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Item 8. Financial Statements and Supplementary Data

2022-03-14 compared with 2021-03-08 · 892 added, 518 removed, 864 unchanged (62% of the section changed)

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Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Report of Independent Registered Public Accounting Firm (PCAOB ID # 659 )

Consolidated Balance Sheets as of December 31, 2021

Consolidated Statements of Income for Years Ended December 31, 2021 and 2020

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of First Northern Community Bancorp and subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the board of directors;

Management of First Northern Community Bancorp and subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control

over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2021.

Internal control over financial reporting is a process designed to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The Company’s internal control

over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the

board of directors;

and (iii) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances.

Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the

circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances.

Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely

basis by internal control over financial reporting.

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company

conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring

Organizations of the Treadway Commission.

Based on this assessment, management of the Company has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2021.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

To the Stockholders and the Board of Directors of

First Northern Community Bancorp

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Northern Community Bancorp a nd subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of First Northern

Community Bancorp and subsidiary (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively

referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of

December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

These consolidated financial statements are the responsibility of the Company’s

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight

Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in

accordance with the standards of the PCAOB.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the

effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits included performing procedures to assess the risks of material

misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in

the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our

opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses balance was $15.4 million at December 31, 2020.

The allowance for loan losses is maintained to provide for estimated losses inherent in existing loans on evaluations of collectability and prior loss experience.

Individual loans are reviewed for impairment, while all other loans, including individually evaluated loans determined to not be impaired are collectively evaluated for impairment.

The evaluations take into consideration internal and external factors such as trends in portfolio volume, maturity and composition, overall portfolio quality, loan concentrations, levels of and trends in charge-offs and recoveries, current and anticipated economic conditions that may affect the borrowers’ ability to pay, and national and local economic trends and conditions.

As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses balance was $14.0 million as of December 31, 2021.

The allowance for loan losses is maintained to provide for

estimated losses inherent in existing loans on evaluations of collectability and prior loss experience.

Individual loans identified as impaired are reviewed and measured for impairment, while all other loans, that are not identified as impaired, are

collectively evaluated for impairment.

charge-offs and recoveries, current and anticipated economic conditions that may affect the borrowers’ ability to pay, and national and local economic trends and conditions.

We identified management’s risk rating of loans and the estimation of qualitative factors, both of which are used in the allowance for loan losses calculation, as a critical audit matter.

The Company manages risk ratings through the analysis of initial credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix.

The Company manages risk ratings through

the analysis of initial credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix.

Determination of the risk rating involves significant management judgement.

The qualitative factors consist of management’s analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company’s general lending activity, including the risk of losses that are attributable to national or local economic or industry trends which have occurred but have yet been recognized in past loan charge-off history, and the risk of losses attributable to general attributes of the Company’s loan portfolio and credit administration.

Auditing management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for loan losses involved a high degree of subjectivity.

qualitative factors consist of management’s analysis of the level of risks inherent in the loan portfolio, which are related to the risks of the Company’s general lending activity, including the risk of losses that are attributable to national or

local economic or industry trends which have occurred but have not yet been recognized in past loan charge-off history, and the risk of losses attributable to general attributes of the Company’s loan portfolio and credit administration.

management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for loan losses involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

Testing design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses.

Evaluating the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses and testing the calculation itself, including completeness and accuracy of the data, application of the loan risk ratings determined by management, application of the qualitative factors determined by management, and recalculation of the allowance for loan losses balance.

Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately risk rating the loans in accordance with its policies and that the risk ratings for the loans are appropriate.

Evaluating management’s analysis and supporting documentation related to the qualitative factors, and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the analysis provided by management.

Testing the design, implementation, and operating effectiveness of controls relating to management’s review of loans and assignment of risk ratings.

risk ratings determined by management, application of the qualitative factors determined by management, and recalculation of the allowance for loan losses balance.

are appropriate.

Evaluating management’s analysis and supporting documentation related to the qualitative factors, performing a sensitivity analysis over the qualitative thresholds established by management, performing

substantive analytical procedures on the year-end allowance balance, and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the analysis provided by management.

/s/ MOSS ADAMS LLP

Los Angeles, California

Sacramento, California

March 11, 2022

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Certificates of deposit

Investment securities – available-for-sale, at fair value (includes securities pledged to creditors with the right to sell or repledge of $ 41,916 at December 31, 2020 and $ 37,943 at December 31, 2019)

Investment securities – available-for-sale, at fair value (includes securities pledged to creditors with the right to sell or repledge of $ 39,695

at December 31, 2021 and $ 41,916

at December 31, 2020 )

Loans (net of allowance for loan losses of $ 13,952 at December 31, 2021 and $ 15,416 at December 31, 2020 )

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Total Liabilities

Commitments and contingencies (Note 11)

Commitments and contingencies (Note 10 and 11)

Stockholders’ Equity:

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16,000,000 shares authorized;

13,634,463 and 12,919,132 shares issued and outstanding at December 31, 2020 and 2019, respectively

13,848,904 and 13,634,463

shares issued and outstanding at December 31, 2021 and 2020 , respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income, net

Accumulated other comprehensive (loss) income, net

Total Stockholders’ Equity

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Net interest income

Provision for loan losses

Net interest income after provision for loan losses

(Reversal of) provision for loan losses

Net interest income after (reversal of) provision for loan losses

Non-interest income:

Service charges on deposit accounts

Net gain (loss) on sale of available-for-sale securities

Net gain on sale of loans held-for-sale

(Losses) gains on sales/calls of available-for-sale securities

Gains on sales of loans held-for-sale

Debit card income

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(in thousands)

Other comprehensive income (loss), net of tax:

Unrealized holding gains (losses) on securities arising during the current period, net of tax effect of $ 2,358 , $ 2,187 , and ($ 355 ) for the years ended December 31, 2020, 2019, and 2018, respectively

Reclassification adjustment due to (gains) losses realized on sales of securities, net of tax effect of ($ 85 ), $ 1 , and $ 6 for the years ended December 31, 2020, 2019, and 2018, respectively

Other comprehensive (loss) income, net of tax:

Unrealized holding (losses) gains on securities arising during the current period, net of tax effect of ($ 4,082 ) and $ 2,358 for the years

ended December 31, 2021 and 2020 ,

Reclassification adjustment due to losses (gains) realized on sales of securities, net of tax effect of $ 64 and ($ 85 ) for the years ended

December 31, 2021 and 2020 ,

Officers’ retirement plan equity adjustments, net of tax effect of $ 276 and ($ 280 ) for the years ended December 31, 2021 and 2020 , respectively

Directors’ retirement plan equity adjustments, net of tax effect of ($ 15 ), ($ 17 ), and 10 for the years ended December 31, 2020, 2019, and 2018, respectively

Total other comprehensive income (loss), net of tax effect of $ 1,978 , $ 2,086 , and ($ 257 ) for the years ended December 31, 2020, 2019, and 2018, respectively

Directors’ retirement plan equity adjustments, net of tax effect of $ 16 and ($ 15 ) for the years ended

December 31, 2021 and 2020 ,

Total other comprehensive (loss) income, net of tax effect of ($ 3,726 ) and $ 1,978 for the years ended December 31, 2021 and 2020 , respectively

Comprehensive income

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Balance at December 31, 2019

Other comprehensive loss, net of tax

Stock dividend adjustment

5 % stock dividend declared in 2019

Cash in lieu of fractional shares

Stock-based compensation

Common shares issued related to restricted stock grants and ESPP

Stock options exercised, net

Balance at December 31, 2018

Other comprehensive income, net of tax

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Common shares issued related to restricted stock grants and ESPP, net of restricted stock reversals

Stock options exercised, net

Balance at December 31, 2020

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Stock dividend adjustment

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Stock options exercised, net

Stock repurchase and retirement

Balance at December 31, 2021

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Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

(Reversal of) provision for loan losses

Stock-based compensation

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Accretion and amortization of securities, net

Net (gain) loss on sale/call of available-for-sale securities

Net gain on sale of loans held-for-sale

Impairment on other real estate owned

Gain on sale of bank premises and equipment

(Benefit) provision for deferred income taxes

Net loss (gain) on sale/call of available-for-sale securities

Gain on sale of loans held-for-sale

Provision (benefit) for deferred income taxes

Valuation adjustment on mortgage servicing rights

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Originations of loans held-for-sale

Increase in deferred loan origination fees and costs, net

(Decrease) increase in deferred loan origination fees and costs, net

Amortization of operating lease right-of-use asset

Increase in interest receivable and other assets

Net increase in interest payable and other liabilities

Decrease in interest payable and other liabilities

Net cash provided by operating activities

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Purchase of available-for-sale securities

Net increase in Certificates of Deposit

Proceeds from redemption (purchases) of stock in Federal Home Loan Bank and other equity securities, at cost

Net increase in loans

Proceeds from maturities of certificates of deposit

Proceeds from sales of certificates of deposit

Purchase of certificates of deposit

(Purchases of) proceeds from redemption of stock in Federal Home Loan Bank and other equity securities, at

Net decrease (increase) in loans

Purchases of bank premises and equipment, net

Proceeds from the sale of bank premises and equipment

Proceeds from sales of other real estate owned

Net cash used in investing activities

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Net increase in deposits

Increase in Federal Home Loan Bank advances

Proceeds from Federal Home Loan Bank advances

Principal payments on Federal Home Loan Bank advances

Cash dividends paid in lieu of fractional shares

Common stock issued

Repurchases of common stock

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Summary of Significant Accounting Policies

First Northern Community Bancorp (the “Company”) is a bank holding company whose only subsidiary, First Northern Bank of Dixon (“Bank”), a California state-chartered bank, conducts general banking activities, including collecting deposits and originating loans, and serves Solano, Yolo, Sacramento, Placer, El Dorado, and Contra Costa Counties.

All intercompany transactions between the Company and the Bank have been eliminated in consolidation.

First Northern Community Bancorp (the “Company”) is a bank holding company whose only subsidiary, First Northern Bank of Dixon (“Bank”), a California

state-chartered bank, conducts general banking activities, including collecting deposits and originating loans, and serves Solano, Yolo, Sacramento, Placer, El Dorado, and Contra Costa Counties.

All intercompany transactions between the Company and

the Bank have been eliminated in consolidation.

The consolidated financial statements also include the accounts of Yolano Realty Corporation, a wholly-owned subsidiary of the Bank.

Yolano Realty Corporation was formed in September 2009 for the purpose of managing selected other real estate owned properties.

Yolano Realty Corporation was formed in September 2009 for the

purpose of managing selected other real estate owned properties.

Yolano Realty Corporation was an inactive subsidiary in 2021.

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.

Actual results could differ from those estimates applied in the preparation of the accompanying consolidated financial statements.

For the Company, the most significant accounting estimates are the allowance for loan losses, recognition and measurement of impaired loans, other-than-temporary impairment of securities, fair value measurements, share based compensation, valuation of mortgage servicing rights and deferred tax asset realization.

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.

Actual results

could differ from those estimates applied in the preparation of the accompanying consolidated financial statements.

For the Company, the most significant accounting estimates are the allowance for loan losses, recognition and measurement of impaired

loans, other-than-temporary impairment of securities, fair value measurements, share based compensation, valuation of mortgage servicing rights and deferred tax asset realization.

A summary of the significant accounting policies applied in the

preparation of the accompanying consolidated financial statements follows.

Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers due from banks, federal funds sold for one-day periods and short-term bankers acceptances to be cash equivalents.

For purposes of the consolidated statements of cash flows, the Company considers due from banks, federal funds sold for one-day periods

and short-term bankers acceptances to be cash equivalents.

At times, the Company maintains deposits with other financial institutions in amounts that may exceed federal deposit insurance coverage.

Management regularly evaluates the credit risk associated with correspondent banks.

Management regularly evaluates the credit risk

associated with correspondent banks.

Investment Securities

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Treasury securities, U.S.

Agency securities, obligations of states and political subdivisions, obligations of U.S.

Agency securities, obligations of states and political subdivisions,

obligations of U.S.

Corporations, collateralized mortgage obligations and mortgage-backed securities.

At the time of purchase of a security the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs, and intent to hold.

At the time of purchase of a security the Company designates the security as held-to-maturity or available-for-sale, based on its investment

objectives, operational needs, and intent to hold.

The Company does not purchase securities with the intent to engage in trading activity.

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Available-for-sale securities are recorded at fair value with unrealized holding gains and losses, net of the related tax effect, reported as a separate component of stockholders’ equity until realized.

The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to the earliest call date using the effective interest method.

The amortized cost of securities is adjusted

for amortization of premiums and accretion of discounts to the earliest call date using the effective interest method.

Such amortization and accretion is included in investment income, along with interest and dividends.

The cost of securities sold is based on the specific identification method;

The cost of securities sold is

based on the specific identification method;

realized gains and losses resulting from such sales are included in earnings.

