What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-06 · 214 added, 255 removed, 466 unchanged (50% of the section changed)

5 unchanged sentences

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, 2019, filed with the SEC on March 10, 2020 (“2019 10-K”), the matters described in “Risk Factors” in Item 1A of our Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and in Item 1A of this Form 10-Q, and the following:

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;

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• 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;

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• our inability to obtain needed liquidity;

• risks related to the ongoing integration of F&M into the Company’s operations;

• our ability to successfully execute our acquisition growth strategy;

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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.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2020, and our consolidated results of operations for the three and nine months ended September 30, 2020, compared to the same period in the prior fiscal year for the three and nine months ended September 30, 2019.

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.

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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 and any acquired intangible asset with an indefinite useful economic life, but reviews them 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 September 30, 2020 which is related to its banking activities.

The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2019.

The Company performed a goodwill impairment analysis as of September 30, 2020, due to triggering events being identified, and determined that goodwill was not 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

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.

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We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements.

As of September 30, 2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

As of March 31, 2021, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

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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 and nine-month periods ended September 30, 2020 and September 30, 2019, respectively.

Net interest income was $11.9 million for the three months ended September 30, 2020 and $36.9 million for the nine months ended September 30, 2020, compared to $11.6 million for the three months ended September 30, 2019 and $31.7 million of the nine months ended September 30, 2019.

For the three months ended September 30, 2020, net interest income benefited from the origination of $139 million of SBA Paycheck Protection Program (“PPP”) loans and organic loan growth partially offset by a decrease in net interest margin percentage.

The net interest margin for the three-month period ended September 30, 2020 was 3.11%, compared to 3.34% for the three-month period ended September, 2019.

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 12 days and (2) market reactions to decreasing longer-term interest rates on loans, investments and cash and cash equivalents security yields;

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 impact of higher cash and cash equivalents balances decreased the interest margin percentage by two basis points as the rate impact is covered above.

Higher non-accretable difference accretion of two basis points offset the negative impact of higher cash balances above.

The net interest margin for the nine-months ended September 30, 2020 was 3.36%, compared to 3.35% for the nine-month period ended September 30, 2019.

The modest increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts, which increased net interest margin by 11 basis points.

Other factors affecting the net interest margin for the nine month periods of 2020 to 2019 are similar to those discussed above, with a two basis point decrease in net interest margin due to the impact of higher cash and cash equivalent balances as the rate impact is discussed above.

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 and nine-month periods ended September 30, 2020, and for the three and nine-month periods ended September 30, 2019.

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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(Dollar amounts in thousands)

Three months ended September 30, 2020 compared to the three months ended September 30, 2019:

Three months ended September 30, 2020 Three months ended September 30, 2019

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 77,774 $ 18 0.09 % $ 32,376 $ 203 2.49 %

Loans 1,258,224 14,154 4.48 % 1,143,252 14,646 5.08 %

Interest-bearing deposits 3,752 23 2.44 % 5,577 34 2.42 %

Investment securities (1) 166,622 846 2.02 % 185,921 1,174 2.56 %

Other investments 15,145 177 4.65 % 13,072 166 5.04 %

Total interest earning assets (1) $ 1,521,517 $ 15,218 3.98 % $ 1,380,198 $ 16,223 4.67 %

Average interest-bearing liabilities:

Savings accounts $ 183,381 $ 98 0.21 % $ 158,967 $ 155 0.39 %

Demand deposits 285,993 231 0.32 % 219,955 550 0.99 %

Money market 255,160 280 0.44 % 200,647 593 1.17 %

CD’s 297,691 1,469 1.96 % 381,331 1,870 1.95 %

IRA’s 41,852 177 1.68 % 44,184 203 1.82 %

Total deposits $ 1,064,077 $ 2,255 0.84 % $ 1,005,084 $ 3,371 1.33 %

FHLB Advances and other borrowings 173,758 1,054 2.41 % 169,908 1,259 2.94 %

Total interest-bearing liabilities $ 1,237,835 $ 3,309 1.06 % $ 1,174,992 $ 4,630 1.56 %

Net interest income $ 11,909 $ 11,593

Interest rate spread 2.92 % 3.11 %

Net interest margin (1) 3.11 % 3.34 %

Average interest earning assets to average interest-bearing liabilities 1.23 1.17

(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 September 30, 2020 and September 30, 2019.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $27 thousand for the three months ended September 30, 2020 and September 30, 2019, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:

Nine months ended September 30, 2020 Nine months ended September 30, 2019

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

Balance Interest

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(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 nine months ended September 30, 2020 and September 30, 2019.

