for sale securities Amortized Cost Estimated Fair Value Due in one year or less $ — $ — Due after one year through five years 3,833 4,095 Due after five years through ten years 44,405 44,880 Due after ten years 54,485 54,267 Total securities with contractual maturities 102,723 103,242 Mortgage-backed securities 39,454 40,991 Total available for sale securities $ 142,177 $ 144,233 Held to maturity securities Amortized Cost Estimated Fair Value Due in one year or less $ — $ — Due after one year through five years 200 200 Due after five years through ten years 400 402 Total securities with contractual maturities 600 602 Mortgage-backed securities 42,951 43,182 Total held to maturity securities $ 43,551 $ 43,784 The amortized cost and fair values of our investment securities by maturity, as of December 31, 2019 were as follows: Available for sale securities Amortized Cost Estimated Fair Value Due in one year or less $ 141 $ 141 Due after one year through five years 5,900 5,959 Due after five years through ten years 43,269 43,180 Due after ten years 60,652 59,508 Total securities with contractual maturities 109,962 108,788 Mortgage-backed securities 70,806 71,331 Total available for sale securities $ 180,768 $ 180,119 Held to maturity securities Amortized Cost Estimated Fair Value Due in one year or less $ 300 $ 302 Total securities with contractual maturities 300 302 Mortgage-backed securities 2,551 2,655 Total held to maturity securities $ 2,851 $ 2,957 37 The following tables show the fair value and gross unrealized losses of securities with unrealized losses, as of the dates indicated below, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position: Less than 12 Months 12 Months or More Total Available for sale securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 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-backed securities — — 24,310 316 24,310 316 Trust preferred securities 5,612 38 — — 5,612 38 Total available for sale securities $ 16,713 $ 82 $ 32,562 $ 451 $ 49,275 $ 533 December 31, 2019 U.S. government agency obligations $ 14,593 $ 156 $ 10,540 $ 191 $ 25,133 $ 347 Mortgage-backed securities 22,537 62 5,883 48 28,420 110 Corporate debt securities 7,001 15 1,398 102 8,399 117 Corporate asset-backed securities 8,683 285 18,171 579 26,854 864 Trust preferred securities 7,420 79 — — 7,420 79 Total available for sale securities $ 60,234 $ 597 $ 35,992 $ 920 $ 96,226 $ 1,517 Less than 12 Months 12 Months or More Total Held to maturity securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2020 Mortgage-backed securities 16,538 34 — — 16,538 34 Total held to maturity securities $ 16,538 $ 34 $ — $ — $ 16,538 $ 34 December 31, 2019 Mortgage-backed securities — — — — — — Total held to maturity securities $ — $ — $ — $ — $ — 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. 38 The composition of our investment securities portfolio by credit rating as of the periods indicated below was as follows: December 31, December 31, 2020 2019 Available for sale securities Amortized Cost Fair Value Amortized Cost Fair Value U.S. government agency $ 72,502 $ 74,356 $ 122,826 $ 123,136 AAA 11,142 11,088 4,383 4,245 AA 25,037 24,879 23,475 22,749 A 8,713 8,925 18,776 18,725 BBB 24,783 24,985 11,167 11,123 Below investment grade — — — — Non-rated — — 141 141 Total available for sale securities $ 142,177 $ 144,233 $ 180,768 $ 180,119 December 31, December 31, 2020 2019 Held to maturity securities Amortized Cost Fair Value Amortized Cost Fair Value U.S. government agency $ 42,951 $ 43,182 $ 2,551 $ 2,655 AAA — — — — AA — — 125 126 A 600 602 — — BBB — — — — Below investment grade — — — — Non-rated — — 175 176 Total $ 43,551 $ 43,784 $ 2,851 $ 2,957 At December 31, 2020, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $0.6 million and mortgage-backed securities with a carrying value of $3.0 million as collateral against specific municipal deposits. At December 31, 2020, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $1.2 million as collateral against a borrowing line of credit with the Federal Reserve Bank of Minneapolis. However, at December 31, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit. At December 31, 2020, the Bank also has mortgage-backed securities with a carrying value of $0.5 million pledged as collateral to the Federal Home Loan Bank of Des Moines. During the year ended December 31, 2020, the Bank sold approximately $10.8 million of fixed rate mortgage-backed certificates with a net realized gain of $156 thousand, which is included in net gains on investment securities in the Consolidated Statements of Operations. During the twelve months ended December 31, 2019, the Bank sold $35.4 million of mortgage-backed securities and obligations of state and political subdivisions with a net realized gain of $142 thousand. Loans. Total loans outstanding, net of deferred loan fees and costs, increased to $1.24 billion at December 31, 2020 from $1.18 billion at December 31, 2019. Gross loans were increased by the net origination of $123.7 million of SBA PPP loans. Reductions in the acquired loan portfolio, including purchase credit impaired loans reductions of $20.3 million, exceeded growth in the Bank’s originated loan portfolio. The reductions in the purchase credit impaired loans also resulted in lower non-performing and substandard loans. In 2020, approximately $5.5 million of the loan growth was due to draws on lines of credit on December 31, 2020, with the proceeds deposited into the customer’s money market account at the Bank, and withdrawn to repay the lines on January 4, 2021. The same customers executed similar transactions at the end of 2019, with the dollar amount being approximately $12.7 million. 