Investments with fair values that are less than amortized cost are considered impaired.

Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates.

At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary.

This assessment includes consideration regarding the duration and severity of impairment, the credit quality of the issuer and a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses.

Other-than-temporary impairment is recognized in earnings if one of the following conditions exists:

Impairment may result from either a decline in

the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates.

At each consolidated financial statement date, management assesses each investment to determine if impaired investments are

temporarily impaired or if the impairment is other than temporary.

This assessment includes consideration regarding the duration and severity of impairment, the credit quality of the issuer and a determination of whether the Company intends to sell

the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses.

Other-than-temporary impairment is recognized in earnings if one

of the following conditions exists:

1) the Company’s intent is to sell the security;

2) it is more likely than not that the Company will be required to sell the security before the impairment is recovered;

or 3) the Company does not expect to recover its amortized cost basis.

If, by contrast, the Company does not intend to sell the security and will not be required to sell the security prior to recovery of the amortized cost basis, the Company recognizes only the credit loss component of other-than-temporary impairment in earnings.

or 3) the Company does not expect to

recover its amortized cost basis.

other-than-temporary impairment in earnings.

The credit loss component is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows.

The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.

The remaining difference between the

security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.

Federal Home Loan Bank Stock and Other Equity Securities, at Cost

Federal Home Loan Bank ("FHLB") stock represents an equity interest that does not have a readily determinable fair value because its ownership is restricted and it lacks a market (liquidity).

Federal Home Loan Bank ("FHLB") stock represents an equity interest that does not have a readily determinable fair value because its

ownership is restricted and it lacks a market (liquidity).

FHLB stock and other securities are recorded at cost.

Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.

For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement.

Restructured loans are loans on which concessions in terms have been granted because of the borrowers’ financial difficulties.

A restructuring constitutes a troubled debt restructuring, and thus an impaired loan, if the restructuring constitutes a concession and the debtor is experiencing financial difficulties.

An impaired loan is measured based upon the present value of future cash flows discounted at the loan’s effective rate, the loan’s observable market price, or the fair value of collateral if the loan is collateral dependent.

considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.

that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement.

Restructured loans are loans on which

concessions in terms have been granted because of the borrowers’ financial difficulties.

A restructuring constitutes a troubled debt restructuring, and thus an impaired loan, if the restructuring constitutes a concession and the debtor is

experiencing financial difficulties.

Interest on impaired loans is recognized on a cash basis.

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Unearned discount on installment loans is recognized as income over the terms of the loans by the interest method.

Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.

Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield are deferred and amortized over the contractual term of the loan using the interest method.

Interest on other

loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.

Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield are deferred and amortized over

the contractual term of the loan using the interest method.

Processing fees received from the SBA for PPP loans are recognized as an adjustment to the effective yield over the loans' projected life.

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans.

Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal.

When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income.

Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

Accrual of interest on loans is

discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal.

When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period

interest income.

and interest.

Accrual of interest on loans that are troubled debt restructurings commence after a sustained period of performance.

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Loans originated and held-for-sale are carried at the lower of cost or estimated fair value in the aggregate.

Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale.

Net fees and costs of

originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale.

Net unrealized losses are recognized through a valuation allowance by charges to income.

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The allowance for loan losses is established through a provision charged to expense.

It is the Company’s policy to charge-off loans when the following exists:

It is the Company’s policy to charge-off loans

when the following exists:

management determines that a loss is expected or when specified by regulatory examination;

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loan is canceled as part of a court judgment.

The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and overdrafts on evaluations of collectability and prior loss experience.

The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and overdrafts on

evaluations of collectability and prior loss experience.

The loan portfolio is segregated into loan types to facilitate the assessment of risk to pools of loans based on historical charge-off experience and internal and external factors.

Non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $ 500,000 or more are reviewed for impairment, while all other loans, including individually evaluated loans determined not to be impaired, are collectively evaluated for impairment.

The evaluations take into consideration internal and external factors such as trends in portfolio volume, maturity and composition, overall portfolio quality, loan concentrations, levels of and trends in charge-offs and recoveries, current and anticipated economic conditions that may affect the borrowers’ ability to pay and national and local economic trends and conditions.

loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $ 500 or more

are evaluated for impairment, while all other loans, including individually evaluated loans determined not to be impaired, are collectively evaluated for impairment.

The evaluations take into consideration internal and external factors such as trends

in portfolio volume, maturity and composition, overall portfolio quality, loan concentrations, levels of and trends in charge-offs and recoveries, current and anticipated economic conditions that may affect the borrowers’ ability to pay and national

and local economic trends and conditions.

While management uses these evaluations to determine the allowance for loan losses, additional provisions may be necessary based on changes in the factors used in the evaluations.

Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in the near term.

Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in

the near term.

Management believes that the allowance for loan losses was adequate at December 31, 2021.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses.

While management uses

available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors.

In addition, various regulatory agencies, as an integral part of their examination

process, periodically review the Bank’s allowance for loan losses.

Such agencies may require the Bank to recognize additional allowance based on their judgment about information available to them at the time of their examination.

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Premises and equipment are stated at cost, less accumulated depreciation.

Depreciation is computed substantially by the straight-line method over the estimated useful lives of the related assets.

Depreciation is computed substantially by the straight-line

method over the estimated useful lives of the related assets.

Leasehold improvements are depreciated over the estimated useful lives of the improvements or the terms of the related leases, whichever is shorter.

The useful lives used in computing depreciation are as follows:

The useful lives used in

computing depreciation are as follows:

Buildings and improvements

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Other real estate acquired by foreclosure is carried at fair value less estimated selling costs.

Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary.

Prior to foreclosure, the value of the

underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary.

Fair value of other real estate owned is generally determined based on an appraisal of the property.

Any subsequent operating expenses or income, reduction in estimated values and gains or losses on disposition of such properties are included in other operating expenses.

Gain recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale.

subsequent operating expenses or income, reduction in estimated values and gains or losses on disposition of such properties are included in other operating expenses.

Gain recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of

the property sold and the terms of the sale.

Under certain circumstances, revenue recognition may be deferred until these criteria are met.

The Bank held no other real estate owned (“OREO”) as of December 31, 2020 and 2019.

The Bank held no

other real estate owned (“OREO”) as of December 31, 2021 and 2020.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company currently has no identifiable intangible assets.

Long-lived assets and certain identifiable intangibles are required to be reviewed for impairment whenever events or changes in

circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company currently has no identifiable intangible

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

If such assets are considered to be impaired, the impairment to be

recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Pension Benefit Plans

The Company and the Bank maintain unfunded non-contributory defined benefit pension plans for a select group of highly compensated employees and directors, as well as a supplemental executive retirement plan.

The Company and the Bank maintain unfunded non-contributory defined benefit pension plans for a select group of

highly compensated employees and directors, as well as a supplemental executive retirement plan.

Net periodic benefit cost is recognized over the approximate service period of plan participants and includes discount rate assumptions.

See Note 17 of Notes to Consolidated Financial Statements.

See Note 17 of

Notes to Consolidated Financial Statements.

Revenue from Contracts with Customers

The following are descriptions of the Company’s sources of Non-interest income within the scope of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) :

The following are descriptions of the Company’s sources of Non-interest income within the scope of Topic 606, Revenue from Contracts with Customers (Topic 606) :

Service charges on deposit accounts

Service charges on deposit accounts include account maintenance and analysis fees and transaction-based fees.

Account maintenance and analysis fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis.

Account maintenance and

analysis fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis.

The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed.

Transaction-based fees consist of non-sufficient funds fees, wire fees, overdraft fees and fees on other products and services and are charged to deposit customers for specific services provided to the customer.

The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

The performance obligation is

completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

Investment and brokerage services income

The Bank earns investment and brokerage services fees for providing a broad range of alternative investment products and services through Raymond James Financial Services, Inc.

The Bank earns investment and brokerage services fees for providing a broad range of alternative investment products and services

through Raymond James Financial Services, Inc.

Brokerage fees are generally earned in two ways.

Brokerage fees for managed accounts charge a set annual percentage fee based on the underlying portfolio value and are earned and recognized on a quarterly basis.

Brokerage fees for managed accounts charge a set annual percentage fee based on the underlying portfolio value and are earned and recognized on a

quarterly basis.

Brokerage fees for a standard commission account are charged on a per transaction fee and are earned and recognized at the time of the transaction.

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Debit card income represent fees earned on Bank-issued debit card transactions.

The Bank earns interchange fees from debit cardholder transactions through the related payment network.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

The Bank earns interchange fees from debit cardholder

transactions through the related payment network.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to

the cardholder.

The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ account.

Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income.

Certain expenses directly associated with the debit card are recorded on a net basis with the

interchange income.

Other income within the scope of Topic 606 include check sales fees, bankcard fees, and merchant fees.

Check sales fees, based on check sales volume, are received from check printing companies and are recognized monthly.

Check sales fees, based on check

sales volume, are received from check printing companies and are recognized monthly.

Bankcard fees are earned from the Bank’s credit card program and are recognized monthly as the service period is completed.

Merchant fees are earned for card payment services provided to its merchant customers.

Merchant fees are earned for card

payment services provided to its merchant customers.

The Bank has a contract with a third party to provide card payment services to merchants that contract for those services.

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Gain or Loss on Sale of Loans and Servicing Rights

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control.

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent

application of a financial-components approach that focuses on control.

Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings.

A sale is recognized when the transaction closes and the proceeds are other than beneficial interests in the assets sold.

A sale is recognized when the transaction closes and the proceeds are

other than beneficial interests in the assets sold.

A gain or loss is recognized to the extent that the sales proceeds and the fair value of the servicing asset exceed or are less than the book value of the loan.

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold.

The Company sold substantially all of its conforming long-term residential mortgage loans originated during the years ended December 31, 2020, 2019, and 2018 for cash proceeds equal to the fair value of the loans.

Mortgage servicing rights ("MSR") in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer.

The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets.

The Company measures and reports its residential mortgage servicing assets initially at fair value and amortizes the servicing rights in proportion to, and over the period of, estimated net servicing revenues.

Company sold substantially all of its conforming long-term residential mortgage loans originated during the years ended December 31, 2021

and 2020, for cash proceeds equal to the fair value of the loans.

Mortgage servicing rights ("MSR") in loans sold are measured by allocating the previous carrying amount of the transferred assets

between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer.

The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the

risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets.

The Company measures and reports its residential mortgage servicing assets initially at fair value and amortizes the servicing rights in

proportion to, and over the period of, estimated net servicing revenues.

Management assesses servicing rights for impairment as of each financial reporting date.

Fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time are each separately reported.

Fair value adjustments that encompass market-driven valuation changes and the runoff in

value that occurs from the passage of time are each separately reported.

In determining the fair value of the MSR, the Company uses quoted market prices when available.

Subsequent fair value measurements are determined using a discounted cash flow model.

Subsequent fair value measurements are

determined using a discounted cash flow model.

In order to determine the fair value of the MSR, the present value of expected future cash flows is estimated.

Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

Assumptions used include market discount rates, anticipated prepayment speeds, delinquency

and foreclosure rates, and ancillary fee income.

This model is periodically validated by an independent external model validation group.

The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available.

Key assumptions used in measuring the fair value of MSR as of December 31 were as follows:

The model assumptions and the MSR fair value estimates are also compared to observable trades of similar

portfolios as well as to MSR broker valuations and industry surveys, as available.

Key assumptions used in measuring the fair value of the MSR as of December 31, were as follows:

Constant prepayment rate

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Prepayments in excess of management’s estimates would negatively impact the recorded value of the mortgage servicing rights.

The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on current market rates.

The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on

current market rates.

Management reviews this rate on an ongoing basis based on current market rates.

A significant increase in the discount rate would reduce the value of mortgage servicing rights.

The Company accounts for income taxes under the asset and liability method.

Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company accounts for income taxes under the asset

and liability method.

assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those

temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A liability for uncertain tax positions is recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority.

Interest and/or penalties related to income taxes are reported as a component of provision for income taxes.

A liability for uncertain tax

positions is recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority.

Interest and/or penalties related to income taxes are

reported as a component of provision for income taxes.

Share Based Compensation

The Company accounts for share based compensation transactions whereby the Company receives employee services in exchange for equity instruments, including stock options and restricted stock.

The Company recognizes in the consolidated statements of income the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over their requisite service period (generally the vesting period).

The Company accounts for share based compensation transactions whereby the Company receives employee services in exchange for equity

instruments, including stock options and restricted stock.

The Company recognizes in the consolidated statements of income the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over their

requisite service period (generally the vesting period).

The fair value of options granted is determined on the date of the grant using a Black-Scholes-Merton pricing model.

The grant date fair value of restricted stock is determined by the closing market price of the day prior to the grant date.