The FTE adjustment to net interest income included in the rate calculations totaled $1 thousand and $103 thousand for the nine months ended September 30, 2020 and September 30, 2019, respectively.

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.

Rate/Volume Analysis.

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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).

(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 September 30, 2020, compared to the three months ended September 30, 2019, the loan volume increase is primarily due to SBA PPP originations, and the impact of organic growth since October 1, 2019.

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.

Volume change factors for the nine month period are similar to the three month period, along with the impact of having nine months of F&M balances in 2020 compared to only three months in the comparable 2019 period, as the F&M acquisition closed July 1, 2019.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ 181 $ (366) $ (185)

Loans 1,393 (1,885) (492)

Interest-bearing deposits (11) — (11)

Investment securities (115) (213) (328)

Other investments 25 (14) 11

Total interest earning assets 1,473 (2,478) (1,005)

Interest expense:

Savings accounts 21 (78) (57)

Demand deposits 136 (455) (319)

Money market accounts 135 (448) (313)

CD’s (413) 12 (401)

IRA’s (10) (16) (26)

Total deposits (131) (985) (1,116)

FHLB Advances and other borrowings 28 (233) (205)

Total interest bearing liabilities (103) (1,218) (1,321)

Net interest income $ 1,576 $ (1,260) $ 316

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

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

Increase (decrease) due to

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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 and nine months ended September 30, 2020 was $1,500 and $5,250, respectively.

The provision for loan losses was impacted by loan growth, net loan charge offs, 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.

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.

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Non-interest Income .

The following table reflects the various components of non-interest income for the three and nine month periods ended September 30, 2020 and 2019, respectively.

Three months ended September 30, Nine months ended September 30,

2020 2019 % Change 2020 2019 % Change

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:

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Net gains on investment securities 235 73 221.92 %

Net gain on sale of branch — — N/M — 2,295 N/M

Net gain on sale of acquired business lines 180 — N/M 432 — N/M

Settlement proceeds — — N/M 131 — N/M

Other 247 285 (13.33) %

Total non-interest income $ 4,176 $ 3,603 15.90 %

The growth in most line items, for the nine months ended September 30, are due to the impact of the F&M acquisition on July 1, 2019.

Service charges on deposit accounts decreased to $431 and $1,336 for the three and nine months ended September 30, 2020, from $625 and $1,756 in the comparable prior year periods.

This decrease was due to lower retail customer activity and due to higher balances of retail checking accounts, primarily in the three months ended September 30, 2020.

Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination fees in both the current three and nine-month periods.

Gain on sale of loans increased in both the current three and nine-month periods due to higher mortgage loan origination sold volumes.

The change in loan fees and service charges for the three and nine months ended September 30, 2020, is largely due to changes in commercial loan customer activity, which was significantly higher in the first quarter of 2020

The Company recognized a gain on sale of its Michigan branch of $2,295 in the second quarter of 2019.

In the quarter ended September 30, 2020, the Bank’s acquired wealth management business partner exercised their contractual call originated prior to the acquisition, resulting in the sale of the wealth management business.

The sale resulted in a $180 gain, Also, the Company sold the Wells Insurance Agency in June 2020, realizing a net gain of $252.

During the quarter ended June 30, 2020, the Company recognized $131 of non-interest income related to a private mortgage-backed security claim.

This distribution represents a supplement to the proceeds received in March 2017 from this private mortgage-backed security, previously owned by the Bank, and sold in 2011.

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”).

Non-interest Expense.