39 The following table reflects the composition, or mix, of our loan portfolio at December 31, 2020 and December 31, 2019: December 31, 2020 December 31, 2019 Amount Percent Amount Percent Real Estate Loans: Commercial/agricultural real estate: Commercial real estate $ 507,675 40.9 % $ 514,459 43.6 % Agricultural real estate 68,795 5.6 % 85,363 7.3 % Multi-family real estate 122,152 9.9 % 87,008 7.4 % Construction and land development 98,517 8.0 % 86,410 7.3 % Residential mortgage: Residential mortgage 131,386 10.6 % 176,332 15.0 % Purchased HELOC loans 6,260 0.5 % 8,407 0.7 % Total real estate loans 934,785 75.5 % 957,979 81.3 % C&I/Agricultural operating and Consumer installment loans: C&I/Agricultural operating: Commercial and industrial ("C&I) 116,553 9.4 % 133,734 11.4 % Agricultural operating 32,785 2.6 % 37,780 3.2 % Consumer Installment: Originated indirect paper 25,851 2.1 % 39,585 3.4 % Other Consumer 13,213 1.1 % 18,186 1.5 % Total C&I/Agricultural operating and Consumer installment loans 188,402 15.2 % 229,285 19.5 % Gross loans before SBA PPP loans 1,123,187 90.7 % 1,187,264 100.8 % SBA PPP Loans 123,702 10.0 % — — % Gross loans 1,246,889 100.7 % 1,187,264 100.8 % Unearned net deferred fees and costs and loans in process (4,245) (0.3) % (393) — % Unamortized discount on acquired loans (5,063) (0.4) % (9,491) (0.8) % Total loans (net of unearned income and deferred expense) 1,237,581 100.0 % 1,177,380 100.0 % Allowance for Loan losses (17,043) (10,320) Total loans receivable, net $ 1,220,538 $ 1,167,060 Our loan portfolio is diversified by types of borrowers and industry groups within the market areas that we serve. Significant loan concentrations are considered to exist for a financial entity when the amounts of loans to multiple borrowers engaged in similar activities cause them to be similarly impacted by economic or other conditions. As illustrated above, at December 31, 2020, the largest loan concentration we identified was commercial real estate loans which comprised 41% of our total loan portfolio. Approximately 76% of our total gross loans are secured by real estate. 40 The following table sets forth, as of December 31, 2020 and December 31, 2019 respectively the fixed and adjustable-rate loans in our loan portfolio: December 31, 2020 December 31, 2019 Amount Percent Amount Percent Fixed rate loans: Real estate loans: Commercial/Agricultural real estate $ 347,617 28.1 % $ 397,793 33.8 % Residential mortgage 90,105 7.3 % 124,993 10.6 % Total fixed rate real estate loans 437,722 35.4 % 522,786 44.4 % Non-real estate loans: C&I/Agricultural Operating 237,062 19.2 % 135,264 11.5 % Consumer installment 38,998 3.2 % 57,644 4.9 % Total fixed rate non-real estate loans 276,060 22.3 % 192,908 16.4 % Total fixed rate loans 713,782 57.7 % 715,694 60.8 % Adjustable-rate loans: Real estate loans: Commercial/Agricultural real estate 449,523 36.3 % 375,446 31.9 % Residential mortgage 47,540 3.8 % 59,747 5.1 % Total adjustable-rate real estate loans 497,063 40.2 % 435,193 37.0 % Non-real estate loans: C&I/Agricultural operating 35,978 2.9 % 36,251 3.1 % Consumer installment 66 — % 126 — % Total adjustable-rate non-real estate loans 36,044 2.9 % 36,377 3.1 % Total adjustable-rate loans 533,107 43.1 % 471,570 40.1 % Gross loans 1,246,889 1,187,264 Unearned net deferred fees and costs and loans in process (4,245) (0.3) % (393) — % Unamortized discount on acquired loans (5,063) (0.5) % (9,491) (0.9) % Total loans (net of unearned income) 1,237,581 100.0 % 1,177,380 100.0 % Allowance for loan losses (17,043) (10,320) Total loans receivable, net $ 1,220,538 $ 1,167,060 41 Loan amounts, their contractual maturities and weighted average interest rates at December 31, 2020 are shown below. SBA PPP loans of $123.7 million at an interest rate of 1% are included in the one year to five-year amounts in the C&I/agricultural operating segment. Real estate Non-real estate Commercial/Agricultural real estate Residential mortgage C&I/Agricultural operating Consumer installment Total Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Due in one year or less (1) $ 90,573 4.31 % $ 13,216 4.40 % $ 65,008 3.82 % $ 1,083 8.54 % $ 169,880 4.16 % Due after one year through five years 209,017 4.41 % 23,152 4.91 % 168,185 1.93 % 14,520 5.79 % $ 414,874 3.48 % Due after five years 497,549 4.28 % 101,278 4.71 % 39,847 4.31 % 23,461 5.34 % $ 662,135 4.39 % $ 797,139 4.32 % $ 137,646 4.71 % $ 273,040 2.73 % $ 39,064 5.60 % $ 1,246,889 4.05 % (1) Includes loans having no stated maturity and overdraft loans. Loan amounts, their contractual maturities and interest rates at December 31, 2019 are as follows: Real estate Non-real estate Commercial/Agricultural real estate Residential mortgage C&I/Agricultural operating Consumer installment Total Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Due in one year or less (1) $ 104,682 4.85 % $ 16,601 4.66 % $ 68,139 4.96 % $ 1,828 8.95 % $ 191,250 4.91 % Due after one year through five years 266,395 4.68 % 42,909 5.16 % 64,315 4.59 % 19,280 5.80 % $ 392,899 4.77 % Due after five years 402,162 4.84 % 125,229 4.94 % 39,061 4.30 % 36,663 5.35 % $ 603,115 4.84 % $ 773,239 4.79 % $ 184,739 4.97 % $ 171,515 4.67 % $ 57,771 5.61 % $ 1,187,264 4.78 % (1) Includes loans having no stated maturity and overdraft loans. We believe that the critical factors in the overall management of credit or loan quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, recording an adequate allowance to provide for incurred loan losses, and reasonable non-accrual and charge-off policies. Risk Management and the 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 accompanying Consolidated Statements of Operations as Provision for Loan Losses. See “Statement of Operations Analysis - Provision for Loan Losses ” above. 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 on the affected loan. 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 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 42 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. Changes in the ALL by loan portfolio segment for the periods presented were as follows: Commercial/Agricultural Real Estate C&I/Agricultural Operating Residential Mortgage Consumer Installment Unallocated Total Year ended December 31, 2020: Allowance for Loan Losses: Beginning balance, January 1, 2020 $ 6,205 $ 1,643 $ 879 $ 467 $ 357 $ 9,551 Charge-offs — (932) (5) (145) — (1,082) Recoveries 75 8 7 69 — 159 Provision 3,991 1,393 160 98 549 6,191 Total Allowance on originated loans $ 10,271 $ 2,112 $ 1,041 $ 489 $ 906 $ 14,819 Purchased credit impaired loans — — — — — — Other acquired loans: Beginning balance, January 1, 2020 $ 526 $ 27 $ 163 $ 53 $ — $ 769 Charge-offs — (159) (74) (3) — (236) Recoveries 77 33 15 7 — 132 Provision 1,081 240 231 7 — 1,559 Total allowance on other acquired loans $ 1,684 $ 141 $ 335 $ 64 $ — $ 2,224 Total allowance on acquired loans $ 1,684 $ 141 $ 335 $ 64 $ — $ 2,224 Ending balance, December 31, 2020 $ 11,955 $ 2,253 $ 1,376 $ 553 $ 906 $ 17,043 Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Year ended December 31, 2019: Allowance for Loan Losses: Beginning balance, January 1, 2019 $ 4,019 $ 1,258 $ 1,048 $ 641 $ 153 $ 7,119 Charge-offs (355) — (120) (257) — (732) Recoveries — — — 84 — 84 Provision 2,541 385 (49) (1) 204 3,080 Total Allowance on originated loans $ 6,205 $ 1,643 $ 879 $ 467 $ 357 $ 9,551 Purchased credit impaired loans — — — — — — Other acquired loans: Beginning balance, January 1, 2019 $ 183 $ 32 $ 205 $ 65 $ — $ 485 Charge-offs (26) — (120) (33) — (179) Recoveries 3 — 5 10 — 18 Provision 366 (5) 73 11 — 445 Total Allowance on other acquired loans $ 526 $ 27 $ 163 $ 53 $ — $ 769 Total Allowance on acquired loans $ 526 $ 27 $ 163 $ 53 $ — $ 769 Ending balance, December 31, 2019 $ 6,731 $ 1,670 $ 1,042 $ 520 $ 357 $ 10,320 The specific credit allocation for the ALL is based on a regular analysis of all originated 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 December 31, 2020, the Company had identified impaired loans of $43.4 million, consisting of $18.5 million of 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 43 loans includes $11.7 million of performing TDR loans. At December 31, 2019, the Company had identified impaired loans of $63.2 million, consisting of $12.6 million TDR loans, the carrying amount of purchased credit impaired loans of $32 million and $18.6 million of substandard non-TDR loans. The $63.2 million total of impaired loans includes $5.4 million of performing TDR loans. At December 31, 2020, the allowance for loan losses was $ 17.0 million or 1.38% of total loans compared to $10.3 million or 0.88% of our total loan portfolio at December 31, 2019. This level was based on our analysis of the loan portfolio risk at each of December 31, 2020 and December 31, 2019, as discussed above. The increase in the allowance for loan losses was primarily due to the impact the change in Q-Factor related to qualitative factor increases to reflect uncertainty in current general economic conditions. To a lesser extent, the provision for growth in the originated loan portfolio contributed to the increase in the amount of allowance for loan losses. The percentage of allowance for loan losses was also helped by a decrease in gross acquired loans. The percentage of gross acquired loans to gross loans, excluding SBA PPP loans, decreased to 25% at December 31, 2020 compared to 