The grant date fair value of restricted stock is determined by the closing

market price of the day prior to the grant date.

The Company issues new shares of common stock upon the exercise of stock options.

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Earnings Per Share (“EPS”)

Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period, excluding non-vested restricted shares.

Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of

common shares outstanding for the period, excluding non-vested restricted shares.

Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity.

The number of potential common shares included in annual diluted EPS is a year to date average of the number of potential common shares included in each quarter’s diluted EPS computation under the treasury stock method.

The calculation of weighted average shares includes two classes of the Company’s outstanding common stock:

The number of potential common shares included in annual

diluted EPS is a year to date average of the number of potential common shares included in each quarter’s diluted EPS computation under the treasury stock method.

The calculation of weighted average shares includes two classes of the Company’s

outstanding common stock:

common stock and restricted stock awards.

Holders of restricted stock also receive dividends at the same rate as common shareholders, subject to vesting restrictions, and they both share equally in undistributed earnings.

Holders of restricted stock also receive dividends at the same rate as common shareholders, subject to vesting restrictions, and they both share equally in undistributed

earnings.There are no unvested share-based payment awards that contain nonforfeitable rights to dividends.

See Note 14 of Notes to Consolidated Financial Statements.

Advertising Costs

Advertising costs were $ 418 , $ 434 , and $ 373 for the years ended December 31, 2020, 2019, and 2018, respectively.

Advertising costs were $ 382

and $ 418 for the years ended December 31, 2021

and 2020, respectively.

Advertising costs are expensed as incurred.

Comprehensive Income

Accounting principles generally accepted in the United States require that recognized revenue, expenses, gains, and losses be included in net income.

Certain changes in assets and liabilities, such as unrealized gain and losses on available-for-sale securities and directors’ and officers’ retirement plans, are reported as a separate component of the equity section of the consolidated balance sheet.

Accounting principles generally accepted in the United States require that recognized revenue, expenses, gains, and losses be included

in net income.

consolidated balance sheet.

Such items, along with net income, are components of comprehensive income.

Stock Dividend

On January 23, 2020 , the Company announced that its Board of Directors had declared a 5 % stock dividend which resulted in 616,506 shares, which was paid on March 25, 2020 to shareholders of record as of February 28, 2020 .

On January 27, 2021 , the Company announced that its Board of Directors had declared a 5 % stock dividend which will result in an estimate of 649,260 shares, which will be paid on March 25, 2021 to shareholders of record as of February 26, 2021 .

The earnings per share data for all periods presented have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 27, 2021.

December 31, 2020 figures included in the Consolidated Balance Sheets and Consolidated Statement of Changes in Stockholders’ Equity have been adjusted to reflect the estimated impact of the 2021 stock dividend.

Figures that have been adjusted include common stock shares issued and outstanding, Common stock balance and Retained earnings balance.

The December 31, 2019, 2018 and 2017 balances included in the Consolidated Balance Sheets and Statement of Changes in Stockholders’ Equity have not been adjusted to retroactively reflect the stock dividends, but instead show the historical rollforward of stock dividends declared.

On January 27, 2021 , the

Company announced that its Board of Directors had declared a 5 % stock dividend which resulted in 650,542 shares, which was paid on March 25, 2021 to shareholders

of record as of February 26, 2021 .

On January 27, 2022 , the Company announced that its Board of Directors had declared a 5 % stock dividend which will result in an

estimate of 659,471 shares, which will be paid on March 25, 2022 to shareholders of record as of February 28, 2022 .

The earnings per share data for all periods presented have been adjusted to give retroactive effect to stock dividends and stock splits,

including the 5% stock dividend declared on January 27, 2022.

December 31, 2021 figures included in the Consolidated Balance Sheets and

Consolidated Statement of Stockholders’ Equity have been adjusted to reflect the estimated impact of the 2022 stock dividend.

Figures that have been adjusted include common stock shares issued and outstanding, common stock balance and retained

earnings balance.

The December 31, 2020 and 2019 balances included in the Consolidated Balance Sheets and Statement of Stockholders’ Equity have not been adjusted to retroactively reflect the stock dividends, but instead show the

historical rollforward of stock dividends declared.

Segment Reporting

The "Segment Reporting" topic of the FASB ASC requires that public companies report certain information about operating segments.

It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers.

The Company is a holding company for a community bank, which offers a wide array of products and services to its customers.

also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers.

The Company is a holding company for a community bank, which offers a wide array

of products and services to its customers.

Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business.

As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

Therefore, the Company only reports one segment.

As a result, the Company is not organized around

discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

Therefore, the Company reports

community banking as its only segment.

Impact of Recently Issued Accounting Standards

The CARES Act was passed by Congress and signed into law on March 27, 2020.

Section 4013 of the CARES Act provides that a financial institution may elect to not apply GAAP requirements to loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, and suspends the determination of loan modifications related to the COVID-19 pandemic from being treated as TDR’s.

The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and modifications that occur beginning on March 1, 2020 until the earlier of:

The CARES Act was passed

by Congress and signed into law on March 27, 2020.

Section 4013 of the CARES Act provides that a financial institution may elect to not apply GAAP requirements to loan modifications related to the COVID-19 pandemic that would otherwise be

categorized as a TDR, and suspends the determination of loan modifications related to the COVID-19 pandemic from being treated as TDRs.

The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of

December 31, 2019, and modifications that occurred beginning on March 1, 2020 until the earlier of:

sixty days after the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020.

The suspension of TDR accounting and reporting guidance may not be applied to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic .

In December 2020, the Consolidated Appropriations Act, 2021 was signed into law.

Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19.

Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic .

On April 3, 2020, the SEC Office of the Chief Accountant issued a public statement communicating that for eligible entities that elect to apply Section 4013 of the CARES Act, the SEC staff would not object that this is in accordance with GAAP for the periods for which such elections are available.

In June 2020, the American Institute of Certified Public Accountants published Q&A Section 2130.41 regarding a technical question regarding the recognition of interest income on Section 4013 loans which provided multiple permitted policy elections regarding the recognition of interest on Section 4013 restructured loans .

The Bank has continued to actively assist its communities by providing temporary loan relief under Section 4013 of the CARES Act.

The suspension of TDR

accounting and reporting guidance may not be applied to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic.

In December 2020, the Consolidated Appropriations Act, 2021

was signed into law.

termination of the national emergency declaration relating to COVID-19.

Future TDRs are indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted,

including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic .

On April 3, 2020, the SEC

Office of the Chief Accountant issued a public statement communicating that for eligible entities that elect to apply Section 4013 of the CARES Act, the SEC staff would not object that this is in accordance with GAAP for the periods for which such

elections are available.

multiple permitted policy elections regarding the recognition of interest on Section 4013 restructured loans.

The Bank has continued to actively assist its communities by providing temporary loan relief under

Section 4013 of the CARES Act.

This relief included loan modifications which include forbearance programs (both full payment deferrals and interest only payments) to customers who have been negatively impacted by the pandemic.

For loans that have been provided temporary full payment deferrals, the Bank has made a policy election to cease recognition of interest income during the term of the payment deferrals (generally three to six months ).

Upon completion of the forbearance period, the foregone interest over the deferral period is capitalized as deferred interest and recognized as an adjustment to the effective interest rate over the remaining life of the loan using the effective yield method.

Loans that were provided interest only payment relief will continue to accrue interest over the interest only period provided that the loans continue to perform as agreed.

This policy election does not impact the Bank’s existing policies regarding non-accrual determinations if reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal regardless of whether a loan was modified under Section 4013 of the CARES Act.

On March 22, 2020, the federal bank regulatory agencies issued joint guidance advising that the agencies have confirmed with the staff of the Financial Accounting Standards Board that short-term modifications due to COVID-19, made on a good faith basis to borrowers who were current prior to relief, are not TDRs.

The CARES Act also provided relief from TDR classification for certain COVID-19 loan modifications.

The Bank elected not to classify modifications that meet the criteria under either the CARES Act or the criteria specified by the regulatory agencies as TDRs .

In March 2020, the FASB issued ASU 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842):

For loans that have

been provided temporary full payment deferrals, the Bank has made a policy election to cease recognition of interest income during the term of the payment deferrals (generally three to six months ).

Upon completion of the forbearance period, the foregone

interest over the deferral period is capitalized as deferred interest and recognized as an adjustment to the effective interest rate over the life of the loan using the effective yield method.

Loans that were provided interest only payment relief

will continue to accrue interest over the interest only period provided that the loans continue to perform as agreed.

This policy election does not impact the Bank’s existing policies regarding non-accrual determinations if reasonable doubt exists

as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with

respect to interest or principal regardless of whether a loan was modified under Section 4013 of the CARES Act.

On March 22, 2020, the Federal bank regulatory agencies issued joint guidance advising that the agencies have confirmed with the staff

of the Financial Accounting Standards Board that short-term modifications due to COVID-19, made on a good faith basis to borrowers who were current prior to relief, are not TDRs.

The CARES Act also provided relief from TDR classification for

certain COVID-19 loan modifications.

The Bank elected not to classify modifications as TDRs that meet the criteria under either the CARES Act or the criteria specified by the regulatory agencies as TDRs.

In March 2020, the FASB issued ASU 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

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2016-02, Leases (Topic 842).

This ASU adds an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No.

This ASU adds an SEC paragraph pursuant

to the issuance of SEC Staff Accounting Bulletin No.

119 on loan losses to the FASB Codification Topic 326.

This ASU also updates the SEC section of the Codification for the change in the effective date of Topic 842.

This ASU is effective upon addition to the FASB Codification.

This ASU was effective upon

addition to the FASB Codification.

The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) is effective on January 1, 2023 for smaller reporting companies with less than $250 million in public float as defined in the SEC's rules (such as the Company).

W hile the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13 , it expects that the impact of adoption will be significantly influenced by the composition, characteristics and quality of the Company’s loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments.

The amendments in ASU 2020-03 make narrow-scope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (CECL) standard issued in 2016.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) is effective on January 1, 2023 for smaller reporting companies with less

than $250 million in public float as defined in the SEC's rules.

The Company is a smaller reporting company.

The Company will apply the amendment's provisions as a

cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective.

The Company has formed a team that is working on an implementation plan to adopt the amendment.

The implementation plan will

include developing policies, procedures and internal controls over the model.

The Company is also working with a software vendor to measure expected losses required by the amendment.

The Company is currently evaluating the effects that the

adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is

March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments.

The amendments in ASU 2020-03 make narrow-scope improvements to various aspects of the financial instruments guidance, including the current expected

credit losses (CECL) standard issued in 2016.

The ASU is part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application.

The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities.

The items addressed in that

project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities.

Effective dates for each amendment vary.

The Company does not expect the adoption of this update to have a significant impact on its financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).

The Company does not expect the adoption of

this update to have a significant impact on the Company's consolidated financial statements.

March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).

This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform.

This ASU is effective for all entities as of March 12, 2020 through December 31, 2022.

The Company is in the process of evaluating the provisions of this ASU, but does not expect it to have a material impact on our consolidated financial statements.

This ASU provides optional expedients and exceptions

for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform.

This ASU was effective for all entities as of March 12, 2020 through December

As of January 1, 2022, the Company is no longer originating LIBOR based loans and are originating new loans using the Secured Overnight Financing Rate (SOFR).

For existing LIBOR based loans, the Company is monitoring the development and

reporting of fallback indices.

The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

The Company is in the process of evaluating the provisions of this ASU, but does not expect it to have a material impact on our consolidated financial statements.

clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic

848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU 2021-01 on contract modifications that

change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within

the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of

the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

The Company is in the process of evaluating the provisions of this ASU

but does not expect it to have a material impact on the Company's consolidated financial statements.

Cash and Due from Banks

The Bank is required to maintain reserves with the Federal Reserve Bank based on a percentage of deposit liabilities.

No aggregate reserves were required at December 31, 2020 and 2019.

The Bank has met its average reserve requirements during 2020, 2019, and 2018 and the minimum required balance at December 31, 2020 and 2019.

No aggregate reserves were required at December 31, 2021

The Bank has met its average reserve requirements during 2021 and 2020 and the minimum required balance at December 31,

2021 and 2020.

Investment Securities

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Gross realized gains from sales and calls of available-for-sale securities were $ 322 and $ 342 for the years ended December 31, 2021 and 2020, respectively.

Gross realized losses from sales of available-for-sale securities were $ 46 , $ 84 , and $ 20 for the years ended December 31, 2020, 2019, and 2018, respectively.

realized losses from sales of available-for-sale securities were $ 543 and $ 46 for the years ended December 31, 2021 and 2020, respectively.

The amortized cost and estimated fair value of debt and other securities at December 31, 2021, by contractual maturity, are shown in the following table:

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Due after ten years

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or

prepayment penalties.

In addition, factors such as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities.