The following table reflects the various components of non-interest expense for the three and nine month periods ended September 30, 2020 and 2019, respectively.

Three months ended September 30, Nine months ended September 30,

2020 2019 % Change 2020 2019 % Change

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:

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Occupancy 1,316 1,374 (4.22) %

Office 532 599 (11.19) % 1,650 1,649 0.06 %

Data processing 1,342 1,192 12.58 %

Amortization of intangible assets 399 412 (3.16) %

Mortgage servicing rights expense 603 325 85.54 % 2,330 822 183.45 %

Mortgage servicing rights expense, net (450) 736 (161.14) %

Advertising, marketing and public relations 163 239 (31.80) %

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Non-interest expense (annualized) / Average assets 2.29 % 2.85 % (19.72) %

The growth in most line items for the nine months September 30 are due to the impact of the F&M acquisition on July 1, 2019.

Compensation expense, for the nine-month period ended September 30, 2020 was higher than the comparable prior year period due primarily to the impact of the F&M acquisition, and to a lesser extent, higher variable mortgage production compensation related to higher mortgage loan origination activity, primarily in the second and third quarter of 2020.

Compensation expense for three months ended September 30, 2020 compared to September 30, 2019 was higher largely due to higher variable mortgage production compensation related to higher mortgage loan activity.

Data processing expense increases were due primarily to higher loan origination activity and larger deposit balances.

Mortgage servicing rights expense increased during the three and nine months ended September 30, 2020 by $278 and $1,508 respectively, compared to the comparable prior year periods.

The Company recognized related impairment charges of $250 and $1,422 respectively in the three and nine-month periods ended September 30, 2020 compared to $100 and $210 for the three and nine months ended September 30, 2019, largely 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.

Professional services expenses were lower during the three months ended September 30, 2020 compared to the prior period due to merger costs in third quarter 2019.

For the nine months ended September 30, 2020 compared to the comparable prior year periods, professional service expenses were lower primarily due to lower audit costs and third quarter 2019 acquisition costs.

Higher 2019 audit costs were largely due to the transition period audit required due to the change in the Company’s fiscal year-end.

Other expenses for the three and nine-month period ended September 30, 2020 decreased compared to September 30, 2019, largely due to lower merger-related expenses.

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 $1,267 and $3,309 for the three and nine months ended September 30, 2020 compared to $430 and $2,252 for the three and nine months ended September 30, 2019.

The impact of higher non-taxable municipal income in 2019 was offset by higher non-deductible merger costs, netting to approximately the same effective tax rates in both periods.

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 $115.5 million at September 30, 2020 from $55.8 million at December 31, 2019.

Deposit levels remain robust, while the Bank experienced loan growth primarily due to SBA PPP loan originations and chose to modestly shrink the investment portfolio due to current low yielding investment options.

As such, the Company has chosen to maintain a higher level of liquidity.

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.

Investment Securities.

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Our investment portfolio is comprised of securities available for sale and securities held to maturity.

In the first quarter, the Bank sold approximately $10.7 million of fixed-rate mortgage-backed certificates, (“MBS”) and these were replaced with similar, lower premium MBS.

Securities available for sale, which represent the majority of our investment portfolio, were $150.9 million at September 30, 2020, compared with $180.1 million at December 31, 2019.

The reduction in the AFS portfolio is due to maturities and calls of U.S government agency obligations.

The maturities and calls in the corporate asset-based securities in 2020 were replaced with bank holding company issued subordinated debt of which the Bank purchased $7.3 million in the third quarter.

Securities held to maturity increased to $16.9 million at September 30, 2020, compared to $2.9 million at December 31, 2019.

This increase was due to the purchase of agency mortgage-backed securities in the first quarter and third quarter of 2020.