36% at December 31, 2019. At December 31, 2020, the Bank had $286.2 million in gross acquired loans, which were recorded at fair market value at acquisition. The Bank had $424.7 million in gross acquired loans at December 31, 2019, which were recorded at fair market value at acquisition. Allowance for Loan Losses to Loans, net of SBA PPP Loans December 31, 2020 September 30, 2020 June 30, 2020 December 31, 2019 Loans, end of period $ 1,237,581 $ 1,230,139 $ 1,281,175 $ 1,177,380 SBA PPP loans, net of deferred fees (120,711) (135,177) (132,800) — Loans, net of SBA PPP loans and deferred fees $ 1,116,870 $ 1,094,962 $ 1,148,375 $ 1,177,380 Allowance for loan losses $ 17,043 $ 14,836 $ 13,373 $ 10,320 ALL to loans net of SBA PPP loans and deferred fees 1.53 % 1.35 % 1.16 % 0.88 % ALL to loans, end of period 1.38 % 1.21 % 1.04 % 0.88 % 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 of our ALL 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. 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. Loans 30-89 days or more past due increased $6.7 million at December 31, 2020 compared to December 31, 2019, largely related to increases in commercial real estate and construction and land development loans 30-59 days delinquent. Nonaccrual loans decreased from $19.1 million to $10.7 million at December 31, 2020, primarily due to significant decreases in nonaccrual acquired loans, specifically in acquired commercial/agricultural real estate loans. While agricultural loans make up approximately 8% of the Bank’s loan portfolio, nonaccrual loans secured by agricultural collateral account for 65% or $7.0 million of the Bank’s nonaccrual loans, largely due to loans acquired in bank acquisitions. We believe our credit and underwriting policies continue to support more effective lending decisions by the Bank, which increases the likelihood of maintaining loan quality going forward. Refer to the “Risk Management and the Allowance for Loan Losses” section below for more information related to non-performing loans. For the year ended December 31, 2020, loan charge-offs were $1.318 million compared to $0.911 million for the year ended December 31, 2019, largely due to an increase in commercial and industrial loans. Certain external factors may result in higher future losses but are not readily determinable at this time, including, but not limited to: unemployment rates, increased taxes and continuing increased regulatory expectations with respect to ALL levels. As a result, our analysis may show a need to increase our ALL as a percentage of total loans and nonperforming loans for the near future. Loans charged-off are subject to periodic review and specific efforts are taken to achieve maximum recovery of principal, accrued interest and related expenses on the loans charged off. 44 COVID-19 Loan Modifications. In response to COVID-19, our banking regulator issued an Interagency Statement encouraging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual obligations due to COVID-19. Additionally, Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act is terminated. Section 541 of the Consolidated Appropriations Act, 2021 extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act. In accordance with this guidance, the Bank instituted a plan to offer modifications to impacted borrowers. The Bank continues to work with borrowers as the pandemic persists and is requiring additional support in exchange for additional modifications beyond the original term. As of December 31, 2020, the Bank’s COVID-19 related modifications under Section 4013 of the CARES Act, totaled $61 million, or 5% of gross loans versus $126.7 million, or 10% of gross loans at September 30, 2020, and $197.3 million, or 15% of gross loans at June 30, 2020. At December 31, 2020, hotel industry sector loans represented $51.6 million of the approved deferrals. The Bank has approximately $2.4 million of total payment deferrals expiring in the first quarter of 2021. Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We employ early identification of non-accrual and problem loans in order to minimize the risk of loss. Non-performing loans are defined as either 90 days or more past due or non-accrual. The accrual of interest income 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 ended consumer installment loans past due 120 days or more; and • Residential mortgage 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 recorded as interest income. Restructuring a loan 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. Restructured 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. Restructured loans that comply with the restructured terms are considered performing loans. 