What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-02 compared with 2021-03-08 · 167 added, 178 removed, 747 unchanged (32% of the section changed)

6 unchanged sentences

In 2021, 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.

(1) income realized from the origination of the Small Business Administration Paycheck Protection Program (“SBA PPP”) loans;

(2) loan growth and related growth in loan interest income;

(3) growth in the investment securities portfolio;

(4) lower deposit costs due to the lower interest rate environment, and partially offset by;

(5) lower accretion of discounts associated with the paydown of purchased credit impaired loans;

and (6) lower interest income on loans and cash and cash equivalents due to the lower interest rate environment.

The Company recorded no provision for loan losses in 2021 largely due to qualitative factor decreases to reflect greater certainty and improvement in current general economic conditions, offsetting the impact of organic loan growth.

In 2021’s higher interest rate and tight housing supply environment, the Company experienced fewer mortgage loans originated for sale, which decreased gain on sale and income recorded in loan servicing income from the capitalization of mortgage servicing rights, partially offset by a reversal of mortgage servicing rights impairment and a decrease in variable compensation tied to mortgage loan production.

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.

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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.

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 $21.27 million for the twelve months ended December 31, 2021, compared to net income of $12.73 million for the twelve months ended December 31, 2020.

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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.

In evaluating the level of the allowance for loan losses, 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).

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In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio

Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for loan losses.

Any allowance for loan loss on these pools 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).

Goodwill and Other Intangible Assets.

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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.

In 2021, the Company performed quarterly reviews to determine if a triggering event had occurred that would require impairment testing.

These quarterly reviews determined that no triggering event occurred during 2021.

The Company performed its required annual goodwill impairment test as of December 31, 2021, and determined that goodwill was not impaired.

Fair Value Measurements and Valuation Methodologies.

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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:

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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, 2021, 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.

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.

STATEMENT OF OPERATIONS ANALYSIS

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Net interest income was $53.7 million for 2021 compared to $50.3 million for 2020.

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 increase is largely due to an increase in SBA PPP accretion, which increased $4.1 million.

The net interest margin for 2021 was 3.34% compared to 3.40% for 2020.

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.

The decrease in the net interest margin percentage was due to the following factors:

1) a decrease in the accretion of discounts associated with the paydown of purchased credit impaired loans;

2) a full year of interest expense on the Company’s issuance of 6% subordinated debt in August 2020;

3) the increase in lower yielding cash and investment securities as a percentage of interest-earning assets;

and 4) lower interest income on loans, securities and cash and cash equivalents due to the lower interest rate environment.These decreases were partially offset by:

1) higher income SBA PPP accretion and 2) lower deposit costs due to a decrease in interest rates in 2020 and the Company’s action to reduce higher costing certificates of deposits.

Accretion on purchased credit impaired loans recognized due to loan payoffs or significant reductions in loan balances was $0.4 million in 2021, which was a decrease of $2.3 million from accretion recognized in 2020 or $2.7 million.

In 2021, the Bank recognized $6.2 million of accretion of net origination fees and contractual interest income of $0.7 million in 2021 and $2.1 million of accretion of net origination fees and contractual interest income of $1.0 million in 2020.

Remaining deferred SBA PPP fees were approximately $0.3 million at December 31, 2021.

Interest expense on liabilities decreased $3.9 million in 2021 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%.

The Bank has approximately $179 million of certificates of deposit maturing in 2022, at a weighted average cost of approximately 1.35%.

Of these, $64 million mature in the first quarter of 2022, with a weighted average cost of 1.50%.

$73 million mature in the second quarter of 2022 with a weighted average cost of approximately 1.50%.

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.

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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).

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, 2021 v.

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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.

There was no provision for loan losses recorded in 2021 compared to $7.8 million for 2020.

In 2021, the impact of growth in the originated loan portfolio and modest charge-offs were offset by a reduction in Q-Factors related to economic qualitative factor decreases to reflect reduced uncertainty in current general economic conditions and a modest reduction in the unallocated reserve.