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:

Securities available for sale Amortized

September 30, 2020

Available for sale securities Amortized

March 31, 2021

government agency obligations $ 31,474 $ 31,712

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Corporate debt securities 27,752 27,913

Corporate asset-based securities 36,443 35,543

Corporate asset-backed securities 35,664 35,709

Trust preferred securities 17,298 17,630

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Corporate debt securities 17,199 17,462

Corporate asset-based securities 27,718 26,854

Corporate asset-backed securities 36,039 35,827

Trust preferred securities 16,297 16,448

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

Securities held to maturity Amortized

September 30, 2020

Held to maturity securities Amortized

March 31, 2021

government agency obligations $ 3,500 $ 3,483

Obligations of states and political subdivisions 4,600 4,593

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Available for sale securities Amortized

Value Amortized

Agency $ 83,929 $ 86,135 $ 122,826 $ 123,136

government agency $ 102,922 $ 103,769 $ 72,502 $ 74,356

AAA 11,101 11,134 11,142 11,088

5 unchanged sentences

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

September 30, 2020 December 31, 2019

Securities held to maturity Amortized

March 31, 2021 December 31, 2020

Held to maturity securities Amortized

Value Amortized

3 unchanged sentences

Total $ 57,419 $ 55,786 $ 43,551 $ 43,784

At September 30, 2020, securities with a market value of $1.3 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis.

As of September 30, 2020, this line of credit had a zero-outstanding balance.

At September 30, 2020, the Bank has pledged mortgage-backed securities with a market value of $3.9 million and U.S.

government agency securities with a market value of $0.6 million as collateral against municipal deposits.

At September 30, 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.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $53 million, to $1.23 billion as of September 30, 2020, from $1.18 billion at December 31, 2019.

This growth was due to the impact of the growth in the SBA PPP origination of $139.2 million, partially offset by the net remaining deferred origination fees of $4.0 million.

This growth was partially offset by a reduction in acquired commercial loans and originated loan portfolio.

In addition, residential mortgage loans and indirect consumer loans of $36.4 million and $11.0 million, respectively, decreased.

The following table reflects the composition, or mix of our loan portfolio at September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

Amount Amount

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

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:

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Total loans receivable, net $ 1,175,266 $ 1,220,538

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

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.

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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.

believe that any modifications or changes to the ALL methodology would be to enhance the ALL.

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.

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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 September 30, 2020, the Company had identified impaired loans of $51.7 million, consisting of $19.8 million TDR loans, the carrying amount of purchased credit impaired loans of $23.4 million and $8.5 million of substandard non-TDR loans.

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.

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The $43.4 million total of impaired loans includes $11.7 million of performing TDR loans.

At September 30, 2020 and December 31, 2019, we had 342 and 389 such impaired loans, respectively, all secured by real estate or personal property.

Of the impaired loans, there were 19 individual loans where estimated fair value was less than their book value (i.e.

we deemed impairment to exist) totaling $5.3 million for which $1.2 million in specific ALL was recorded as of September 30, 2020.

The allowance for loan and losses increased to $14.8 million at September 30, 2020 representing 1.21% of loans receivable, less the 100% SBA guaranteed PPP loans.

A significant portion of the current loan portfolio includes loans 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 $10.3 million at December 31, 2019, representing 0.88% of loans receivable.

The increase in the allowance was due to loan growth, 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.

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

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)

September 30,

2020 June 30,

2020 December 31,

2019 September 30, 2019

2021 Decmber 31, 2020

Loans, end of period $ 1,192,126 $ 1,237,581

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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:

September 30, 2020 and Nine Months Then Ended December 31, 2019 and Twelve Months Then Ended

March 31, 2021 and Three Months Then Ended December 31, 2020 and Twelve Months Then Ended

Nonperforming assets:

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(in thousands, except ratios)

September 30, 2020 and Three Months Ended December 31, 2019 and Three Months Ended September 30, 2019 and Three Months Ended

March 31, 2021 December 31, 2020

Nonperforming assets:

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Acquired NPAs to total assets 0.38 % 0.45 %

Nonperforming assets decreased by $6.7 million to $14.9 million at September 30, 2020 from December 31, 2019.

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.

Part of this reduction, included the return to accrual status of nonaccrual acquired loans totaling $1.7 million in the second quarter of 2020, based on their current payment status and history and in accordance with the Bank’s policy.