45 The following table identifies the various components of non-performing assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended: December 31, 2020 and twelve months ended December 31, 2019 and twelve months ended Nonperforming assets: Nonaccrual loans Commercial real estate $ 827 $ 5,705 Agricultural real estate 5,084 7,568 Commercial and industrial (“C&I”) 357 1,850 Agricultural operating 1,872 1,702 Residential mortgage 2,451 2,063 Consumer installment 156 168 Total nonaccrual loans $ 10,747 $ 19,056 Accruing loans past due 90 days or more 586 1,104 Total nonperforming loans (“NPLs”) 11,333 20,160 Other real estate owned 156 1,429 Other collateral owned 41 31 Total nonperforming assets (“NPAs”) $ 11,530 $ 21,620 Troubled Debt Restructurings (“TDRs”) $ 18,477 $ 12,594 Nonaccrual TDRs $ 6,735 $ 7,198 Average outstanding loan balance $ 1,234,732 $ 1,074,952 Loans, end of period $ 1,237,581 $ 1,177,380 Total assets, end of period $ 1,649,095 $ 1,531,249 ALL, at beginning of period $ 10,320 $ 7,604 Loans charged off: Commercial/Agricultural real estate — (381) C&I/Agricultural operating (1,091) — Residential mortgage (78) (239) Consumer installment (149) (291) Total loans charged off (1,318) (911) Recoveries of loans previously charged off: Commercial/Agricultural real estate 150 3 C&I/Agricultural operating 44 1 Residential mortgage 20 5 Consumer installment 77 93 Total recoveries of loans previously charged off: 291 102 Net loans charged off (“NCOs”) (1,027) (809) Additions to ALL via provision for loan losses charged to operations 7,750 3,525 ALL, at end of period $ 17,043 $ 10,320 Ratios: ALL to NCOs (annualized) 1,659.49 % 1,275.65 % NCOs (annualized) to average loans 0.08 % 0.08 % ALL to total loans 1.38 % 0.88 % NPLs to total loans 0.92 % 1.71 % NPAs to total assets 0.70 % 1.41 % 46 The following table shows the detail of non-performing assets by originated and acquired portfolios. Nonperforming Originated and Acquired Assets December 31, 2020 and Three Months Ended September 30, 2020 and Three Months Ended June 30, 2020 and Three Months Ended December 31, 2019 and Three Months Ended Nonperforming assets: Originated nonperforming assets: Nonaccrual loans $ 3,649 $ 3,255 $ 3,951 $ 4,285 Accruing loans past due 90 days or more 415 698 1,455 946 Total originated nonperforming loans (“NPL”) 4,064 3,953 5,406 5,231 Other real estate owned (“OREO”) 63 352 270 441 Other collateral owned 41 56 42 28 Total originated nonperforming assets (“NPAs”) $ 4,168 $ 4,361 $ 5,718 $ 5,700 Acquired nonperforming assets: Nonaccrual loans $ 7,098 $ 9,899 $ 10,836 $ 14,771 Accruing loans past due 90 days or more 171 252 425 158 Total acquired nonperforming loans (“NPL”) 7,269 10,151 11,261 14,929 Other real estate owned (“OREO”) 93 404 422 988 Other collateral owned — — — 3 Total acquired nonperforming assets (“NPAs”) $ 7,362 $ 10,555 $ 11,683 $ 15,920 Total nonperforming assets (“NPAs”) $ 11,530 $ 14,916 $ 17,401 $ 21,620 Loans, end of period $ 1,237,581 $ 1,230,139 $ 1,281,175 $ 1,177,380 Total assets, end of period $ 1,649,095 $ 1,622,593 $ 1,607,514 $ 1,531,249 Ratios: Originated NPLs to total loans 0.33 % 0.32 % 0.42 % 0.44 % Acquired NPLs to total loans 0.59 % 0.83 % 0.88 % 1.27 % Originated NPAs to total assets 0.25 % 0.27 % 0.36 % 0.37 % Acquired NPAs to total assets 0.45 % 0.65 % 0.73 % 1.04 % Non-performing assets include non-performing loans, other real estate owned and other collateral owned. Our non-performing assets were $11.5 million, or 0.70% of total assets, at December 31, 2020 compared to $21.6 million, or 1.41% of total assets, at December 31, 2019. The decrease was largely due to reductions in acquired nonperforming loans. Nonaccrual Loans Roll forward Quarter Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Balance, beginning of period $ 13,154 $ 14,787 $ 16,090 $ 19,056 $ 19,022 Additions 912 716 1,907 1,811 2,641 Acquired nonaccrual loans — — — — — Charge offs (2) (141) (175) (452) (198) Transfers to OREO — (172) — (1,100) (425) Return to accrual status — (165) (1,702) (120) (14) Payments received (3,317) (1,744) (1,292) (2,887) (1,957) Other, net — (127) (41) (218) (13) Balance, end of period $ 10,747 $ 13,154 $ 14,787 $ 16,090 $ 19,056 47 The table below shows the quarterly totals of accruing troubled debt restructurings since December 31, 2019. The increase in troubled debt restructuring in 2020 was largely due to one commercial real estate and one C&I loan to one borrower that have collateral positions such that no impaired reserves were required on these loans. Troubled Debt Restructurings in Accrual Status December 31, 2020 September 30, 2020 June 30, 2020 December 31, 2019 Number of Modifications Recorded Investment Number of Modifications Recorded Investment Number of Modifications Recorded Investment Number of Modifications Recorded Investment Troubled debt restructurings: Accrual Status Commercial/Agricultural real estate 16 $ 4,695 19 $ 5,480 19 $ 1,885 14 $ 1,730 C&I/Agricultural Operating 4 3,836 5 3,868 5 1,199 2 366 Residential mortgage 43 3,162 42 3,178 39 2,981 40 3,233 Consumer installment 8 49 7 53 8 62 7 67 Total loans 71 $ 11,742 73 $ 12,579 71 $ 6,127 63 $ 5,396 The table below shows the quarter-end totals of special mention, substandard and the total of these, known as criticized loans. The decrease in criticized loans in 2020 was largely due to decreases in acquired nonperforming and other substandard loans. December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Special mention loan balances $ 6,672 $ 7,777 $ 19,958 $ 19,387 $ 10,856 Substandard loan balances 28,541 32,922 35,911 38,393 39,892 Criticized loans, end of period $ 35,213 $ 40,699 $ 55,869 $ 57,780 $ 50,748 Acquired loans represent much of the reduction in non-performing loans and classified loans. The table below shows the changes in the Bank’s non-accretable difference on purchased credit impaired loans. The Bank has transferred the non-accretable difference on purchased credit impaired loans to accretable discount as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions. This transferred non-accretable difference to accretable discount is accreted over the remaining maturity of the loan or until payoff, whichever is shorter. Non-accretable difference: Quarter Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Non-accretable difference, beginning of period $ 1,661 $ 3,355 $ 4,327 $ 6,290 $ 6,737 Additions to non-accretable difference for acquired purchased credit impaired loans — — — — (170) Non-accretable difference realized as interest from payoffs of purchased credit impaired loans (324) (130) (196) (1,043) (271) Transfers from non-accretable difference to accretable discount. (50) (1,294) (741) (669) — Non-accretable difference used to reduce loan principal balance (200) (270) (35) — — Non-accretable difference transferred to OREO due to loan foreclosure — — — (251) (6) Non-accretable difference, end of period $ 1,087 $ 1,661 $ 3,355 $ 4,327 $ 6,290 Mortgage Servicing Rights . The Company continues to sell loans to investors in the secondary market and generally retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value by a third party; 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 48 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 decreased to $3.3 million at December 31, 2020 from $4.3 million at December 31, 2019. This decrease was primarily due to $1.8 million of impairment recorded in 2020 on the MSR impairment for a total impairment of $2.0 million at December 31, 2020, increased amortization, and was partially offset by additions from originations. The unpaid balances of one- to four-family residential real estate loans serviced for others as of December 31, 2020 and December 31, 2019 were $553.7 million and $524.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at December 31, 2020 and December 31, 2019 was 0.59% and 0.82%, respectively. Intangible Assets. We have intangible assets of $5.5 million at December 31, 2020 compared to $7.6 million at December 31, 2019. The intangible assets are comprised of core deposit intangible assets arising from various acquisitions from 2016 through 2019 and, until its sale in June 2020, the premium on the Wells Insurance Agency customer relationships. In 2020, Wells Insurance Agency was sold, and the related intangible related to customer relationships of $0.5 million was eliminated and reflected in the net gain on sale of the agency. Amortization of these intangibles was $1.6 million in 2020. Deposits. Deposits are our largest source of funds. Total deposits increased to $1.30 billion at December 31, 2020 from $1.20 billion at December 31, 2019. The increase in deposits, largely attributable to the growth in non-maturity deposits, allowed the Company to reduce reliance on higher cost brokered and institutional deposits. The brokered and institutional deposits decreased to $2.8 million at December 31, 2020 from $54.4 million at December 31, 2019. In addition, retail certificates of deposits decreased by $35.6 million as the Company chose not to match higher rates offered by local retail certificate of deposit competitors. Non-maturity deposit growth included the impact of December 31, 2020 draws on lines of credit of $5.5 million deposited in the customers money market accounts, which were withdrawn on January 4, 2021 and repaid the draw on lines of credit. This is compared to $12.7 million of December 31, 2019 draws on lines of credit, taken on December 31, 2019, with the proceeds deposited into the customer’s money market accounts and subsequently repaid on January 2, 2020. The following is a summary of deposits by type at December 31, 2020 and December 31, 2019, respectively: December 31, 2020 December 31, 2019 Non interest bearing demand deposits $ 238,348 $ 168,157 Interest bearing demand deposits 301,764 223,102 Savings accounts 196,348 156,599 Money market accounts 245,549 246,430 Certificate accounts 313,247 401,414 Total deposits $ 1,295,256 $ 1,195,702 Brokered deposits included above: $ 2,516 $ 50,377 49 Federal Home Loan Bank (FHLB) advances and other borrowings. A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at December 31, 2020 and December 31, 2019 is as follows: December 31, 2020 2019 Stated Maturity Amount Range of Stated Rates Amount Range of Stated Rates Federal Home Loan Bank advances (1), (2), (3), (4), (5) 2020 $ — — % — % $ 69,000 1.67 % 2.05 % 2021 8,000 0.00 % 2.16 % 4,000 