In 2020, the provision allocated for originated loan growth was approximately $1.2 million for 2020 and provision related to charge-offs and changes in specific reserves was approximately $1.2 million.

The remaining provision in 2020 related to qualitative factor increases to reflect uncertainty in current general economic conditions and a modest increase in unallocated ALL.

Management believes that the provisions for the year ended December 31, 2021 and 2020, are both 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.

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Loan fees and service charges 705 1,383 (49.02)%

Insurance commission income 475 734 (35.29)%

Insurance commission income — 475 N/M

Net gains on investment securities 1,224 110 1,012.73%

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

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

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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.

Service charges on deposit accounts decreased $106 thousand due to fewer overdrafts attributable to the impact of higher average balances in retail checking accounts.

Interchange income increased due to an increase in our customer spending utilizing debit cards.

Loan servicing income decreased largely due to decreased capitalized mortgage servicing rights as a result of lower mortgage loan origination sold volumes.

The decrease in gain on sale of loans in 2021 is due to lower mortgage loan origination and sale volumes, partially offset by an increase in SBA loans sold.

Net gains on investment securities increased in 2021 due to the $573 thousand net gain on sale of primarily senior debt of large bank holding companies and lower yielding trust preferred securities, which helped fund loan growth and decrease 100% risk weighted AFS securities compared to a $156 thousand gain on sale of high premium mortgage-backed certificates in 2020.

The net gains on investment securities remaining increase was due to the increase in the market value of our investment in Farmer Mac and Bankers’ Bank stock .

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.

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Occupancy 5,327 5,523 (3.55)%

Office 2,152 2,188 (1.65)%

Data processing 5,560 5,193 7.07%

Amortization of intangible assets 1,596 1,622 (1.60)%

Mortgage servicing rights expense 3,050 1,108 175.27%

Mortgage servicing rights expense, net 191 3,050 (93.74)%

Advertising, marketing and public relations 986 967 1.96%

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Non-interest expense (annualized) / Average assets 2.35 % 2.74 %

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.

Compensation expense increased in 2021 primarily due to an increase in incentives based on performance, such as commercial loan growth origination.

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.

Mortgage servicing rights expense, net benefited from the reversal of previously recorded impairment charges of $1.4 million in 2021 compared to impairment charges of $1.8 million in 2020.

This decrease is due to the impact of lower actual and forecasted prepayment rates.

The remaining increase is due to higher amortization based on the current interest rate environment and a modestly larger mortgage servicing portfolio.

Professional fees decreased in 2021 largely due to less utilization of third parties in completing one-time and ongoing projects.

Other non-interest expense decreased in 2021 due to lower origination and branch closure costs in 2020 of $165 thousand.

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 provision was $7.7 million in 2021 compared to $4.6 million for 2020 primarily due to the impact of higher pre-tax income.

The tax rate remained nearly flat at 26.6% in 2021 and 26.4% in 2020.

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.

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Total assets increased $90.5 million to $1.74 billion at December 31, 2021, from $1.65 billion at December 31, 2020.

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.

Strong originated loan growth and net purchases in the Bank’s investment portfolio were funded by strong deposit growth and a reduction in cash and cash equivalents.

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.

Cash and cash equivalents decreased from $119.4 million at December 31, 2020, to $47.7 million at December 31, 2021.

As noted above, this decrease, along with deposit growth, funded loan and investment portfolio growth.

Investment Securities.

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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.

Securities AFS (recorded at fair value), which represent the majority of our investment portfolio, increased to $203.1 million at December 31, 2021, compared with $144.2 million at December 31, 2020.

This increase was primarily due to purchases of $99 million of agency mortgage-backed securities and purchases of debt issued by bank holding companies, largely subordinated debt of $27 million.

In 2021, the sale of trust preferred securities issued by bank holding companies with an amortized cost of $17.4 million and $10.6 million of non-CDFI bank holding company senior debt, reduced the portfolio of these securities to zero.

The weighted average coupon of these sales was 2.2%.