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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Quarter Ended

September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

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

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Balance, end of period $ 8,678 $ 10,747 $ 13,154 $ 14,787 $ 16,090

Nonaccrual TDR loans remained at $7.2 million at both September 30, 2020 and December 31, 2019.

September 30, 2020 December 31, 2019 September 30, 2019

Modifications Recorded

Investment Number of

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

Modifications Recorded

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Total loans 71 $ 11,752 71 $ 11,742

Classified assets decreased to $32.9 million at September 30, 2020, from $39.9 million at December 31, 2019 largely due to the reduction in nonperforming assets discussed above, with a modest increase in newly classified assets.

Nonperforming assets decreased to $14.9 million or 0.92% of total assets at September 30, 2020 compared to $21.6 million or 1.41% of total assets at December 31, 2019.

Included in nonperforming assets at September 30, 2020 are $10.6 million of nonperforming assets acquired during recent whole-bank acquisitions.

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.

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(in thousands)

2021 December 31,

2020 September 30,

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2020 March 31,

2020 December 31,

2019 September 30, 2019

Special mention loan balances $ 13,659 $ 6,672 $ 7,777 $ 19,958 $ 19,387

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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 $102 million and $39 million, respectively at September 30, 2020.

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 September 30, 2020, the Bank had $126.7 million of loan modifications remaining due to pandemic-related borrower requests.

Approximately $50 million of modifications are scheduled to resume their regular principal and interest payments in the fourth quarter.

Hotel industry sector loans represent approximately $70 million of the approved deferrals projected at December 31, 2020.

Of these, $48 million represent a second deferral under the CARES ACT, with the customer making an interest only payment and the Bank generally receives the reserve accounts pledge.

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

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.

The table below shows the changes in the Bank’s non-accretable difference on purchased credit impaired loans.

Payoffs of purchased credit impaired loans, including selected nonaccrual loans discussed above resulted in associated non-accretable differences being realized as interest income as shown below.

The Bank has transferred non-accretable difference on purchased credit impaired loans to accretable loan discount as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions.

This transferred accretion is accreted over the remaining contractual term of the loan or until payoff, whichever is shorter.

Non-accretable Difference:

(in thousands)

September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30, 2019

Non-accretable difference, beginning of period $ 3,355 $ 4,327 $ 6,290 $ 6,737 $ 3,889

Additions to non-accretable difference for acquired purchased credit impaired loans — — — (170) 2,898

Non-accretable difference realized as interest from payoffs of purchased credit impaired loans (130) (196) (1,043) (271) (50)

Transfers from non-accretable difference to accretable discount.

(1,294) (741) (669) — —

Non-accretable difference used to reduce loan principal balance (270) (35) — — —

Non-accretable difference transferred to OREO due to loan foreclosure — — (251) (6) —

Non-accretable difference, end of period $ 1,661 $ 3,355 $ 4,327 $ 6,290 $ 6,737

Mortgage Servicing Rights.

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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 from $4.3 million at December 31, 2019 to $3.5 million at September 30, 2020, primarily due to $1.4 million of impairment recorded on the MSR asset due to the impact of higher prepayment activity and partially offset by increased capitalized servicing on newly sold mortgage originations.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of September 30, 2020 and December 31, 2019 were $555.7 million and $524.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2020 and December 31, 2019 was 0.63% and 0.82%, respectively.

Deposits increased $75.0 million to $1.271 billion at September 30, 2020, from $1.196 billion at December 31, 2019.

The strong non-maturity deposit growth allowed the Company to reduce reliance on higher cost brokered and institutional deposits.

This planned reduction in brokered and institutional deposits resulted in a reduction to $3.3 million at September 30, 2020 from $50.4 million at December 31, 2019.

Additionally, retail certificates of deposit decreased by $28 million as the Company chose not to match higher rate local retail certificate competition.

The following is a summary of deposits by type at September 30, 2020 and December 31, 2019, respectively:

September 30, 2020 December 31, 2019

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 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

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Total deposits $ 1,380,202 $ 1,295,256

Brokered deposits included above:

$ 2,516 $ 2,516

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings.