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No decline in value was considered “other-than-temporary” during 2021.

Eight securities, all considered investment grade, which had a fair value of $ 95,948 and a total unrealized loss of $ 374 have been in an unrealized loss position for less than twelve months as of December 31, 2020.

No securities have been in an unrealized loss position for more than twelve months as of December 31, 2020.

The unrealized losses on the Company's investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates.

One hundred sixty-eight securities, all considered investment grade, which had a fair value of $ 389,464 and a total unrealized loss of $ 7,514 have been in an unrealized loss position for less than

twelve months as of December 31, 2021.

Twenty-two securities, all considered investment grade, which had a fair value of $ 41,453 and total unrealized loss of $ 1,163 ,

have been in an unrealized loss position for more than twelve months as of December 31, 2021.

The unrealized losses on the Company's investment securities were caused by market conditions for these types of investments, particularly changes in

risk-free interest rates.

The Company does not intend to sell the securities and has concluded it is not more likely than not that it will be required to sell these securities prior to recovery of their anticipated cost basis.

Therefore, the Company does not consider these investments to be other than temporarily impaired as of December 31, 2020.

The fair value of investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer's financial condition deteriorates, or the liquidity for securities declines.

Therefore, the Company

does not consider these investments to be other than temporarily impaired as of December 31, 2021.

The fair value of investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the

issuer's financial condition deteriorates, or the liquidity for securities declines.

As a result, other than temporary impairments may occur in the future.

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Mortgage-backed securities

Investment securities carried at $ 41,916 and $ 37,943 at December 31, 2020 and 2019, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

Investment securities carried at $ 39,695 and

$ 41,916 at December 31, 2021

and 2020, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

The composition of the Company’s loan portfolio, by loan class, at December 31, is as follows:

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Net deferred origination fees and costs

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix.

The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times.

Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses.

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis

of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix.

The Company strives to identify loans experiencing difficulty early enough to correct the problems, to

record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times.

Asset quality reviews of loans and other non-performing assets are

administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies.

Commercial loans, whether secured or unsecured, generally are made to

support the short-term operations and other needs of small businesses.

These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above.

Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.

Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors.

Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied.

commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.

Based on this information, the Company may decide to take any of

several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors.

Notwithstanding, when repayment becomes

unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers,

qualified independent third parties, purchase invoices, or other appropriate documentation.

Paycheck Protection Program (“PPP”) loans outstanding included in Commercial loans totaled $ 37 million and $ 155 million as of December 31, 2021 and December

31, 2020, respectively.

Commercial real estate loans generally fall into two

categories, owner-occupied and non-owner occupied.

Loans secured by owner occupied real estate are primarily susceptible to changes in the market conditions of the related business.

This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles.

These same risks apply to Commercial loans whether secured by equipment, receivables or other personal property or unsecured.

Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections.

This may be driven by, among other things, industry changes,

geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles.

These same risks apply to commercial loans whether secured by equipment, receivables, or

other personal property or unsecured.

Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site

similar support from guarantors.

Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.

When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss.

Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default.

Losses on loans secured by owner-occupied

real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.

When default is driven by issues related specifically to the business owner,

collateral values tend to provide better repayment support and may result in little or no loss.

Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses

due to default.

Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates.

Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space.

Most often, these shifts are a result of

changes in general economic or market conditions or overbuilding and resulting over-supply of space.

Losses are dependent on the value of underlying collateral at the time of default.

Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means .

Values are generally driven by these same factors and influenced

by interest rates and required rates of return as well as changes in occupancy costs.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or

other appropriate means.

Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock.

Repayment is primarily from the sale of an agricultural product or service.

Repayment is primarily from the

sale of an agricultural product or service.

Agricultural loans are generally secured by inventory, receivables, equipment, and other real property.

Agricultural loans primarily are susceptible to changes in market demand for specific commodities.

This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought or floods.

Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections.

Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary .

Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks;

Based on this information, the Company

may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors.

Notwithstanding, when

repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Residential mortgage loans, which are secured by real estate, are primarily susceptible to

non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfalls in collateral value.

In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts .

Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion.

Losses are primarily related to underlying collateral value and changes therein as described above.

In general, non-payment is usually due to loss of employment and follows

general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts .

Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the

added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion.

Losses are primarily related to underlying collateral value and changes therein as described

Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower.

Based on this information, the Company may decide to take

any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the

underlying collateral.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks:

non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfall in collateral value.

In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, and demand shifts.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

non-payment due to diminished or lost income, over-extension of credit, a lack of

borrower's cash flow to sustain payments, and shortfall in collateral value.

In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment

rate, loss of collateral value, and demand shifts.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other

appropriate documentation.

Collateral valuations are obtained at origination of the credit.

Once repayment is questionable, and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more frequent depending on the collateral type).

Once repayment is questionable, and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more

frequent depending on the collateral type).

At December 31, 2021, approximately 16 % in principal amount of the Company’s loans were for general commercial uses, including professional, retail and small businesses.

Approximately 51 % in principal amount of the Company’s loans were secured by commercial real estate, which consists primarily of loans secured by commercial properties and construction and land development loans.

Approximately 11 % in principal amount of the Company’s loans were for agriculture, approximately 7 % in principal amount of the Company’s loans were residential mortgage loans, approximately 0 % in principal amount of the Company’s loans were residential construction loans and approximately 2 % in principal amount of the Company’s loans were consumer loans.

Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment.

If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.

For collateral dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount.

Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted.

Approximately 60 % in principal amount of the Company’s loans were secured by commercial real estate, which consists primarily of loans secured by commercial properties

and construction and land development loans.

Approximately 12 % in principal amount of the Company’s loans were for agriculture,

approximately 9 % in principal amount of the Company’s loans were residential mortgage loans, approximately 1 % in principal amount of the Company’s loans were residential construction loans and approximately 2 % in principal amount of the Company’s loans were consumer loans.

Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain

additional collateral or a principal payment.

estimate its probable loss, using the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.

For collateral

dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount.

Depending on the length of time until final collection, the

Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted.

Revaluations may occur as often as every 3 - 12 months depending on the underlying collateral and volatility of values.

Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed.

Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets.

Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or

judgment liens on the borrower's other assets.

At December 31, 2021 and 2020, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank.

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Residential Construction

Non-accrual loans amounted to $ 15,211 at December 31, 2020 and were comprised of four commercial loans totaling $ 363 , three commercial real estate loans totaling $ 4,875 , three agriculture loans totaling $ 9,130 , one residential mortgage loan totaling $ 153 , and five consumer loans totaling $ 690 .

Non-accrual loans amounted to $ 1,157 at December 31, 2019, and were comprised of three commercial loans totaling $ 266 , two commercial real estate loans totaling $ 466 , one residential mortgage loans totaling $ 172 , and four consumer loan totaling $ 253 .

All non-accrual loans are measured for impairment based upon the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of collateral, if the loan is collateral dependent.

If the measurement of the non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses.

If the loan is considered to be collateral dependent, it is generally the Company's policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral.

There were no commitments to lend additional funds to borrowers whose loan was on non-accrual status at December 31, 2020 and December 31, 2019.

Non-accrual loans amounted to $ 10,197 at December 31, 2021, and were comprised of two commercial loans totaling $ 133 , one commercial real estate loan totaling $ 555 , three agriculture loans totaling $ 8,712 , one residential mortgage loan totaling $ 138 , and four consumer loans totaling $ 659 .

Non-accrual loans amounted to $ 15,211 at December 31, 2020, and were comprised of four commercial loans totaling $ 363 , three commercial real estate loans totaling $ 4,875 , three agriculture loans totaling $ 9,130 , one residential mortgage loan totaling $ 153 , and five

consumer loans totaling $ 690 .

All non-accrual

loans are considered impaired and are measured for impairment based upon the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of collateral, if the loan is

collateral dependent.

against the allowance for loan losses.

to the estimated net realizable value of the underlying collateral.

There were no commitments to lend additional funds to borrowers

whose loans were on non-accrual status at December 31, 2021 and December 31, 2020.

Loans with deferrals granted under Section 4013 of the CARES Act are not considered past due if performing in accordance with the forbearance agreement and/or reported as nonaccrual if

deemed collectible during the deferral period.

See Note 1 for discussion on policy election on loan modifications under Section 4013 of the CARES Act.

Impaired Loans

Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $ 500,000 or more.

Once identified, impaired loans are measured individually for impairment using one of three methods:

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due

according to the contractual terms of the loan agreement, including scheduled interest payments.

Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or

worse and an aggregate exposure of $ 500 or more.

Once identified as impaired, impaired loans are measured individually for impairment using

one of three methods:

present value of expected cash flows discounted at the loan's effective interest rate;

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or fair value of collateral if the loan is collateral dependent.

In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses.

In general, any portion of the recorded

investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of December 31, 2021 and 2020, were as follows:

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December 31, 2020

December 31, 2018

Commercial Real Estate

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Residential Construction

None of the interest on impaired loans was recognized using a cash basis of accounting for the years ended December 31, 2020, 2019, and 2018.

None of the interest on impaired loans

was recognized using a cash basis of accounting for the years ended December 31, 2021 and 2020.

Troubled Debt Restructurings

The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted because of the borrowers' financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan.

These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months .

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent.

If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

The Company had $ 2,325 and $ 3,413 in TDR loans as of December 31, 2020 and 2019, respectively.

The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions

in terms have been granted because of the borrowers' financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan.

These concessions may include reductions in the interest rate, payment

extensions, forgiveness of principal, forbearance, or other actions.

Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower's sustained repayment performance for

a reasonable period, generally six months .

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan

agreement, or the fair value of collateral less selling costs if the loan is collateral dependent.

If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a

charge-off of the loan.

The Company had $ 10,103 and $ 2,325 in TDR loans as of December 31, 2021

and 2020, respectively.

Specific reserves for TDR loans totaled $ 93 and $ 253 as of December 31, 2021 and 2020, respectively.

TDR loans performing in compliance with modified terms totaled $ 2,260 and $ 3,318 as of December 31, 2020 and 2019, respectively.

There were no commitments to advance additional funds on existing TDR loans as of December 31, 2020.

The CARES Act also provided relief from TDR classification for certain COVID-19 loan modifications.

The Bank elected not to classify modifications that meet the criteria under either the CARES Act or the criteria specified by the regulatory agencies as TDRs.

There were no loans modified as TDRs during the year ended December 31, 2020.

TDR loans performing in

compliance with modified terms totaled $ 10,006 and $ 2,260 as of December 31, 2021 and 2020, respectively.

There were no commitments to advance

additional funds on existing TDR loans as of December 31, 2021.

On March 22, 2020, the Federal bank regulatory agencies issued joint guidance advising that the agencies have confirmed with the staff of the Financial Accounting

Standards Board that short-term modifications due to COVID-19, made on a good faith basis to borrowers who were current prior to relief, are not TDRs.

The CARES Act also provided relief from TDR classification for certain COVID-19 loan

modifications.

In December 2020, the Consolidated Appropriations Act, 2021 was signed into law.

Bank elected not to classify modifications that meet the criteria under either the CARES Act or the criteria specified by the regulatory agencies as TDRs.

Loans modified as troubled debt restructurings during the years ended December 31, 2021 and 2020, were as follows:

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Pre-modification

Residential Construction

Year Ended December 31, 2018

Pre-modification

There were no loans modified

as TDRs during the year ended December 31, 2020.

Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance.

No loans were modified as a TDR within the previous 12 months that subsequently defaulted during the years ended December 31, 2021, and 2020.

The Company considers a loan to be in payment default when it is 90 days or more past due.

The Company considers

a loan to be in payment default when it is 90 days or more past due.

Credit Quality Indicators

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Risk ratings are adjusted as future circumstances warrant.

All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State regulatory agencies;

credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State regulatory agencies;

a 5 equates to a Special Mention;

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and an 8 equates to a Loss.

General definitions for each risk rating are as follows:

General definitions for each

risk rating are as follows:

Risk Rating “1” – Pass (High Quality):

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Government bonds).

Risk Rating “2” – Pass (Above Average Quality):

Risk Rating “2” – Pass (Above Average

This category is reserved for borrowers with strong balance sheets that are well structured with manageable levels of debt and good liquidity.

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Collateral protection is better than the Company’s Credit Policy guidelines.

Risk Rating “3” – Pass (Average Quality):

Risk Rating “3” – Pass (Average

Credits within this category are considered to be of average, but acceptable, quality.

Loan characteristics, including term and collateral advance rates, meet the Company’s Credit Policy guidelines;

unsecured lines to borrowers with above average liquidity and cash flow may be considered for this category;

unsecured lines to borrowers

with above average liquidity and cash flow may be considered for this category;

the borrower’s financial strength is well documented, with adequate, but consistent, cash flow to meet all obligations.

Liquidity should be sufficient and leverage should be moderate.