The sale of these 100% risk-weighted assets partially offset the impact of loan growth on risk-weighted assets and increased the overall yield of interest-earning assets.

In addition, the bank sold $9.7 million of other AFS securities, largely U.S.

agency mortgage-backed securities.

These 2021 sales resulted in net realized gains of $573 thousand, which is included in net gains on investment securities in the Consolidated Statements of Operations

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 gain on investment securities in the Consolidated Statement of Operations.

In 2021, the Bank purchased $39 million of HTM securities, consisting largely of U.S.

agency mortgage-backed securities.

This growth was offset by principal repayments.

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

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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

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government agency obligations $ 7,654 $ 17 $ 6,834 $ 53 $ 14,488 $ 70

Mortgage-backed securities 22,537 62 5,883 48 28,420 110

Corporate debt securities 3,447 27 1,418 82 4,865 109

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December 31, 2021

Obligations of states and political subdivisions $ 593 $ 7 $ — $ — $ 593 $ 7

Mortgage-backed securities 46,969 1,346 14,716 715 61,685 2,061

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At December 31, 2021, the Bank also has mortgage-backed securities with a carrying value of $0.3 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.

Total loans outstanding, net of deferred loan fees and costs, increased to $1.31 billion at December 31, 2021, from $1.24 billion at December 31, 2020.

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.

Gross loan growth consisted largely of $191 million in commercial real estate loans and, $56 million of multi-family real estate loans.

The portfolio shrinkage in construction and development was largely offset by agricultural and commercial and industrial growth.

We also experienced net forgiveness of $115 million of SBA PPP loans.

The planned runoff of the residential mortgage portfolio of $43 million and indirect loans of $10 million contributed to reduced growth in the loan portfolio.

The following table reflects the composition, or mix, of our loan portfolio at December 31, 2021 and December 31, 2020:

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Loan amounts, their contractual maturities and weighted average interest rates at December 31, 2021 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.

SBA PPP loans at an interest rate of 1% are included in the C&I/agricultural operating segment amounts as follows:

(1) $2.1 million is included in the one year or less amounts and (2) $6.7 million is included in the one year to five-year amounts.

Real estate Non-real estate

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(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:

Loan amounts, their contractual maturities and 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

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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.

The following table summarizes SBA PPP loans by origination year as of December 31, 2021 and December 31, 2020, respectively.

2020 Originations 2021 Originations Total

Balance Net Deferred Fee Income Balance Net Deferred Fee Income Balance Net Deferred Fee Income

SBA PPP loans, December 31, 2019 $ — $ — $ — $ — $ — $ —

2020 SBA PPP loan originations 139,310 5,119 — — 139,310 5,119

2020 SBA PPP loan forgiveness and fee accretion (15,608) (2,128) — — (15,608) (2,128)

SBA PPP loans, December 31, 2020 123,702 2,991 — — 123,702 2,991

2021 SBA PPP loan originations — — 55,854 3,494 55,854 3,494

2021 SBA PPP loan forgiveness and fee accretion (121,574) (2,987) (49,227) (3,201) (170,801) (6,188)

SBA PPP loans, December 31, 2021 $ 2,128 $ 4 $ 6,627 $ 293 $ 8,755 $ 297

Risk Management and the Allowance for Loan Losses.

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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

The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL.

In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors.

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Total Allowance on originated loans $ 12,354 $ 1,959 $ 518 $ 225 $ 774 $ 15,830

Purchased credit impaired loans — — — — — —

Other acquired loans:

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Total Allowance on originated loans $ 10,271 $ 2,112 $ 1,041 $ 489 $ 906 $ 14,819

Purchased credit impaired loans — — — — — —

Other acquired loans:

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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 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

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, 2021, the Company had evaluated loans for impairment with a recorded investment of $31.7 million, consisting of $11.2 million PCI loans, with a carrying amount of $10.5 million, $9.9 million of TDR loans, net of TDR PCI loans and $11.3 million of substandard non-TDR non-PCI loans.

The $31.7 million total of loans individually evaluated for impairment includes $8.0 million of performing TDR loans.

At December 31, 2020, the Company had evaluated loans for impairment with a recorded investment of $42.3 million, consisting of $17.9 million of PCI loans with a carrying amount of $16.9 million, $15.6 million TDR loans, net of TDR PCI loans and $9.8 million of substandard non-TDR, non-PCI loans.

The $42.3 million total of loans individually evaluated for impairment includes $11.7 million of performing TDR loans.

At December 31, 2021, the allowance for loan losses was $16.9 million or 1.29% of total loans compared to $17.0 million or 1.38% of our total loan portfolio at December 31, 2020.

This level was based on our analysis of the loan portfolio risk at each of December 31, 2021, and December 31, 2020, 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 decrease in allowance dollars is due to modest net charge-offs in 2021.

The slight decrease in the allowance for loan losses to total loan portfolio percentage was primarily due to the impact of growth in the originated loan portfolio, largely offset by a reduction in Q-Factors related to economic qualitative factor decreases to reflect reduced uncertainty in current general economic conditions.

The percentage of allowance for loan losses was also helped by a decrease in gross acquired loans.

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

2020 September 30,

2020 June 30,

2021 December 31,

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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.

Loans 30-89 days or more past due decreased $16.7 million at December 31, 2021, compared to December 31, 2020, largely related to decreases in commercial real estate and construction and land development loans 30-59 days delinquent.

Nonaccrual loans increased modestly to $11.7 million at December 31, 2021, from $10.7 million at December 31, 2020, primarily due to an increase in commercial real estate due to a $4.5 million loan.

Nonaccrual loans related to acquisitions decreased to $5.2 million at December 31, from $7.3 million at December 31, 2020.

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.

For the year ended December 31, 2021, loan charge-offs were $0.339 million compared to $1.318 million for the year ended December 31, 2020, largely due to a decrease 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:

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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.

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.

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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.

As of December 31, 2021, the Bank’s COVID-19 related modifications under Section 4013 of the CARES Act, totaled $6.6 million, or 0.5% of gross loans versus $61 million, or 5.0% of gross loans at December 31, 2020.

At December 31, 2021, hotel industry sector loans represented $6.0 million of the approved deferrals, compared to $51.6 million at December 31, 2020.

The Bank has approximately $6.0 million of total payment deferrals expiring in the first quarter of 2022.

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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

December 31, 2021 December 31, 2020

Nonperforming assets:

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Our non-performing assets were $13.2 million, or 0.76% of total assets, at December 31, 2021, compared to $11.5 million, or 0.70% of total assets, at December 31, 2020.

The decrease was largely due to reductions in acquired nonperforming loans.

The increase was largely due to an increase in originated nonaccrual loans and the transfer of $1.4 million of a former branch asset to OREO, partially offset by a decrease in acquired nonaccrual loans.

Nonaccrual Loans Roll forward

Quarter Ended

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

December 31, 2021 December 31, 2020

Balance, beginning of period $ 10,747 $ 19,056

Additions 6,580 5,346

Acquired nonaccrual loans — — — — —

Charge offs (288) (770)

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Balance, end of period $ 11,665 $ 10,747

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.

The table below shows the totals of accruing troubled debt restructurings as of December 31, 2021, and December 31, 2020.

The 2021 decrease in troubled debt restructurings in dollars was largely due to one C&I loan of $3.0 million that paid in full in 2021.

Troubled Debt Restructurings in Accrual Status

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

Modifications Recorded

Investment Number of

Modifications Recorded

Investment Number of

December 31, 2021 December 31, 2020

Modifications Recorded

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Total loans 56 $ 7,984 71 $ 11,742

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

The table below shows the totals of special mention, substandard and the total of these, known as criticized loans as of December 31, 2021, and 2020.

The decrease in criticized loans in 2021 was largely due to decreases in acquired substandard loans and a reduction in originated accruing TDR loans, nonperforming and other substandard loans.

December 31, 2021 December 31, 2020

Special mention loan balances $ 4,536 $ 6,672

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Criticized loans, end of period $ 27,353 $ 35,213

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.

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Non-accretable difference:

Quarter Ended

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

December 31, 2021 December 31, 2020

Non-accretable difference, beginning of period $ 1,087 $ 6,290

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Non-accretable difference, end of period $ 653 $ 1,087

Accretable difference:

The table below shows scheduled accretion by year for the accretable difference recognized due to fair value purchase accounting on recent whole bank acquisitions.

In addition, the Company has $1.61 million of accretable discount from purchased impaired loans with the original non-accretable discount transferred to accretable discount.

The scheduled accretion on this balance is estimated to be $100 per year;

however, large balance payoffs, as seen in 2021 and 2020, would accelerate this accretion.

Fiscal years ending December 31, Purchase Accounting Accretable Discount

Mortgage Servicing Rights .

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The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions and judgments, such as those for:

in the mix of loans, interest rates, prepayment speeds, and default rates.

changes in the mix of loans, interest rates, prepayment speeds, and default rates.

Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs.

Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset 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 fair market value of the Company’s MSR asset increased to $4.3 million at December 31, 2021, from $3.3 million at December 31, 2020.

This increase was primarily due to $1.4 million of impairment reversal recorded in 2021 on the MSR impairment which reduced the impairment to $0.6 million at December 31, 2021.

This was partially offset by a reduction in the gross MSR balance of $0.5 million, which was due to amortization of $1.6 million and additions from originations of $1.1 million.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of December 31, 2021, and December 31, 2020, were $556.1 million and $553.7 million, respectively.

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We have intangible assets of $3.9 million at December 31, 2021, compared to $5.5 million at December 31, 2020.

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.

The intangible assets are comprised of core deposit intangible assets arising from various acquisitions from 2016 through 2019.

Amortization of these intangibles was $1.6 million in 2021.

Foreclosed and repossessed assets.

Included in foreclosed and repossessed assets, net is a closed branch location that is being held for sale.

The excess property was created when the Bank constructed a new, smaller facility on a portion of the site that better supports the Bank’s needs.

The property is being held at $1,360, which was its carrying value prior to its reclassification as held for sale, as the bank has a signed purchase agreement from a non-financial institution in excess of its carrying value.

As such, no gain or loss was recognized on the reclassification.

The Bank expects to complete the sale in the first half of 2022.

Deposits are our largest source of funds.

Total deposits increased to $1.39 billion at December 31, 2021, from $1.30 billion at December 31, 2020.

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 increase in deposits, largely attributable to the growth in non-maturity deposits, allowed the Company to reduce reliance on higher cost certificates of deposit.

This non-maturity deposit growth was partially offset by a $110.2 million reduction of retail certificates of deposits, as the Company chose not to match higher rates offered by local retail certificate of deposit competitors.

Brokered and institutional deposits decreased to $0.0 million at December 31, 2021, from $2.5 million at December 31, 2020.

The Bank believes these markets are available to the Bank if the need arises.

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

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Total deposits $ 1,387,535 $ 1,295,256

Brokered deposits included above:

$ 2,516 $ 50,377

Federal Home Loan Bank (FHLB) advances and other borrowings.

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2030 12,500 0.52 % 0.86 % 12,500 0.52 % 0.86 %

2030 12,500 0.52 % 0.86 % — — % — %

Subtotal 111,530 123,530

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2030 15,000 6.00 % 6.00 % 15,000 6.00 % 6.00 %

$ 30,000 $ 30,000

Unamortized debt issuance costs (430) (528)

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Totals $ 169,953 $ 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 $723,862 and $792,909 at December 31, 2020 and 2019, respectively.

(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 pledged balances of $861,900 and $723,862 at December 31, 2021 and 2020, respectively.

At December 31, 2021, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $204,271 compared to $118,391 as of December 31, 2020.

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 $123,530 and $162,530, during the twelve months ended December 31, 2021 and December 31, 2020, respectively.

(3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2021 and December 31, 2020 were 2.45% and 1.02%, 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.

(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.

(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.

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%.

(a) A term note which was subsequently refinanced in October 2020 and modified in 2021, 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 3.00%, due to the modification in October 2021.

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

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In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter.

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due quarterly.

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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.

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

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FHLB advances decreased to $111.5 million at December 31, 2021, from $123.5 million at December 31, 2020.

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.

An $11 million advance matures in 2022, with additional fixed-rate advances of $45.5 million maturing in 2023 through 2025.

There are $55 million of advances with a stated maturity in 2029 and 2030, that are callable quarterly by the Federal Home Loan Bank.

In the first quarter of 2021, the Bank terminated $8 million of advances at a pre-tax cost of approximately $100 thousand.

Stockholders’ Equity.

Total stockholders’ equity was $170.9 million at December 30, 2021, compared to $160.6 million at December 31, 2020.

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.

The increase in stockholders’ equity was due to the Company’s net income of $21.3 million and restricted stock amortization of $0.8 million.

This increase was partially offset by 1) the repurchase of approximately 620 thousand shares of its common stock, which reduced equity by $8.0 million;

2) the payment of the annual cash dividend, paid in February 2021, to common stockholders of $0.23 per share or $2.5 million;

and 3) a decrease in the unrealized gain on available for sale securities of $1.3 million.

In November 2020, the Board of Directors authorized a 5% or 557 thousand share repurchase program.

The Company repurchased all remaining authorized shares of the Company’s stock under the November 2020 share repurchase program not previously repurchased in 2020 during the year ended December 31, 2021.

On July 23, 2021, the Board of Directors adopted a new share repurchase program.

Under this new share repurchase program, approximately 160 thousand shares, were repurchased during the year ended December 31, 2021.

The Company is authorized to repurchase an additional 373 thousand shares under this July 2021 share repurchase program

Liquidity and Asset / Liability Management.

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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:

At December 31, 2021, our liquidity ratio increased to 17.0% percent from 16.5% at December 31, 2020.

This was largely due to the growth in AFS and HTM securities portfolio, which was mostly offset by a reduction in interest-bearing cash.

Our primary sources of funds are deposits;

amortization, prepayments and maturities of outstanding loans;

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Although $178.8 million of our $203.0 million (88%) 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.

However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2021 and may remain at lower than historical levels in 2022 based on management’s current pricing strategy, which reflects the Bank’s current strong on-balance sheet liquidity ratio.

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.

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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

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.

Currently, we have approximately $204.2 million available to borrow under this arrangement, supported by loan collateral as of December 31, 2021.

At December 31, 2021, the Bank had no borrowing capacity under the Federal Reserve SAB PPP Liquidity Facility, as the program expired on July 30, 2021.

We also maintain lines of credit of $0.9 million with the Federal Reserve Bank and $25 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.

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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 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.

As of December 31, 2021, the Company had approximately $271.0 million in unused loan commitments, compared to approximately $247.3 million in unused commitments as of December 31, 2020.

In addition, there are $5.0 million in contribution of capital for SBIC and an investment company at December 31, 2021, with no such commitments at December 31, 2020.

See Note 11, “Commitments and Contingencies”;

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Actual For Capital Adequacy

Purposes To Be Well Capitalized

Under Prompt Corrective

Action Provisions

Amount Ratio Amount Ratio Amount Ratio

Amount Ratio Amount Ratio

As of December 31, 2021

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

Total capital (to risk weighted assets) $ 182,242 13.1 % $ 111,694 > = 8.0 %

Tier 1 capital (to risk weighted assets) 135,329 9.7 % 83,771 > = 6.0 %

Common equity tier 1 capital (to risk weighted assets) 135,329 9.7 % 62,828 > = 4.5 %

Tier 1 leverage ratio (to adjusted total assets) 135,329 7.9 % 68,323 > = 4.0 %

As of December 31, 2020

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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-K

Item 7. Management’s Discussion and Analysis