1.85 % 2.16 % 2022 15,000 2.34 % 2.45 % 15,000 2.34 % 2.45 % 2023 20,000 1.43 % 1.44 % — — % — % 2024 20,530 0.00 % 1.45 % 530 0.00 % 0.00 % 2025 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 % — — % — % Subtotal $ 123,530 $ 131,030 Unamortized discount on acquired notes (32) (59) Federal Home Loan Bank advances, net $ 123,498 $ 130,971 Other borrowings: Senior notes (6) 2031 $ 28,856 3.25 % 3.50 % $ 28,856 4.00 % 4.75 % Subordinated notes (7) 2027 $ 15,000 6.75 % 6.75 % $ 15,000 6.75 % 6.75 % 2030 15,000 6.00 % 6.00 % $ 30,000 Unamortized debt issuance costs (528) (296) Total other borrowings $ 58,328 $ 43,560 Totals $ 181,826 $ 174,531 (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 $723,862 and $792,909 at December 31, 2020 and 2019, respectively. At December 31, 2020, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $118,391 compared to $203,935 as of December 31, 2019. This decrease was largely due to a change in the classification of the Bank based on asset size, which resulted in several asset classes no longer qualifying for collateral. (2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $162,530 and $151,530, during the twelve months ended December 31, 2020 and December 31, 2019, respectively. (3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2020 and December 31, 2019 were 0.50% and 1.74%, respectively. (4) Five of the FHLB notes with remaining balances totaling $8,530, were acquired as a result of the F&M acquisition. These notes mature on various dates through 2024 with a weighted average rate of 2.05% and weighted average maturity of 13 months. (5) 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. (6) 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. The only change terms were a reduction in the floor rate. 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. 50 (7) 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 (FHLB) advances and other borrowings We utilize advances and other borrowings, as necessary, to supplement core deposits to meet our funding and liquidity needs and we evaluate all options for funding securities. FHLB advances decreased to $123.5 million at December 31, 2020 from $131.0 million at December 31, 2019. During 2020, the Bank replaced short-term advances with new longer-term advances. The Bank entered into $45 million of advances with maturities between 2023 and 2025 with average interest rates of 1.44%. Additionally, in 2020 we entered into $12.5 million of advances with a ten-year maturity, callable quarterly by the FHLB with interest rates ranging from 0.52% to 0.86%. This increased the advances callable quarterly by the FHLB to $55 million with maturities in 2029 and 2030. At December 31, 2020, the Bank had $123.7 million of borrowing capacity under the Federal Reserve SBA PPP Liquidity Facility, which the Federal Reserve established in 2020. Stockholders’ Equity. Total stockholders’ equity was $160.6 million at December 31, 2020 compared to $150.6 million at December 31, 2019. In December 2020, the Company’s Board of Directors authorized a 5% stock buyback program or approximately 557,000 share buyback authorization. The Company previously had a stock buyback program in existence at January 1, 2020 which was suspended in March 2020 and terminated in July of 2020. The Company’s net income of $12.7 million was partially offset by the payment in February 2020 of a shareholder annual dividend of $0.21 per share and the 2020 repurchase of approximately 253,400 shares at a weighted average price of $11.13 per share. Under the December 2020 stock buyback program, the Company purchased approximately 98,000 shares in December 2020, and is authorized to repurchase up to approximately 459,000 additional shares. Liquidity and Asset / Liability Management. Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors’ needs, and meet other financial obligations as they become due without undue cost, risk or disruption to normal operating activities. We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk. A key metric we monitor is our liquidity ratio, calculated as cash and investments with maturities less than one-year divided by deposits with maturities less than or equal to one-year. At December 31, 2020, our liquidity ratio increased to 16.53 percent from 11.16 percent at December 31, 2019. Our primary sources of funds are: deposits; amortization, prepayments and maturities of outstanding loans; other short-term investments; and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. 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 greatly influenced by general interest rates, economic conditions and competition. Although $206.7 million of our $313.2 million (66%) CD portfolio 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 and branch closures, our retention rate decreased in 2020 and may remain at this lower level in 2021 based on management’s current pricing strategy, which reflects the Bank’s current strong liquidity position. 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. Based on interest rates on scheduled maturities and lower current market interest rates, this should also improve our cost of funds. We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, and our 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, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. Currently, we have approximately $118.4 million available to borrow under this 51 arrangement, supported by loan collateral as of December 31, 2020. At December 31, 2020, the Bank had $123.7 million of borrowing capacity under the Federal Reserve SAB PPP Liquidity Facility. We also maintain lines of credit of $1.2 million with the Federal Reserve Bank and $15.0 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan. In addition, the Company maintains a $5.0 million revolving line of credit which is available as needed for general liquidity purposes. While the Bank does not have formal brokered certificate lines of credit with counter parties at December 31, 2020, we believe that the Bank could access this market, which provides an additional potential source of liquidity. See Note 10, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K, for further detail. In reviewing the adequacy of our 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 Arrangements . In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. 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 December 31, 2020, the Company had approximately $247.3 million in unused commitments, compared to approximately $243.6 million in unused commitments as of December 31, 2019. See Note 12, “Commitments and Contingencies”; “Financial Instruments with Off-Balance Sheet Risk” of “Notes to Consolidated Financial Statements” which are included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K, for further detail. Capital Resources. As of the dates indicated below, our Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions for the Bank. 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 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 % As of December 31, 2019 Total capital (to risk weighted assets) $ 160,302 13.1 % $ 98,174 > = 8.0 % $ 122,718 > = 10.0 % Tier 1 capital (to risk weighted assets) 149,982 12.2 % 73,631 > = 6.0 % 98,174 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 149,982 12.2 % 55,223 > = 4.5 % 79,767 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 149,982 10.4 % 57,834 > = 4.0 % 72,293 > = 5.0 % At December 31, 2020, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator. 52 Below are the amounts and ratios for our capital levels as of the dates noted below for the Company. Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2020 Total capital (to risk weighted assets) $ 166,703 14.3 % $ 93,381 > = 8.0 % N/A N/A Tier 1 capital (to risk weighted assets) 122,082 10.5 % 70,035 > = 6.0 % N/A N/A Common equity tier 1 capital (to risk weighted assets) 122,082 10.5 % 52,527 > = 4.5 % N/A N/A Tier 1 leverage ratio (to adjusted total assets) 122,082 7.7 % 63,718 > = 4.0 % N/A N/A As of December 31, 2019 Total capital (to risk weighted assets) $ 137,259 11.2 % $ 98,174 > = 8.0 % $ 122,718 > = 10.0 % Tier 1 capital (to risk weighted assets) 111,939 9.1 % 73,631 > = 6.0 % 98,174 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 111,939 9.1 % 55,223 > = 4.5 % 79,767 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 111,939 7.7 % 57,834 > = 4.0 % 72,293 > = 5.0 % 53 Selected Quarterly Financial Data The following is selected financial data summarizing the results of operations for each quarter as of the periods indicated below: Year ended December 31, 2020: March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Interest income $ 16,908 $ 15,886 $ 15,218 $ 16,515 Interest expense 4,237 3,583 3,309 3,143 Net interest income 12,671 12,303 11,909 13,372 Provision for loan losses 2,000 1,750 1,500 2,500 Net interest income after provision for loan losses 10,671 10,553 10,409 10,872 Non-interest income 3,603 5,013 5,062 4,770 Non-interest expense 10,731 11,392 10,724 10,826 Income before income tax expense 3,543 4,174 4,747 4,816 Provision (benefit) for income tax 937 1,105 1,267 1,246 Net income $ 2,606 $ 3,069 $ 3,480 $ 3,570 Basic earnings per share $ 0.23 $ 0.28 $ 0.31 $ 0.32 Diluted earnings per share $ 0.23 $ 0.28 $ 0.31 $ 0.32 Dividends paid $ 0.21 $ — $ — $ — Year ended December 31, 2019: March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 Interest income $ 13,718 $ 14,336 $ 16,223 $ 16,146 Interest expense 3,656 4,253 4,630 4,371 Net interest income 10,062 10,083 11,593 11,775 Provision for loan losses 1,225 325 575 1,400 Net interest income after provision for loan losses 8,837 9,758 11,018 10,375 Non-interest income 2,332 5,238 3,621 3,784 Non-interest expense 9,894 9,389 12,975 10,428 Income before income tax expense 1,275 5,607 1,664 3,731 Provision (benefit) for income tax 322 1,500 430 562 Net income $ 953 $ 4,107 $ 1,234 $ 3,169 Basic earnings per share $ 0.09 $ 0.37 $ 0.11 $ 0.28 Diluted earnings per share $ 0.09 $ 0.37 $ 0.11 $ 0.28 Dividends paid $ 0.20 $ — $ — $ —