Liquidity should be sufficient and leverage should

Monitoring of collateral may be required, including a borrowing base or construction budget.

Alternative financing is typically available.

Risk Rating “4” – Pass (Below Average Quality):

Credits within this category are considered sound, but merit additional attention due to industry concentrations within the borrower’s customer base, problems within their industry, deteriorating financial or earnings trends, declining collateral values, increased frequency of past due payments and/or overdrafts, discovery of documentation deficiencies which may impair our borrower’s ability to repay, or the Company’s ability to liquidate collateral.

Financial performance is average but inconsistent.

Risk Rating “4” – Pass (Below Average

declining collateral values, increased frequency of past due payments and/or overdrafts, discovery of documentation deficiencies which may impair our borrower’s ability to repay, or the Company’s ability to liquidate collateral.

Financial performance

is average but inconsistent.

There also may be changes of ownership, management or professional advisors, which could be detrimental to the borrower’s future performance.

Risk Rating “5” – Special Mention (Criticized):

Loans in this category are currently protected by their collateral value and have no loss potential identified, but have potential weaknesses which may, if not monitored or corrected, weaken our ability to collect payments from the borrower or satisfactorily liquidate our collateral position.

Risk Rating “5” – Special Mention

(Criticized):

from the borrower or satisfactorily liquidate our collateral position.

Loans where terms have been modified due to their failure to perform as agreed may be included in this category.

Adverse trends in the borrower’s operation, such as reporting losses or inadequate cash flow, increasing and unsatisfactory leverage, or an adverse change in economic or market conditions may have weakened the borrower’s business and impaired their ability to repay based on original terms.

The condition or value of the collateral has deteriorated to the point where adequate protection for our loan may be jeopardized in the future.

Adverse trends in the borrower’s operation, such as reporting

losses or inadequate cash flow, increasing and unsatisfactory leverage, or an adverse change in economic or market conditions may have weakened the borrower’s business and impaired their ability to repay based on original terms.

The condition or

value of the collateral has deteriorated to the point where adequate protection for our loan may be jeopardized in the future.

Loans in this category are in transition and, generally, do not remain in this category beyond 12 months.

During this time, efforts are focused on strategies aimed at upgrading the credit or locating alternative financing.

Risk Rating “6” – Substandard (Classified):

During this time,

efforts are focused on strategies aimed at upgrading the credit or locating alternative financing.

Risk Rating “6” – Substandard

(Classified):

Loans in this category are inadequately protected by the borrower’s net worth, capacity to repay or collateral pledged, if any.

Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.

Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of

There exists a strong possibility of loss if the deficiencies are not corrected.

Loans that are dependent on the liquidation of collateral to repay are included in this category, as well as borrowers in bankruptcy or where legal action is required to effect collection of our debt.

Risk Rating “7” – Doubtful (Classified):

Loans that are dependent on the liquidation of collateral to repay are included in this category, as well as borrowers in bankruptcy or where legal action is

required to effect collection of our debt.

Risk Rating “7” – Doubtful

(Classified):

Loans in this category indicate all of the weaknesses of a Substandard classification, however, collection of loan principal, in full, is highly questionable and improbable;

possibility of loss is very high, but there is still a possibility that certain collection strategies may, yet, be successful, rendering a definitive loss difficult to estimate, at this time.

possibility of loss is very high, but there is still

a possibility that certain collection strategies may, yet, be successful, rendering a definitive loss difficult to estimate, at this time.

Loans in this category are in transition and, generally, do not remain in this category more than 6 months.

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Active Charge-Off.

Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required.

Loans in this category are

considered uncollectible and of such little value that their removal from the Company’s books is required.

The charge-off is pending or already processed.

Collateral positions have been or are in the process of being liquidated and the borrower/guarantor may or may not be cooperative in repayment of the debt.

Collateral positions have been or are in the process of being liquidated and the

borrower/guarantor may or may not be cooperative in repayment of the debt.

Recovery prospects are unknown at this time, but we are still actively engaged in the collection of the loan.

Inactive Charge-Off.

Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required.

Loans in this category are

considered uncollectible and of such little value that their removal from the Company’s books is required.

The charge-off is pending or already processed.

Collateral positions have been liquidated and the borrower/guarantor has nothing of any value remaining to apply to the repayment of our loan.

Collateral positions have been liquidated and the borrower/guarantor has nothing of any value

remaining to apply to the repayment of our loan.

Any further collection activities would be of little value.

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Provision for loan losses

Net charge-offs

Ending Balance

Period-end amount allocated to:

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Balance as of December 31, 2020

Balance as of December 31, 2018

Provision for loan losses

Net charge-offs

Net (charge-offs)/ recoveries

Ending Balance

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Provision for loan losses

Net charge-offs

Net (charge-offs)/ recoveries

Ending Balance

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Balance as of December 31, 2020

The Company’s investment in loans as of December 31, 2020, 2019, and 2018 related to each balance in the allowance for loan losses by loan category and disaggregated on the basis of the Company’s impairment methodology was as follows:

December 31, 2020

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Ending Balance

The Company’s investment in loans as of December

31, 2021 and 2020

related to each balance in the allowance for loan losses by loan category and disaggregated on the basis of the Company’s impairment methodology was as follows:

December 31, 2021

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Mortgage Operations

The Company recognizes a gain or loss and a related asset for the fair value of the rights to service loans for others when loans are sold.

The Company sold substantially its entire portfolio of conforming long-term residential mortgage loans originated during the year ended December 31, 2020 for cash proceeds equal to the fair value of the loans.

At December 31, 2020 and 2019, the Company serviced real estate mortgage loans for others totaling $ 206,208 and $ 208,862 , respectively.

The Company recognizes a gain or loss and a related asset for the fair value of the rights to service loans for others

when loans are sold and servicing is retained.

The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the year ended December 31, 2021 on a servicing retained basis, for cash proceeds equal to the fair value of the loans.

At December 31, 2021 and 2020, the Company serviced real estate mortgage

loans for others totaling $ 208,169 and $ 206,208 ,

respectively.

The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues.

The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date.

assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date.

For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates.

Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions.

The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value.

value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions.

The amount of impairment

recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value.

Impairment, if any, is recognized through a valuation allowance for each individual stratum.

Changes in the carrying amount of mortgage servicing rights are reported in earnings under other operating income on the consolidated statements of income.

Changes in the carrying amount

of mortgage servicing rights are reported in earnings under other operating income on the consolidated statements of income.

The following table summarizes the activity related to the Company’s mortgage servicing rights assets for the years ended December 31, 2021 and 2020.

Mortgage servicing rights are included in Interest Receivable and Other Assets on the consolidated balance sheets.

Mortgage servicing rights

Valuation allowance

Mortgage servicing rights, net of valuation allowance

Mortgage servicing

rights are included in Interest Receivable and Other Assets on the consolidated balance sheets.

Mortgage servicing rights

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At December 31, 2021 and December 31, 2020 , the estimated fair market value of the Company's mortgage servicing rights asset was $ 1,531 and $ 1,242 , respectively.

The changes in fair value of mortgage servicing rights during 2021 was primarily due to new

originations and changes in prepayment speeds.

The changes in fair value of mortgage servicing rights during 2020 was primarily due to changes in prepayment speeds.

The changes in fair value of mortgage servicing rights during 2019 was primarily due to changes in prepayment speeds and principal balances.

The Company received contractually specified servicing fees of $ 530 and $ 528 for the years ended December 31, 2021 and 2020, respectively.

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Premises and Equipment

Premises and equipment consist of the following at December 31 of the indicated years:

Premises and equipment consisted of the following at December 31, of the indicated years:

Furniture and equipment

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Short-Term and Long-Term Borrowings

Short-term borrowings totaling $ 5,000 as of December 31, 2020, consisted of an advance with the FHLB through its COVID-19 Relief and Recovery Advances Program.

The advance matures in 0.4 years and has a 0 % interest rate.

The advance is secured under terms of a blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral such as commercial and mortgage loans.

Short-term borrowings totaled $ 0 and $ 5,000 as of December 31, 2021 and December 31, 2020, respectively.

This consisted of an advance with the FHLB through its COVID-19 Relief and Recovery

Advances Program.

The advance had a 0 % interest rate and matured in the second quarter of 2021.

The advance was secured under terms of a

blanket collateral agreement by a pledge of FHLB stock and certain other qualifying collateral such as commercial and mortgage loans.

As of December 31, 2021, the Company had a remaining collateral borrowing capacity with the FHLB of $ 306,597 and, at such date, also had unsecured formal lines of credit totaling $ 122,000 with correspondent banks.

The Company had no short-term borrowings as of December 31, 2019.

The Company had no Federal Funds purchased during the years ended December 31, 2020 and 2019.

The Company had no long-term borrowings during the years ended December 31, 2020 and 2019.

The Bank leases ten branch and administrative locations under operating leases expiring on various dates through 2030.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term.

For lease agreements entered into or reassessed after the adoption of Topic 842, the Bank combines lease and nonlease components.

The Company had no Federal Funds

purchased during the years ended December 31, 2021 and 2020.

The Company had no long-term borrowings

during the years ended December 31, 2021 and 2020.

The Company leases eleven branch and

administrative locations under operating leases expiring on various dates through 2030.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease

For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines lease and nonlease components.

The Bank had no financing leases as of December 31, 2021.

Most leases include options to renew, with renewal terms that can extend the lease term from 3 to 10 years.

The exercise of lease renewal options is at the Bank’s sole discretion.

The exercise of lease renewal options is at the Company’s sole

Most leases are currently in the extension period.

For the remaining leases with options to renew, the Bank has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain of being exercised.

For the remaining leases with options to renew, the Company has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain

of being exercised.

Certain lease agreements include rental payments that are adjusted periodically for inflation.

The Bank's lease agreements do not contain any residual value guarantees or restrictive covenants.

The Bank uses its FHLB advance fixed rates, which are the Bank’s incremental borrowing rates for secured borrowings, as the discount rates to calculate lease liabilities.

The Company had right-of-use assets totaling $ 5,913 and $ 6,962 as of December 31, 2020 and December 31, 2019, respectively.

The Company had lease liabilities totaling $ 6,453 and $ 7,483 as of December 31, 2020 and December 31, 2019, respectively.

The Company's lease agreements do not contain any residual value guarantees or restrictive covenants.

The Company uses its FHLB advance fixed rates, which are its incremental borrowing rates for secured borrowings, as the discount rates to calculate lease

The Company had right-of-use assets totaling $ 5,138

and $ 5,913 as of December 31, 2021 and December 31, 2020, respectively.

Right-of-use assets are included in Interest receivable and other assets on the Consolidated Balance Sheets.

The Company had lease liabilities totaling $ 5,664 and $ 6,453 as of December 31, 2021

and December 31, 2020, respectively.

Lease liabilities are included in Interest payable and other liabilities on the Consolidated

Balance Sheets.

The Company recognized lease expenses totaling $ 1,172 and $ 1,275 for the years ended December 31, 2021 and December 31, 2020, respectively.

Lease expenses include expenses related to short-term leases and recognition of deferred gain on sale-leaseback.

Lease expense is included in Occupancy and equipment expense on the Income Statement.

Lease expense is included in Occupancy and Equipment expense on the Consolidated Statements of Income.

The table below summarizes the maturity of remaining lease liabilities at December 31:

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The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.

These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit.

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.

The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit in addition to entering into commitments to sell loans in conjunction with our mortgage banking activities.

These instruments

involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.

The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of

financial instruments.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and

standby letters of credit is represented by the contractual notional amount of those instruments.

The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent

future cash requirements.

The Bank evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation.

Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The credit risk

involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Bank issues both financial and performance standby letters of credit.

The financial standby letters of credit are primarily to guarantee payment to third parties.

The financial standby letters of credit are primarily

to guarantee payment to third parties.

At December 31, 2021, there were no financial standby letters of credit outstanding.

The performance standby letters of credit are typically issued to municipalities as specific performance bonds.

At December 31, 2020, there was $ 1,731 issued in performance standby letters of credit and the Bank carried no liability.

performance standby letters of credit are typically issued to municipalities as specific performance bonds.

At December 31, 2021, there

was $ 2,305 issued in performance standby letters of credit and the Bank carried no liability.

The Bank has experienced no draws on these letters of credit and does not expect to in the future;

however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or imbedded agreements of recourse from the customer.

The Bank has set aside a reserve for unfunded commitments in the amount of $ 950 and $ 840 at December 31, 2020 and 2019, respectively, which is recorded in “interest payable and other liabilities” on the consolidated balance sheets.

however, should a triggering event occur, the Bank either has collateral in

excess of the letter of credit or imbedded agreements of recourse from the customer.

The Bank has set aside a reserve for unfunded commitments in the amount of $ 650 and $ 950 at December 31, 2021 and 2020, respectively, which is recorded in “interest

payable and other liabilities” on the consolidated balance sheets.

Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans.

As of December 31, 2020, the Company had no off-balance sheet derivatives requiring additional disclosure.

Mortgage loans sold to investors may be sold with servicing rights retained, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards.

As of December 31, 2021, the

Company had no off-balance sheet derivatives requiring additional disclosure.

The Company may enter into interest rate lock commitments in connection with its mortgage banking activities to fund residential

mortgage loans within specified times in the future.

These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock to the funding

of the mortgage loan.

To protect against this risk, the Company may enter into commitments to sell loans to economically hedge the risk of potential changes in the value of the loans that would result from the commitment.

These commitments totaled

$ 1,500 and $ 1,052 at

December 31, 2021 and 2020, respectively.

documentation standards.

In the past two years, the Company has not had to repurchase any loans due to deficiencies in underwriting or loan documentation.

Management believes that any liabilities that may result from such recourse provisions are not significant.

Management believes that any liabilities that may result from such recourse provisions are

not significant.

Commitments and Contingencies

The Company is obligated for rental payments under certain operating lease agreements, some of which contain renewal options.

Total rental expense for all leases included in net occupancy and equipment expense amounted to approximately $ 1,275 , $ 1,049 , and $ 878 for the years ended December 31, 2020, 2019, and 2018, respectively.

See Note 9 for a summary of future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one year.

At December 31, 2020, the aggregate maturities for time deposits were as follows:

At December 31, 2021, the aggregate

maturities for time deposits were as follows:

Year ending December 31:

The Company is subject to various legal proceedings in the normal course of its business.

In the opinion of management, after having consulted with legal counsel, the outcome of the pending legal proceedings should not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

In the opinion of management, after having consulted with legal

counsel, the outcome of the pending legal proceedings should not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

Capital Adequacy and Restriction on Dividends

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s and the Bank's consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

Failure to meet minimum

capital requirements can initiate mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s and the Bank's consolidated financial statements.

Under capital adequacy

guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet

items as calculated under regulatory accounting practices.

The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to help ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below).

Quantitative measures established by regulation to help ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios

(set forth in the table below).

In July 2013, the FRB and the other U.S.

federal banking agencies adopted final rules making significant changes to the U.S.

regulatory capital framework for U.S.

regulatory capital framework

banking organizations and to conform this framework to the guidelines published by the Basel Committee known as the Basel III Global Regulatory Framework for Capital and Liquidity.

The Basel Committee is a committee of banking supervisory authorities from major countries in the global financial system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis.

These rules adopted by the FRB and the other federal banking agencies (the U.S.

Basel III Capital Rules) replaced the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules, in accordance with certain transition provisions.

Banks, such as First Northern, became subject to the new rules on January 1, 2015.

The new rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital.

The final rules provide for increased minimum capital ratios as follows:

The Basel Committee is a committee of banking supervisory

authorities from major countries in the global financial system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis.

These rules adopted by the FRB and the

other federal banking agencies (the U.S.

Banks, such as First Northern, became subject to the final rules on January 1, 2015.

The final rules implement higher minimum capital requirements, include

a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital.

The final rules provide for increased minimum

capital ratios as follows:

(a) a common equity Tier 1 capital ratio of 4.5%;

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and (d) a Tier 1 leverage ratio to average consolidated assets of 4%.

Under these rules, in order to avoid certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets).

Under these rules, in order to avoid

certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above

its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets).

The capital conservation buffer is designed to absorb losses during periods of economic stress.

Pursuant to the EGRRCPA, the FRB adopted a final rule, effective August 31, 2018, amending the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “policy statement”) to increase the consolidated assets threshold to qualify to utilize the provisions of the policy statement from $1 billion to $3 billion.

Bank holding companies, such as the Company, are subject to capital adequacy requirements of the FRB;

however, bank holding companies which are subject to the policy statement are not subject to compliance with the regulatory capital requirements until they hold $3 billion or more in consolidated total assets.

As a consequence, as of December 31, 2018, the Company was not required to comply with the FRB’s regulatory capital requirements until such time that its consolidated total assets equal $3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company.

Pursuant to the EGRRCPA, the FRB adopted a final rule, effective August 31, 2018, amending the Small Bank Holding Company and Savings and Loan Holding

Company Policy Statement (the “policy statement”) to increase the consolidated assets threshold to qualify to utilize the provisions of the policy statement from $1 billion to $3 billion.

Bank holding companies, such as the Company, are subject to

capital adequacy requirements of the FRB;

Company is no longer deemed to be a small bank holding company.

However, if the Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements.

In August of 2020, the federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the “CBLR”), implementing two interim final rules adopted in April of 2020.

In August of 2020, the Federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the “CBLR”), implementing

two interim final rules adopted in April of 2020.

The rule provides an optional, simplified measure of capital adequacy.

Under the optional CBLR framework, the CBLR will be 8.5 percent through calendar year 2021 and 9 percent thereafter.

The rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets.

applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets.

Banks not electing the CBLR framework will continue to be subject to the generally applicable risk-based capital rule.

At the present time, the Company and the Bank do not intend to elect to use the CBLR framework.

the present time, the Company and the Bank do not intend to elect to use the CBLR framework.

Management believes, as of December 31, 2021, that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2020, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.

As of December 31, 2021, the most

recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.

To be categorized as “well capitalized” the Bank must meet the minimum ratios as set forth below.

As of the date hereof, there have been no conditions or events since that notification that management believes have changed the institution’s category.

The Bank had Tier I Leverage, Common Equity Tier 1, Tier I Risk-Based and Total Risk-Based capital above the “well capitalized” levels at December 31, 2020 and 2019, respectively, as set forth in the following table (calculated in accordance with the Basel III capital rules):

As of the date

hereof, there have been no conditions or events since that notification that management believes have changed the institution’s category.

The Bank had Tier I Leverage, Common Equity Tier 1, Tier I Risk-Based and Total Risk-Based capital above the “well capitalized” levels at December 31, 2021

and 2020, respectively, as set forth in the following table (calculated in accordance with the Basel III capital rules):

Tier 1 Leverage Capital (to Average Assets)

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Total Risk-Based Capital (to Risk-Weighted Assets)

Cash dividends declared by the Bank are restricted under California State banking laws to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during those periods.

* Ratio for regulatory

requirement excludes the capital conservation buffer of 2.50%.

Cash dividends declared by the Bank are restricted under California State banking laws to the lesser of the Bank’s retained earnings or the Bank’s net

income for the latest three fiscal years, less dividends previously declared during those periods.

Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

Securities available-for-sale and trading securities are recorded at fair value on a recurring basis.

Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans held-for-investment and certain other assets.

available-for-sale and trading securities are recorded at fair value on a recurring basis.

Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans

held-for-investment and certain other assets.

These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process.

Transfers between levels of the fair value hierarchy are

recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process.

Assets Recorded at Fair Value on a Recurring Basis

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Total investments at fair value

There were no transfers of assets measured at fair value on a recurring basis between level 1 and level 2 of the fair value hierarchy.

Assets Recorded at Fair Value on a Non-recurring Basis

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Impaired loans

Mortgage servicing rights

Total assets at fair value

There were no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2020 and 2019.

Key methods and assumptions used in measuring the fair value of impaired loans and other real estate owned as of December 31, 2020 and 2019 were as follows:

There were no liabilities measured at

fair value on a recurring or non-recurring basis at December 31, 2021 and 2020.

Key methods and assumptions used in measuring the fair value of impaired loans and mortgage servicing rights as of December 31, 2021 and 2020, were as follows:

Assumption Inputs

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Collateral, market, income, enterprise, liquidation and discounted cash flows

External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6 % to 10 %, or the amount and timing of cash flows based on the loan's effective interest rate.

External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6 % to 10 %, or the amount

and timing of cash flows based on the loan's effective interest rate.

Mortgage servicing rights

Discounted cash flows

Present value of expected future cash flows was estimated using a discount rate factor of 10.00 % as of December 31, 2020 .

A constant prepayment rate of 20.22 % as of December 31, 2020 was utilized.

Present value of expected future cash flows was estimated using a

weighted average discount rate factor of 9.50 % and 10.00 % as of December 31, 2021

and December 31, 2020, respectively .

A weighted average constant prepayment rate of 15.73 % and 20.22 %

as of December 31, 2021 and December 31, 2020, respectively, was utilized.

The following section describes the valuation methodologies used for assets recorded at fair value.

1 unchanged sentence

Investment securities available-for-sale are recorded at fair value on a recurring basis.

Fair value measurement is based upon quoted market prices, if available.

If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions.

Fair value measurement is based upon quoted market prices, if

prepayment assumptions, and other factors such as credit loss assumptions.

Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S.

Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.

Treasury securities that are traded by dealers or brokers in active

over-the-counter markets and money market funds.

Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.

Securities classified as Level 3 include asset-backed securities in less liquid markets where valuations include significant unobservable assumptions.

Securities classified as Level 3 include asset-backed

securities in less liquid markets where valuations include significant unobservable assumptions.

Impaired Loans

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However, from time to time, a loan is considered impaired.

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.

Loans for which it is probable that

payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.

Once a loan is identified as individually impaired, the Company measures impairment.

The fair value of impaired loans is estimated using one of several methods, including the present value of expected cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.

The fair value of impaired

loans is estimated using one of several methods, including the present value of expected cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral

Those impaired loans not requiring charge-off or specific allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

At December 31, 2020, certain impaired loans were considered collateral dependent and were evaluated based on the fair value of the underlying collateral securing the loan.

At December 31, 2021, certain impaired loans were considered collateral dependent and were evaluated based on the fair value of the underlying collateral

securing the loan.

Impaired loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy.

When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the impaired loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.

When a loan is evaluated based on the fair value of the underlying collateral securing the

loan, the Company records the impaired loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.

Mortgage Servicing Rights

Mortgage servicing rights (MSRs) are subject to impairment testing.

All mortgage servicing rights are initially measured and recorded at fair value at the time loans are sold.

The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date.

mortgage servicing rights are initially measured and recorded at fair value at the time loans are sold.

The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market

participants at the measurement date.

Subsequent fair value measurements are determined using a discounted cash flow model.

In order to determine the fair value of the mortgage servicing rights, the present value of expected future cash flows is estimated.

In order to determine the fair value of the mortgage servicing rights, the present value of expected future cash flows is

Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

At December 31, 2020, the discount rate and constant prepayment rate used in measuring the fair value of the Company’s mortgage servicing rights was 10.00 % and 20.22 % , respectively.

The model used to calculate the fair value of the Company’s mortgage servicing rights is periodically validated.

The model assumptions and the mortgage servicing rights fair value estimates are also compared to observable trades of similar portfolios as well as to mortgage servicing rights broker valuations and industry surveys, as available.

If the valuation model reflects a value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model.

As such, the Company classifies mortgage servicing rights subjected to non-recurring fair value adjustments as Level 3.

At December 31, 2021, the discount rate and constant prepayment rate used in measuring the fair

value of the Company’s MSRs was 9.50 % and 15.73 % , respectively.

The model used to calculate the fair value of the Company’s MSRs is periodically validated.

The model assumptions and the MSRs fair value estimates are also compared to observable trades of similar portfolios as

well as to MSR broker valuations and industry surveys, as available.

If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance as determined by the model.

As such, the Company classifies MSRs subjected to non-recurring fair value adjustments as Level 3.

Disclosures about Fair Value of Financial Instruments

The following table summarizes fair value estimates for financial instruments for the years ended December 31, 2020 and 2019, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note).

The following table summarizes fair value estimates for financial instruments for the years ended December 31, 2021 and 2020, excluding financial instruments recorded at

fair value on a recurring basis (summarized in the first table in this note).

Financial assets:

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Certificates of deposit

Other equity securities

Stock in Federal Home Loan Bank and other equity securities, at cost

Loans receivable:

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Financial liabilities:

Federal Home Loan Bank advances

Interest payable

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected exit prices.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment.

Because no market exists for a significant portion of the

Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

These estimates are

subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future

business and the value of assets and liabilities that are not considered financial instruments.

Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and

In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.

Outstanding Shares and Earnings Per Share

All income per share amounts have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 27, 2021 , payable on March 25, 2021 , to shareholders of record as of February 26, 2021 .

All income per share amounts have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 27, 2022 ,

payable on March 25, 2022 , to shareholders of record as of February 28, 2022 .

Earnings Per Share

Basic and diluted earnings per share for the years ended December 31, were computed as follows:

(in thousands, except per share amounts)

Basic earnings per share:

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Diluted earnings per share

Options not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 424,476 shares, 237,495 shares, and 95,109 shares for the years ended December 31, 2020, 2019, and 2018, respectively.

Restricted stock not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 43,859 shares, 0 shares, and 0 shares for the years ended December 31, 2020, 2019, and 2018, respectively.

Options not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 294,526 shares and 445,700 shares for the

years ended December 31, 2021 and 2020, respectively.

Restricted stock not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 10,439 shares and 46,052 shares for the years ended December 31,

2021 and 2020, respectively.

Stock Compensation Plans

The total number of shares authorized, number of shares outstanding, weighted average exercise prices, exercise prices and weighted average grant date fair value have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 27, 2021 , payable on March 25, 2021 to shareholders of record as of February 26, 2021 .

The total number of shares authorized, number of shares outstanding, weighted average exercise prices, exercise prices and weighted average grant date fair

value have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 27, 2022 , payable on March 25, 2022

to shareholders of record as of February 28, 2022 .

The Company has one stock option plan.

Under the 2016 Stock Incentive Plan (the "Plan"), the Company may grant option grants, stock appreciation rights, restricted stock, or stock units to an employee for an amount up to 50,000 total shares in any calendar year.

In January 2020, the Company’s Board of Directors amended the Plan to increase the maximum number of shares of options, stock appreciation rights, restricted stock, or stock units and performance based awards that any participant may receive under the Plan in any calendar year from 25,000 to 50,000 .

With respect to awards granted to non-employee directors under the Plan during the term of the Plan, the total number of shares of common stock which may be issued upon exercise or settlement of such awards is 100,000 shares and no outside director may receive option grants, stock appreciation rights, restricted stock or stock units for more than 3,000 shares total in any calendar year.

Under the 2016 Stock Incentive Plan (the "Plan"), the Company may grant option grants, stock

appreciation rights, restricted stock, or stock units to an employee for an amount up to 50,000 total shares in any calendar year.

In January 2020, the Company’s Board of Directors amended the Plan to increase the maximum number of shares of options, stock appreciation rights, restricted

stock, or stock units and performance based awards that any participant may receive under the Plan in any calendar year from 25,000 to 50,000 .

With respect to awards granted to non-employee directors under the

Plan during the term of the Plan, the total number of shares of common stock which may be issued upon exercise or settlement of such awards is 100,000 shares and no outside director may receive option grants, stock appreciation rights, restricted stock or stock units for more than 3,000 shares total in any calendar year.

There are 851,496 shares authorized under the 2016 Stock Incentive Plan.

The 2016 Stock Incentive Plan will terminate on March 15, 2026.

The Compensation Committee of the Board of Directors is authorized to prescribe the terms and conditions of each option, including exercise price, vestings, or duration of the option.

Generally, option grants vest at a rate of 25 % per year after the first anniversary of the date of grant and restricted stock awards vest at a rate of 100 % after four years .

The 2016 Stock

Incentive Plan will terminate on March 15, 2026.

The Compensation Committee of the Board of Directors is authorized to prescribe the terms and conditions of each option, including exercise price,

vestings, or duration of the option.

Generally, option grants vest at a rate of 25 % per year after the first anniversary of the date of

grant and restricted stock awards vest at a rate of 100 % after four years .

Options expire 10 years after the date of grant.

Options are granted with an exercise price of the fair value of the related common stock on the date of grant.

Stock option activity for the Company’s Stock Incentive Plan during the year ended December 31, 2020 is as follows:

Options are granted

with an exercise price of the fair value of the related common stock on the date of grant.

Stock option activity for the Company’s Stock Incentive Plan during the year ended December 31, 2021, was as follows:

Stock Options

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Stock options vested and currently exercisable:

The weighted average grant date fair value per share of options granted during the years ended December 31 was $ 1.34 in 2020, $ 1.65 in 2019, and $ 2.14 in 2018.

The intrinsic value of options exercised during the years ended December 31 was $ 122 in 2020, $ 0 in 2019 and $ 81 in 2018.

The fair value of awards vested during the years ended December 31 was $ 149 in 2020, $ 141 in 2019 and $ 114 in 2018.

At December 31, 2020, the range of exercise prices for all outstanding options ranged from $ 3.31 to $ 11.26 .

The weighted average grant date fair value per share of options granted during the years ended December 31, was $ 0 in 2021 and $ 1.28 in 2020.

The intrinsic value of options exercised during the years ended December 31, was $ 63 in 2021 and$ 122 in 2020.

The fair value of awards vested during the years

ended December 31 was $ 182 in 2021

and $ 149 in 2020.

At December 31, 2021, the range of

exercise prices for all outstanding options ranged from $ 3.35 to $ 10.72 .

As of December 31, 2021, there was $ 176 of total unrecognized compensation related to non-vested stock options.

This cost is expected to be recognized over a weighted average period of approximately 2.4 years.

For the years ended December 31, 2020, 2019, and 2018, there was $ 181 , $ 150 , and $ 140 , respectively, of recognized compensation related to stock options.

The Company determines fair value at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the risk-free interest rate, the volatility of the underlying stock and the expected life of the option.

This cost is expected to be recognized over a weighted average period of

approximately 1.8 years.

For the years ended December 31, 2021 and

2020 there was $ 145 and $ 181 , respectively, of recognized compensation related to stock options.

The Company determines fair value at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the

exercise price, the risk-free interest rate, the volatility of the underlying stock and the expected life of the option.

The weighted average assumptions used in the pricing model are noted in the following table.

The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior.

The expected term of options granted is derived from

historical data on employee exercise and post-vesting employment termination behavior.

The risk-free rate for periods within the contractual life of the option is based on the U.S.

Treasury yield curve in effect at the time of the grant.

Expected volatility is based on both the implied volatilities from the traded option on the Company’s stock and historical volatility on the Company’s stock.

volatility is based on both the implied volatilities from the traded option on the Company’s stock and historical volatility on the Company’s stock.

The Company expenses the fair value of the option on a straight line basis over the vesting period.

The Company estimates forfeitures and only recognizes expense for those shares that actually vest.

The Company estimates forfeitures and only recognizes

expense for those shares that actually vest.

The following table shows our weighted average assumptions used in valuing stock options granted for the years ended December 31:

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In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees.

The restricted shares awarded become fully vested after one to four years of continued employment or service from the date of grant.

The restricted shares awarded

become fully vested after one to four years

of continued employment or service from the date of grant.

Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions.

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The aggregate intrinsic value of restricted stock awards vested in calendar years 2021 and 2020, was $ 332 and $ 344 , respectively.

The weighted average fair value per share of restricted stock awards granted during the years ended December 31 was $ 10.61 in 2020, $ 9.87 in 2019, and $ 11.26 in 2018.

The weighted average fair value per share of restricted stock awards granted during the years ended December 31, was $ 10.00 in 2021 and $ 10.10 in 2020.

As of December 31, 2021, there was $ 739 of total unrecognized compensation related to non-vested restricted stock awards.

This cost is expected to be recognized over a weighted average period of approximately 2.5 years.

For the year ended December 31, 2020, 2019, and 2018, there was $ 374 , $ 308 , and $ 262 , respectively, of recognized compensation related to restricted stock awards.

This cost is expected to be recognized over a weighted average

period of approximately 2.4 years.

For the year ended December 31, 2021 and

2020, there was $ 411 and $ 374 , respectively, of recognized compensation related to restricted stock awards.

Employee Stock Purchase Plan

The total number of shares authorized, number of shares purchased and stock price have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 27, 2021 , payable March 25, 2021 , to shareholders of record as of February 26, 2021 .

The total number of shares authorized, number of shares purchased and stock price have been adjusted to give retroactive effect to stock dividends and

stock splits, including the 5 % stock dividend declared on January 27, 2022 , payable March 25, 2022 , to shareholders of record as of February 28, 2022 .

The Company has an Employee Stock Purchase Plan ("ESPP").

Under the 2016 ESPP, the Company is authorized to issue to an eligible employee shares of common stock.

Under the 2016 ESPP, the Company is authorized to issue to an eligible employee shares of common

There are 341,820 shares authorized under the 2016 ESPP, which include authorized but unissued shares under the 2006 Amended ESPP.

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The Board of Directors determines the commencement date and duration of each participation period.

An eligible employee is one who has been continually employed for at least ninety ( 90 ) days prior to commencement of a participation period.

Under the terms of the Plan, employees can choose to have up to 10 percent of their compensation withheld to purchase the Company’s common stock each participation period.

The purchase price of the stock is 85 percent of the lower of the fair value on the last trading day before the Date of Participation or the fair value on the last trading day during the participation period.

Approximately 37 percent of eligible employees are participating in the Plan in the current participation period, which began November 24, 2020 and will end November 23, 2021.

Under the Plan, at the annual stock purchase date of November 23, 2020, there were $ 107 in contributions, and 13,722 shares were purchased at a price of $ 7.77 .

For the year ended December 31, 2020, 2019, and 2018, there was $ 19 , $ 17 , and $ 22 , respectively, of recognized compensation related to ESPP issuances.

Compensation cost is reported in salaries and employee benefits expense in the consolidated statements of income.

An eligible employee is one who has been continually employed for

at least ninety ( 90 ) days prior to commencement of a participation period.

Under the terms of the ESPP, employees can choose to have up to

10 percent of their compensation withheld to purchase the Company’s common stock each participation period.

The purchase price of the stock

is 85 percent of the lower of the fair value on the last trading day before the Date of Participation or the fair value on the last

trading day during the participation period.

Approximately 40 percent of eligible employees are participating in the ESPP in the current

participation period, which began November 24, 2021 and will end November 23, 2022.

Under the ESPP, at the annual stock purchase date of November 23, 2021, there were $ 97 in contributions, and 13,272 shares were purchased at a price of $ 7.32 .

For the year ended December 31, 2021

and 2020, there was $ 32

and $ 19 , respectively, of recognized compensation related to ESPP issuances.

Compensation cost is reported in salaries and employee

benefits expense in the consolidated statements of income.

Profit Sharing Plan

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Employees who have completed 1000 hours of service and are actively employed on the last day of the plan year are eligible.

Under the terms of this plan, a portion of the Bank’s profits, as determined by the Board of Directors, will be set aside and maintained in a trust fund for the benefit of qualified employees.

Under the terms of this plan, a portion of the Bank’s profits, as determined by the

Board of Directors, will be set aside and maintained in a trust fund for the benefit of qualified employees.

Contributions to the plan, included in salaries and employee benefits in the consolidated statements of income, were $ 2,037 and $ 1,786 in 2021 and 2020, respectively.

The profit sharing plan also has a 401(k) feature that allows employees to contribute to the profit sharing plan, even if they are not eligible for a contribution from the Bank.

An employee is eligible to make contributions through the 401(k) feature on the 1 st of the month following 90 days of employment.

profit sharing plan also has a 401(k) feature that allows employees to contribute to the profit sharing plan, even if they are not eligible for a contribution from the Bank.

An employee is eligible to make contributions through the 401(k) feature on

the 1 st of the month following 90 days of employment.

Supplemental Compensation Plans

EXECUTIVE SALARY CONTINUATION PLAN

EXECUTIVE RETIREMENT PLAN

Pension Benefit Plans

The Company and the Bank maintain an unfunded non-contributory defined benefit pension plan (“ Salary Continuation Plan ”) and related split dollar plan for a select group of highly compensated employees.

The plan provides defined annual benefit levels between $ 50 and $ 125 depending on responsibilities at the Bank.

The Salary Continuation Plan provides defined annual benefit levels between $ 50 and $ 125 depending on responsibilities

The retirement benefits are paid for 10 years following retirement at age 65 .

Reduced retirement benefits are available after age 55 and 10 years of service.

Eligibility to participate in the Salary Continuation Plan is limited to a select group of management or highly compensated employees of the Bank that are designated by the Board.

Eligibility to participate in the Salary Continuation Plan is limited to a select group of management or highly compensated employees of the Bank that are

designated by the Board.

Additionally, the Company and the Bank adopted a supplemental executive retirement plan (“SERP”) in 2006.

The SERP is intended to integrate the various forms of retirement payments offered to executives.

The SERP is intended to integrate the various

forms of retirement payments offered to executives.

There are currently three participants in the SERP.

The SERP benefit is calculated using 3 -year average salary plus 7 -year average bonus (average compensation).

For each year of service, the benefit formula credits 2 % to 2.5 % of average compensation up to a cumulative maximum of 50%.

The SERP benefit is calculated using 3 -year

average salary plus 7 -year average bonus (average compensation).

For each year of service, the benefit formula credits 2 % to 2.5 % of average compensation up to a

cumulative maximum of 50%.

Therefore, for an executive serving 20 to 25 years, the target benefit is 50 % of average compensation.

The target benefit is reduced for other forms of retirement income provided by the Bank.

Reductions are made for 50 % of the social security benefit expected at age 65 and for the accumulated value of contributions the Bank makes to the executive’s profit sharing plan.

Reductions are made for 50 % of the social security benefit expected at age 65 and for the

accumulated value of contributions the Bank makes to the executive’s profit sharing plan.

For purposes of this reduction, contributions to the profit sharing plan are accumulated each year at a 3 -year average of the yields on 10 -year Treasury securities.

Retirement benefits are paid monthly for 120 months, plus 6 months for each full year of service over 10 years, up to a maximum of 180 months.

Retirement benefits

are paid monthly for 120 months, plus 6

months for each full year of service over 10 years, up to a maximum of 180 months.

Reduced benefits are payable for retirement prior to age 65.

Should retirement occur prior to age 65, the benefit determined by the formula described above is reduced 5 % for each year payments commence prior to age 65.

Should retirement occur prior to age 65, the benefit determined by the formula described above

is reduced 5 % for each year payments commence prior to age 65.

Therefore, the new SERP benefit is reduced 50 % for retirement at age 55 .

No benefit is payable for voluntary terminations prior to age 55.

The Bank uses a December 31, measurement date for these plans.

For the Year Ended December 31,

The following table sets forth the status of the Salary Continuation Plan and SERP as of December 31, 2021 and December 31, 2020:

Change in benefit obligation

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Interest cost

Plan loss (gain)

Plan (gain) loss

Benefits paid

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Net amount recognized

The Company expects to recognize approximately $ 207 of the unrecognized net actuarial loss and prior service cost as a component of net periodic benefit cost in 2021.

The Company expects to recognize approximately $ 132

of the unrecognized net actuarial loss and prior service cost as a component of net periodic benefit cost in 2022.

For the Year ended December 31,

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Minimum benefit obligation at year end

Increase (decrease) in minimum liability included in other comprehensive income (loss)

(Decrease) increase in minimum liability included in other comprehensive income (loss)

Assumptions used to determine benefit obligations at December 31

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The Bank informally funds the liabilities of the Salary Continuation Plan through life insurance purchased on the lives of plan participants.

This informal funding does not meet the definition of “plan assets” under pension accounting standards.

This informal

funding does not meet the definition of “plan assets” under pension accounting standards.

Therefore, assets held for this purpose are not disclosed as part of the Salary Continuation Plan.

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The Bank paid $ 272 in benefit payments during fiscal 2021.

The following benefit payments, which reflect expected future service, are expected to be paid in future fiscal years:

The following benefit payments, which reflect expected future service, are expected

to be paid in future fiscal years:

Year ending December 31,

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On July 19, 2001, the Company and the Bank approved an unfunded non-contributory defined benefit pension plan (“ Directors’ Retirement Plan ”) and related split dollar plan for the directors of the Bank.

The plan provides a retirement benefit equal to $ 1 per year of service as a director, up to a maximum benefit amount of $ 15 .

The Directors' Retirement Plan provides a retirement benefit equal to $ 1 per year of service as a director, up to a maximum benefit amount of $ 15 .

The retirement benefit is payable for ten years following retirement at age

Reduced retirement benefits are available after age 55 and ten years of service.

The Bank uses a December 31 measurement date for the Directors’ Retirement Plan.

For the Year Ended December 31,

The following table sets forth the status of the Directors' Retirement Plan as of December 31, 2021 and December 31, 2020:

Change in benefit obligation

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Interest cost

Plan loss (gain)

Plan (gain) loss

Benefits paid

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Accrued benefit liability

Accumulated other comprehensive loss (income)

Accumulated other comprehensive loss

Net amount recognized

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Minimum benefit obligation at year end

Increase (decrease) in minimum liability included in other comprehensive income (loss)

(Decrease) increase in minimum liability included in other comprehensive income (loss)

Assumptions used to determine benefit obligations at December 31

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The Bank informally funds the liabilities of the Directors’ Retirement Plan through life insurance purchased on the lives of plan participants.

This informal funding does not meet the definition of “plan assets” under pension accounting standards.

informal funding does not meet the definition of “plan assets” under pension accounting standards.

Therefore, assets held for this purpose are not disclosed as part of the Directors’ Retirement Plan.

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The Bank paid $ 75 in benefit payments during fiscal 2021.

The following benefit payments, which reflect expected future service, are expected to be paid in future fiscal years:

The following benefit payments, which reflect expected future service, are expected

to be paid in future fiscal years:

Year ending December 31,

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EXECUTIVE ELECTIVE DEFERRED COMPENSATION PLAN — 2001 EXECUTIVE DEFERRAL PLAN

On July 19, 2001, the Bank approved a revised Executive Elective Deferred Compensation Plan (“2001 Executive Deferral Plan”) for certain officers to provide them the ability to make elective deferrals of compensation due to tax law limitations on benefit levels under qualified plans.

On July 19, 2001, the Bank approved a revised Executive Elective Deferred Compensation Plan (“2001 Executive Deferral Plan”) for certain officers to

provide them the ability to make elective deferrals of compensation due to tax law limitations on benefit levels under qualified plans.

Deferred amounts earn interest at an annual rate determined by the Bank’s Board.

The plan is a non-qualified plan funded with Bank owned life insurance policies taken on the lives of the participating officers.

The 2001 Executive Deferral Plan

is a non-qualified plan funded with Bank owned life insurance policies taken on the lives of the participating officers.

During the year ended December 31, 2001, the Bank purchased insurance making a single-premium payment aggregating $ 1,125 , which is reported in other assets on the Consolidated Balance Sheets.

The Bank is the beneficiary and owner of the policies.

The cash surrender value of the related insurance policies as of December 31, 2020 and 2019 totaled $ 2,682 and $ 2,614 , respectively.

The increase in accrued liability for the 2001 Executive Deferral Plan totaled $ 9 and $ 12 during the years ended December 31, 2020 and 2019, respectively.

The expenses for the 2001 Executive Deferral Plan for the years ended December 31, 2020, 2019, and 2018 totaled $ 9 , $ 12 , and $ 12 , respectively.

The cash surrender

value of the related insurance policies as of December 31, 2021 and 2020 totaled $ 2,749 and $ 2,682 , respectively.

The net decrease in accrued liability for the 2001 Executive Deferral Plan totaled $ 28 and $ 26 during the years ended December 31, 2021 and 2020, respectively.

net decrease was due to payments totaling $ 35 for each of the years ended December 31, 2021 and 2020, which was partially offset by

interest accrued totaling $ 7 and $ 9

during the years ended December 31, 2021 and 2020.

Interest expense for the 2001 Executive Deferral Plan for the years ended December 31, 2021 and 2020 totaled $ 7 and $ 9 , respectively.

DIRECTOR ELECTIVE DEFERRED FEE PLAN — 2001 DIRECTOR DEFERRAL PLAN

On July 19, 2001, the Bank approved a Director Elective Deferred Fee Plan (“2001 Director Deferral Plan”) for directors to provide them the ability to make elective deferrals of director's fees.

On July 19, 2001, the Bank approved a Director Elective Deferred Fee Plan (“2001 Director Deferral Plan”) for directors to provide them the ability to make

elective deferrals of director's fees.

Deferred amounts earn interest at an annual rate determined by the Bank’s Board.

The plan is a non-qualified plan funded with Bank owned life insurance policies taken on the lives of the participating directors.

The 2001 Director Deferral Plan is a non-qualified plan funded with Bank owned life insurance policies taken on the lives of the

participating directors.

The Bank is the beneficiary and owner of the policies.

The cash surrender value of the related insurance policies as of December 31, 2021 and 2020 totaled $ 153 and $ 148 , respectively.

The increase in accrued liability for the 2001 Director Deferral Plan totaled $ 1 during each of the years ended December 31, 2020 and 2019.

The expenses for the 2001 Director Deferral Plan totaled $ 1 for each of the years ended December 31, 2020, 2019, and 2018.

The net decrease in accrued liability for the 2001

Director Deferral Plan totaled $ 4 for each of the years ended December 31, 2021 and 2020.

The net decrease was due to payments totaling

$ 5 for each of the years ended December 31, 2021 and 2020, which was partially offset by interest accrued totaling $ 1 for each of the years ended December 31, 2021 and 2020.

Interest expense for the 2001 Director Deferral Plan totaled $ 1 for each of the years ended December 31, 2021 and 2020.

The provision for income tax expense consisted of the following for the years ended December 31:

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 consisted of:

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31,

2021 and 2020, consisted of:

Deferred tax assets:

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Lease liability

Investment securities unrealized

Deferred tax assets

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Net deferred tax assets (see Note 7)

Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, management believed it is more-likely-than-not the Company will realize the benefits of these deductible differences.

At December 31, 2020, the Company had no state net operating loss carry forwards and no federal tax credit carry forwards.

Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are

deductible, management believed it is more-likely-than-not the Company will realize the benefits of these deductible differences.

At December 31, 2021, the Company had no

state net operating loss carry forwards and no federal tax credit carry forwards.

A reconciliation of income taxes computed at the federal statutory rate and the provision for income taxes for the years ended December 31, is as follows:

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Accounting for Uncertainty in Income Taxes

The Company had no unrecognized tax benefits for the years ended December 31, 2020 and 2019.

The Company recognized no changes in unrecognized tax benefits during 2020 and 2019 due to the expiration of a statute of limitations.

The Company had no significant uncertain tax positions as of December 31, 2020 and December 31, 2019.

The Company had no unrecognized tax

benefits for the years ended December 31, 2021 and 2020.

The Company recognized no changes in unrecognized tax benefits during 2021

and 2020, due to the expiration of a statute of limitations.

The Company had no significant uncertain tax positions as of December

31, 2021 and December 31, 2020.

The Company does not currently anticipate any significant increase or decrease in unrecognized tax benefits during 2022.

The Company classifies interest and penalties as a component of the provision for income taxes.

At December 31, 2020, there were no unrecognized interest and penalties.

At December 31, 2021, there were no unrecognized interest

and penalties.

The tax years ended December 31, 2020, 2019, and 2018 remain subject to examination by the Internal Revenue Service.

The tax years ended December 31, 2019, 2018, 2017 and 2016 remain subject to examination by the California Franchise Tax Board.

The deductibility of these tax positions will be determined through examination by the appropriate tax authorities or the expiration of the tax statute of limitations.

tax years ended December 31, 2020, 2019, 2018, and 2017 remain subject to examination by the California Franchise Tax Board.

deductibility of these tax positions will be determined through examination by the appropriate tax authorities or the expiration of the tax statute of limitations.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic.

The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021.

In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The CARES Act, among other things, permits NOL carryovers and carrybacks

to offset 100% of taxable income for taxable years beginning before 2021.

In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid

income taxes.

The Company has evaluated the impact of the CARES Act and determined that none of the changes would result in a material income tax benefit to the Company.

On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends several provisions of the CARES Act.

As of December 31, 2020, the Company has determined that neither this Act nor changes to income tax laws or regulations in other jurisdictions have a significant impact on our effective tax rate.

As of December 31,

2021, the Company has determined that neither this Act nor changes to income tax laws or regulations in other jurisdictions have a significant impact on our effective tax rate.

Accumulated Other Comprehensive Income/(Loss)

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Balance as of December 31, 2020

The following table details activity in accumulated other comprehensive income/(loss) for the year ended December 31, 2018.

Unrealized Gains

Comprehensive

Income/(loss)

Balance as of December 31, 2017

Current period other comprehensive (loss) income, net of tax

Balance as of December 31, 2018

Supplemental Consolidated Statements of Cash Flows Information

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Stock dividend distributed

Fair value adjustment of securities available for sale, net of tax of $ 2,273 , $ 2,188 , and $( 349 ) for the years ended December 31, 2020, 2019, and 2018, respectively

Loans held-for-investment transferred to other real estate owned

Fair value adjustment of securities available for sale, net of tax of $( 4,018 ) and $ 2,273 for the years

ended December 31, 2021 and 2020 ,

Loans held-for-sale transferred to loans held-for-investment

Recognition of right-of-use assets obtained in exchange for operating lease liabilities

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This information should be read in conjunction with the other notes to the consolidated financial statements.

The following presents summary balance sheets and summary statements of income and cash flows information for the years ended December 31:

The following presents summary balance sheets

and summary statements of income and cash flows information for the years ended December 31:

Balance Sheets

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Income tax benefit

Loss before undistributed earnings of subsidiary

Income (loss) before undistributed earnings of subsidiary

Equity in undistributed earnings of subsidiary

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Common stock issued

Cash in lieu of fractional shares

Stock repurchases

Cash dividends paid in lieu of fractional shares

Net cash provided by financing activities

4 unchanged sentences

The Bank, in the ordinary course of business, has loan and deposit transactions with directors and executive officers.

In management’s opinion, these transactions were on substantially the same terms as comparable transactions with other customers of the Bank.

In management’s opinion, these

transactions were on substantially the same terms as comparable transactions with other customers of the Bank.

The amount of such deposits totaled approximately $ 8,672 and $ 7,093 at December 31, 2021 and 2020, respectively.

6 unchanged sentences

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 8. Financial Statements and Supplementary Data