FHLB advances were $124.5 million as of September 30, 2020 and $131.0 million as of December 31, 2019, as we continue to utilize these advances, 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.

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:

(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 September 30, 2020 is approximately $105.9 million.

In the quarter ended June 30, 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 pledged SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut.

The Bank borrowed twice under this facility in the second quarter of 2020.

Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at June 30, 2020 or at any time during the quarter ending September 30, 2020.

The Bank could borrow $139.2 million under this facility in 2020.

During the first quarter of 2020, the Bank added $12.5 million of 10-year maturity advances that can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months from the initial advance.

At September 30, 2020 and December 31, 2019, the Bank had $55 million and $42.5 million, respectively, of these 10-year, three-month callable advances.

In the first quarter of 2020, the Bank extended overnight advances with $5 million maturing in each quarter of 2023 and 2024, and $5 million maturing in the first quarter of 2025.

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 September 30, 2020, the Bank has pledged $682.0 million of loans to secure the current FHLB outstanding advances, letters of credit and to provide the unused borrowing capacity compared to $792.9 million of loans pledged at December 31, 2019.

In August 2020, the Company issued ten-year, 6% fixed to floating subordinated notes totaling $15 million.

The notes have a five-year non-call feature.

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 increased to $157.3 million at September 30, 2020 from $150.6 million at December 31, 2019, largely due to net income of $9.2 million.

This increase was offset by the annual cash dividend paid to common stockholders of $2.4 million during the first quarter of 2020.

Additionally, during the first quarter, the Company repurchased 156,000 shares of its common stock at a cost of $1.8 million under the Company’s stock buyback authorization.

On March 20, 2020, the Company announced the Board of Directors had suspended this stock buyback authorization and on July 27, 2020, the Board of Directors terminated the stock buyback authorization, which was previously scheduled to expire on September 30, 2020.

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 .

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We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity.

At September 30, 2020, our on-balance sheet liquidity ratio was 16.2%.

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 $216.9 million of our $323.8 million (67%) CD portfolio as of September 30, 2020 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 may decrease in the future.

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.

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.

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.

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 September 30, 2020, we had approximately $105.9 million available under this arrangement, supported by loan collateral, as compared to $203.9 million at December 31, 2019.

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 borrowing under this facility at June 30, 2020 or at any time during the quarter ended September 30, 2020.

The Bank could borrow $139.2 million under this facility at September 30, 2020.

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.

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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 September 30, 2020, the Company had $260.8 million in unused commitments, compared to $246.7 million in unused commitments as of December 31, 2019.

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 September 30, 2020, 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.

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.

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

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Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2020 (Unaudited)

As of March 31, 2021 (Unaudited)

Total capital (to risk weighted assets) $ 174,424 15.5 % $ 89,877 > = 8.0 % $ 112,347 > = 10.0 %

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Tier 1 leverage ratio (to adjusted total assets) 157,081 9.9 % 63,718 > = 4.0 % 79,647 > = 5.0 %

At September 30, 2020, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

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

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 September 30, 2020 (Unaudited)

Total capital (to risk weighted assets) $ 163,250 14.3 % $ 91,021 > = 8.0 % N/A N/A

Tier 1 capital (to risk weighted assets) 119,028 10.5 % 68,266 > = 6.0 % N/A N/A

Common equity tier 1 capital (to risk weighted assets) 119,028 10.5 % 51,199 > = 4.5 % N/A N/A

Tier 1 leverage ratio (to adjusted total assets) 119,028 7.5 % 63,465 > = 4.0 % N/A N/A

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) $ 137,259 11.2 % $ 98,174 > = 8.0 % N/A N/A

Tier 1 capital (to risk weighted assets) 111,939 9.1 % 73,631 > = 6.0 % N/A N/A

Common equity tier 1 capital (to risk weighted assets) 111,939 9.1 % 55,223 > = 4.5 % N/A N/A

Tier 1 leverage ratio (to adjusted total assets) 111,939 7.7 % 57,834 > = 4.0 % N/A N/A

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 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis