~~AMES NATIONAL CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(unaudited)~~

~~Nine Months Ended September 30, 2017 and 2016~~

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES

Net income
$ 11,010,865 $ 11,710,352
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses
1,221,620 440,787
Provision for off-balance sheet commitments
4,000 12,000
Amortization, net
2,129,648 2,327,654
Amortization of intangible asset
280,837 273,206
Depreciation
861,700 885,202
Deferred income taxes
(303,999 ) 176,658
Securities gains, net
(498,560 ) (296,110 )
(Gain) on sales of loans held for sale
(544,095 ) (773,511 )
Proceeds from loans held for sale
22,668,307 34,782,288
Originations of loans held for sale
(22,161,394 ) (34,657,822 )
Loss on sale of premises and equipment, net
56,168 2,769
Impairment of other real estate owned
- 28,039
(Gain) on sale of other real estate owned, net
(14,648 ) (131,127 )
Change in assets and liabilities:

(Increase) in accrued income receivable
(654,349 ) (805,127 )
(Increase) decrease in other assets
(377,095 ) 286,238
Increase (decrease) in accrued expenses and other liabilities
(126,404 ) 323,605
Net cash provided by operating activities
13,552,601 14,585,101

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of securities available-for-sale
(51,271,943 ) (49,668,267 )
Proceeds from sale of securities available-for-sale
11,756,963 18,738,154
Proceeds from maturities and calls of securities available-for-sale
52,588,102 54,611,331
Net (increase) decrease in interest bearing deposits in financial institutions
(3,749,025 ) 994,573
Net (increase) in loans
(13,190,423 ) (39,394,414 )
Net proceeds from the sale of other real estate owned
191,564 755,906
Purchase of bank premises and equipment, net
(447,039 ) (218,081 )
Other
(61,761 ) -
Net cash (used in) investing activities
(4,183,562 ) (14,180,798 )

CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in deposits
5,129,194 (12,358,477 )
(Decrease) in securities sold under agreements to repurchase
(19,336,317 ) (4,431,520 )
Payments on FHLB borrowings and other borrowings
(1,000,000 ) (1,542,203 )
Proceeds from short-term FHLB borrowings, net
5,500,000 21,000,000
Dividends paid
(6,052,094 ) (5,772,766 )
Net cash (used in) financing activities
(15,759,217 ) (3,104,966 )

Net (decrease) in cash and due from banks
(6,390,178 ) (2,700,663 )

CASH AND DUE FROM BANKS

Beginning
29,478,068 24,005,801
Ending
$ 23,087,890 $ 21,305,138

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~~AMES NATIONAL CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~

~~(unaudited)~~

~~Nine Months Ended September 30, 2017 and 2016~~

2017

2016

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for:

Interest
$ 4,027,782 $ 3,145,519
Income taxes
5,050,220 4,223,653

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

Transfer of loans receivable to other real estate owned
$ 16,668 $ 56,587

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine Months Ended September 30, 2020 and 2019

	2020			2019

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,653,657		$	12,896,189
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,424,475			545,203
Provision for off-balance sheet commitments		51,000			0
Amortization of securities, available-for-sale, loans and deposits, net		558,579			1,048,818
Amortization of intangible asset		650,021			427,221
Depreciation		1,083,790			903,070
Deferred income taxes		(942,251	)		75,549
Securities (gains), net		(429,925	)		(17,031	)
(Gain) on sales of loans held for sale		(1,486,047	)		(685,790	)
Proceeds from loans held for sale		67,934,569			34,023,953
Originations of loans held for sale		(66,468,878	)		(34,574,101	)
Loss on sale and disposal of premises and equipment, net		59,212			9,360
Amortization of investment in new market tax credit projects		436,166			0
(Gain) on sale of other real estate owned, net		(21,617	)		(43,414	)
Change in assets and liabilities:
Increase in accrued income receivable		(384,357	)		(320,758	)
(Increase) decrease in other assets		441,024			(892,594	)
Increase in accrued expenses and other liabilities		1,763,379			943,244
Net cash provided by operating activities		21,322,797			14,338,919

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(165,075,991	)		(61,502,161	)
Proceeds from sale of securities available-for-sale		5,462,657			8,211,157
Proceeds from maturities and calls of securities available-for-sale		104,636,283			64,641,695
Purchase of FHLB stock		(1,148,500	)		(3,912,600	)
Proceeds from the redemption of FHLB stock		1,133,200			4,448,600
Net (increase) in interest-bearing deposits in financial institutions and federal funds sold		(10,695,437	)		(52,872,972	)
Net (increase) decrease in loans		(114,712,894	)		8,159,497
Net proceeds from the sale of other real estate owned		3,415,130			655,161
Purchase of bank premises and equipment		(851,876	)		(648,005	)
Proceeds from the sale of bank equipment		0			4,000
Cash paid for bank acquired		(309,875	)		0
Other		(54,767	)		(50,132	)
Net cash (used in) investing activities		(178,202,070	)		(32,865,760	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		167,337,240			28,086,411
Increase (decrease) in securities sold under agreements to repurchase		(11,541,134	)		11,521,575
Payments on FHLB borrowings		(2,000,000	)		(12,600,000	)
Proceeds from FHLB borrowings		0			3,000,000
Dividends paid		(6,791,295	)		(6,571,446	)
Stock repurchases		(1,992,405	)		(1,808,699	)
Net cash provided by financing activities		145,012,406			21,627,841

Net increase (decrease) in cash and due from banks		(11,866,867	)		3,101,000

CASH AND DUE FROM BANKS
Beginning		34,616,880			30,384,066
Ending	$	22,750,013		$	33,485,066

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Nine Months Ended September 30, 2020 and 2019

	2020		2019

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	7,133,940	$	7,852,381
Income taxes		3,987,474		3,360,844

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned	$	10,738	$	0

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1. ~~Significant Accounting Policies~~

1.	Significant Accounting Policies

The consolidated financial statements for the three and nine months ended September 30, ~~2017~~ 2020 and ~~2016~~2019 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring ~~accruals,~~adjustments, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form ~~10-K~~10-K for the year ended December 31, ~~2016 (the~~2019 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment ~~using a two-step process that begins~~ with an estimation of the fair value of a reporting unit. ~~The second step, if necessary, measures the amount of impairment, if any.~~

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At September 30, ~~2017,~~ 2020, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

Reclassifications: Certain reclassifications have been made to the prior consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on stockholders’ equity and net income of the prior periods.

New and Pending Accounting Pronouncements: In ~~January~~September 2016, ~~the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10):~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities.~~ The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

~~In February 2016,~~ the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company~~’s consolidated financial statements.~~

~~Table of Contents~~

~~In June~~ 2016 ~~the FASB issued ASU No. 2016-13,~~-13, Financial Instruments-Credit Losses (Topic ~~326)~~326): Measurement of Credit Losses on Financial ~~Instruments.~~Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ~~For public~~In October 2019, the FASB voted to approve amendments to the effective date of ASU No.2016-13 for smaller reporting companies, ~~this update will be~~as defined by the SEC, and other non-SEC reporting entities. The amendment delays the effective date for our Company until interim and annual periods beginning after December 15, ~~2019.~~2022. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models, along with refining the implementation of the software and its approach for determining the expected credit losses under the new guidance. The Company’s preliminary evaluation indicates the provisions of ASU No.2016-13 are expected to impact the Company’s financial statements. The Company is ~~currently planning for~~continuing to evaluate the ~~implementation~~extent of ~~this accounting standard. It is too early to assess~~ the ~~impact that the guidance will have on the Company’s consolidated financial statements.~~potential impact.

In ~~May 2014,~~ January 2017, the FASB issued ASU ~~2014-09, Revenue from Contracts with Customers (Topic 606):~~ ~~Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40)~~ . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. Based upon management’s revenue recognition analysis, the Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

~~In January~~ 2017 ~~the FASB issued ASU 2017-04,~~-04, Intangibles-Goodwill and Other (Topic ~~350)~~350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates ~~the~~ Step 2 from the goodwill impairment test. For public companies, this update ~~will be~~became effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment ~~test~~tests with a measurement date after January 1, 2017. ~~The Company does not expect~~ASU 2017-04 was adopted on January 1, 2020 and the adoption of this guidance todid not have a material impact on the ~~Company's~~Company’s consolidated financial statements.

2~~. Dividends~~In August 2018, the FASB issued ASU No.2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update became effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures were adopted on a retrospective basis, and the new disclosures were adopted on a prospective basis. The adoption did not have a material effect on the Company’s consolidated financial statements.

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2.	Bank Acquisition

On ~~August 9, 2017,~~ October 25, 2019, the Company completed the purchase of Iowa State Savings Bank (“ISSB”), (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. ISSB’s acquired assets and liabilities were recorded at fair value at the date of acquisition. This bank was purchased for cash consideration of $22.6 million. As a result of the acquisition, the Company recorded a core deposit intangible asset of $1,891,000 and goodwill of approximately $2,680,000. The results of operations for this acquisition have been included since the transaction date of October 25, 2019. Since the acquisition date, there has been no significant credit deterioration of the acquired loans.

The following table summarizes the fair value of the total consideration transferred as a part of the ISSB Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction (in thousands):

Cash consideration transferred	$	22,643

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and due from banks	$	3,188
Federal funds sold		2,792
Interest bearing deposits in financial institutions		21,035
Securities available-for-sale		33,615
Federal Home Loan Bank stock at cost		365
Loans receivable		137,776
Accrued interest receivable		2,888
Bank premises and equipment		2,452
Other real estate owned		3,582
Bank owned life insurance		2,499
Core deposit intangible asset		1,891
Other assets		204
Deposits		(188,631	)
Securities sold under repurchase agreements		(1,747	)
Accrued interest payable and other liabilities		(1,946	)

Total identifiable net assets		19,963

Goodwill	$	2,680

On October 25, 2019, associated with the ISSB Acquisition, the contractual balance of loans receivable acquired was $139,703,000 and the contractual balance of the deposits assumed was $188,068,000. Loans receivable acquired include commercial real estate, 1-4 family real estate, agricultural real estate, commercial operating, agricultural operating and consumer loans. During the first quarter of 2020, an additional $310,000 of goodwill was recorded due to an adjustment to the initial purchase price.

The acquired loans associated with the ISSB Acquisition at contractual values as of October 25, 2019 were determined to be risk rated as follows (in thousands):

Pass	$	121,346
Watch		12,333
Special Mention		0
Substandard		6,024

Total loans acquired at book value	$	139,703

The core deposit intangible asset is amortized to expense on a declining basis over a period of ten years. The loan market valuation is accreted to income on the effective yield method over a ten year period. The time deposits market valuation is amortized to expense on a declining basis over a two year period.

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Dividends

On October 14, 2020, the Company declared a cash dividend on its common stock, payable on November ~~15, 2017~~ 13, 2020 to stockholders of record as of ~~November 1, 2017,~~ October 30, 2020, equal to ~~$0.22~~$0.25 per share.

3. ~~Earnings Per Share~~

4.	Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three ~~and nine~~ months ended September 30, ~~2017~~ 2020 and ~~2016~~2019 was 9,122,747 and 9,227,685, respectively. The weighted average outstanding shares for the nine months ended September 30, 2020 and 2019 were ~~9,310,913.~~9,156,805 and 9,241,789, respectively. The Company had no0 potentially dilutive securities outstanding during the periods presented.

4~~. Off-Balance Sheet Arrangements~~

5.	Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, ~~2016.~~2019.

~~Table of Contents~~

6.	Fair Value Measurements

5~~. Fair Value Measurements~~

A~~ssets~~Assets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. ~~A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.~~

Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following table presents the balances of assets measured at fair value on a recurring basis by level as of September 30, ~~2017~~ 2020 and December 31, ~~2016.~~ 2019 (in thousands):

Description

Total

Level 1

Level 2

Level 3

2017

U.S. government treasuries
$ 4,449 $ 4,449 $ - $ -
U.S. government agencies
112,657 - 112,657 -
U.S. government mortgage-backed securities
81,956 - 81,956 -
State and political subdivisions
243,438 - 243,438 -
Corporate bonds
60,834 - 60,834 -
Equity securities, other
3,276 34 3,242 -

$ 506,610 $ 4,483 $ 502,127 $ -

2016

U.S. government treasuries
$ 4,368 $ 4,368 $ - $ -
U.S. government agencies
110,209 - 110,209 -
U.S. government mortgage-backed securities
82,858 - 82,858 -
State and political subdivisions
264,448 - 264,448 -
Corporate bonds
51,184 - 51,184 -
Equity securities, other
3,013 - 3,013 -

$ 516,080 $ 4,368 $ 511,712 $ -

~~Table of Contents~~

Description	Total		Level 1		Level 2		Level 3

2020

U.S. government treasuries	$	8,856	$	8,856	$	0	$	0
U.S. government agencies		97,984		0		97,984		0
U.S. government mortgage-backed securities		133,796		0		133,796		0
State and political subdivisions		233,563		0		233,563		0
Corporate bonds		74,619		0		74,619		0

	$	548,818	$	8,856	$	539,962	$	0

2019

U.S. government treasuries	$	9,452	$	9,452	$	0	$	0
U.S. government agencies		126,433		0		126,433		0
U.S. government mortgage-backed securities		81,128		0		81,128		0
State and political subdivisions		195,302		0		195,302		0
Corporate bonds		67,528		0		67,528		0

	$	479,843	$	9,452	$	470,391	$	0

Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. ~~U.S~~U.S. government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds ~~and other equity securities~~ are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

~~The Company's~~ ~~policy is to recognize transfers between levels at the end~~

Table of ~~each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three or nine months ended September 30, 2017.~~

Contents

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, ~~2017~~ 2020 and December 31, ~~2016.~~ 2019 (in thousands):

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

2017
2020

Loans receivable	$	2,439	$	-	$	-	$	2,439	$	1,295	$	0	$	0	$	1,295
Other real estate owned		386		-		-		386		621		0		0		621

Total	$	2,825	$	-	$	-	$	2,825	$	1,916	$	0	$	0	$	1,916

2016
2019

Loans receivable	$	683	$	-	$	-	$	683	$	535	$	0	$	0	$	535
Other real estate owned		546		-		-		546		4,004		0		0		4,004

Total	$	1,229	$	-	$	-	$	1,229	$	4,539	$	0	$	0	$	4,539

~~Loans Receivable~~: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The ~~Company considers these fair value measurements as level 3.~~

~~Other Real Estate Owned:~~ Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The valuation allowance was $287,000 as of September 30, 2017 and $331,000 as of December 31, 2016. The Company considers these fair value measurements as level 3.

~~Table of Contents~~

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 are as ~~follows:~~follows (in thousands):

2020

2017

Estimated

Valuation

Range

Estimated

Fair Value

Valuation

Techniques

Unobservable Inputs

Range

(Average)

Fair Value

Techniques

Unobservable Inputs

(Average)

Impaired Loans

2,439

Evaluation of collateral

Estimation of value

NM*

1,295

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

386

Appraisal

Appraisal adjustment

(7%)

621

Appraisal

Appraisal adjustment

(7%)

2020

2016

Estimated

Valuation

Range

Estimated

Fair Value

Valuation

Techniques

Unobservable Inputs

Range

(Average)

Fair Value

Techniques

Unobservable Inputs

(Average)

Impaired Loans

683

Evaluation of collateral

Estimation of value

NM*

535

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

546

Appraisal

Appraisal adjustment

10%

(8%)

4,004

Appraisal

Appraisal adjustment

(7%)

* ~~Not Meaningful.~~ Evaluations of the underlying assets are completed for each collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

~~Fair value of financial instruments:~~

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

~~The following disclosures represent financial instruments in~~ ~~which the ending balances at September 30, 2017 and December 31, 2016 are not carried at fair value in their entirety on the consolidated balance sheets.~~

~~Cash and due from banks and interest bearing deposits in financial institutions: The recorded amount of these assets approximates fair value.~~

Table of Contents

The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2020 and December 31, 2019 (in thousands):

		2020				2019
	Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value

Financial assets:
Cash and due from banks	Level 1	$	22,750	$	22,750	$	34,617	$	34,617
Interest-bearing deposits	Level 1		119,643		119,643		108,948		108,948
Securities available-for-sale	See previous table		548,818		548,818		479,843		479,843
FHLB and FRB stock	Level 2		3,148		3,148		3,139		3,139
Loans receivable, net	Level 2		1,159,063		1,135,210		1,048,147		1,025,032
Loans held for sale	Level 2		2,797		2,797		2,777		2,777
Accrued income receivable	Level 1		12,173		12,173		11,788		11,788
Financial liabilities:
Deposits	Level 2	$	1,660,173	$	1,663,366	$	1,493,175	$	1,495,155
Securities sold under agreements to repurchase	Level 1		30,492		30,492		42,034		42,034
FHLB advances	Level 2		3,000		3,115		5,000		4,935
Accrued interest payable	Level 1		945		945		1,163		1,163

~~Securities available-for-sale~~: Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtainsThe methodologies used to determine fair value ~~measurements~~as of September 30, 2020 did not change from ~~an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows,~~ the ~~U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and~~methodologies described in the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, some corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs.December 31, 2019 Annual Financial Statements.

~~Loans receivable~~: The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate.

~~Loans held for sale: The fair value of loans held for sale is based on prevailing market prices.~~

~~Deposit~~s: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

S~~ecurities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.~~

~~FHLB advances and other borrowings:~~ ~~Fair values of FHLB advances and other borrowings are estimated using discounted cash flow analysis based on interest rates currently being offered with similar terms.~~

~~Accrued income receivable and accrued interest payable: The carrying amounts of accrued income receivable and accrued interest payable approximate fair value.~~

Commitments to extend credit and standby letters of ~~credit:~~credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the 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.

Table of Contents

~~The estimated fair values of the Company’s financial instruments as described above as of September 30, 2017 and December 31, 2016 are as follows:~~ ~~(in thousands)~~

2017

2016

Fair Value

Estimated

Estimated

Hierarchy

Carrying

Fair

Carrying

Fair

Level

Amount

Value

Amount

Value

Financial assets:

Cash and due from banks
Level 1
$ 23,088 $ 23,088 $ 29,478 $ 29,478
Interest bearing deposits
Level 1
35,486 35,486 31,737 31,737
Securities available-for-sale
See previous table
506,610 506,610 516,080 516,080
Loans receivable, net
Level 2
764,229 753,977 752,182 746,580
Loans held for sale
Level 2
280 280 243 243
Accrued income receivable
Level 1
8,423 8,423 7,769 7,769
Financial liabilities:

Deposits
Level 2
$ 1,114,538 $ 1,115,076 $ 1,109,409 $ 1,110,211
Securities sold under agreements to repurchase
Level 1
39,001 39,001 58,337 58,337
FHLB advances
Level 2
19,000 19,046 14,500 14,681
Other borrowings
Level 2
13,000 13,159 13,000 13,386
Accrued interest payable
Level 1
447 447 408 408

~~The methodologies used to determine fair value as of September 30, 2017 did not change from the methodologies described in the December 31, 2016 Annual Financial Statements.~~

~~Table of Contents~~

6~~. Debt and Equity Securities~~
7.
Debt Securities

The amortized cost of securities ~~available-for-sale~~available-for-sale and their approximate fair values as of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 are summarized ~~below:~~below (in thousands):

2017:			Gross		Gross
2020:												Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	4,412	$	37	$	-		$	4,449	$	8,492	$	364	$	0		$	8,856
U.S. government agencies		112,011		807		(161	)		112,657		92,650		5,340		(6	)		97,984
U.S. government mortgage-backed securities		80,948		1,091		(83	)		81,956		130,706		3,140		(50	)		133,796
State and political subdivisions		241,150		2,684		(396	)		243,438		226,574		7,024		(35	)		233,563
Corporate bonds		60,417		560		(143	)		60,834		69,744		4,875		0			74,619
Equity securities, other		3,257		19		-			3,276
	$	502,195	$	5,198	$	(783	)	$	506,610	$	528,166	$	20,743	$	(91	)	$	548,818

2016:			Gross		Gross
2019:												Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	4,396	$	18	$	(46	)	$	4,368	$	9,392	$	64	$	(4	)	$	9,452
U.S. government agencies		110,372		540		(703	)		110,209		124,913		1,609		(89	)		126,433
U.S. government mortgage-backed securities		82,279		1,018		(439	)		82,858		80,295		867		(34	)		81,128
State and political subdivisions		265,204		1,660		(2,416	)		264,448		193,745		1,852		(295	)		195,302
Corporate bonds		51,731		147		(694	)		51,184		66,012		1,542		(26	)		67,528
Equity securities, other		3,013		-		-			3,013
	$	516,995	$	3,383	$	(4,298	)	$	516,080	$	474,357	$	5,934	$	(448	)	$	479,843

The amortized cost and fair value of debt securities available-for-sale as of September 30, 2020, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).

	Amortized		Estimated
	Cost		Fair Value

Due in one year or less	$	46,260	$	46,694
Due after one year through five years		226,833		236,081
Due after five years through ten years		211,689		220,972
Due after ten years		43,384		45,071
Total	$	528,166	$	548,818

Securities with a carrying value of $193.4 million and $180.0 million at September 30, 2020 and December 31, 2019, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

Table of Contents

The proceeds, gains and losses ~~from~~for securities available-for-sale for the three and nine months ended September 30, 2020 and 2019are summarized ~~as follows:~~ below ((in ~~thousands)~~thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Proceeds from sales of securities available-for-sale
$ 933 $ 5,852 $ 11,757 $ 18,738
Gross realized gains on securities available-for-sale
38 66 501 303
Gross realized losses on securities available-for-sale
- (1 ) (2 ) (7 )
Tax provision applicable to net realized gains on securities available-for-sale
14 29 175 110

~~Table of Contents~~

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020		2019
Proceeds from sales of securities available-for-sale	$	0	$	2,238		$	5,463	$	8,211
Gross realized gains on securities available-for-sale		0		16			430		37
Gross realized losses on securities available-for-sale		0		(1	)		0		(20	)
Tax provision applicable to net realized gains on securities available-for-sale		0		4			108		4

~~Unrealized~~Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 are as ~~follows:~~follows (in thousands):

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
2017:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
2020:																Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government agencies	$	28,424	$	(125	)	$	3,773	$	(36	)	$	32,197	$	(161	)	$	0	$	0		$	917	$	(6	)	$	917	$	(6	)
U.S. government mortgage-backed securities		10,639		(71	)		1,997		(12	)		12,636		(83	)		21,671		(50	)		0		0			21,671		(50	)
State and political subdivisions		22,029		(81	)		21,739		(315	)		43,768		(396	)		5,924		(32	)		180		(3	)		6,104		(35	)
Corporate bonds		5,619		(11	)		7,310		(132	)		12,929		(143	)
	$	66,711	$	(288	)	$	34,819	$	(495	)	$	101,530	$	(783	)	$	27,595	$	(82	)	$	1,097	$	(9	)	$	28,692	$	(91	)

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
2016:	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
2019:																Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	2,893	$	(46	)	$	-	$	-		$	2,893	$	(46	)	$	3,023	$	(4	)	$	0	$	0		$	3,023	$	(4	)
U.S. government agencies		48,225		(703	)		-		-			48,225		(703	)		23,827		(85	)		2,520		(4	)		26,347		(89	)
U.S. government mortgage-backed securities		33,753		(439	)		-		-			33,753		(439	)		14,885		(28	)		1,934		(6	)		16,819		(34	)
State and political subdivisions		125,558		(2,226	)		6,512		(190	)		132,070		(2,416	)		17,512		(125	)		5,954		(170	)		23,466		(295	)
Corporate bonds		35,703		(694	)		-		-			35,703		(694	)		4,129		(26	)		0		0			4,129		(26	)
	$	246,132	$	(4,108	)	$	6,512	$	(190	)	$	252,644	$	(4,298	)	$	63,376	$	(268	)	$	10,408	$	(180	)	$	73,784	$	(448	)

Gross unrealized losses on debt securities totaled ~~$783,000~~$91,000 as of September 30, ~~2017.~~ 2020. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

Table of Contents

8.	Loans Receivable and Credit Disclosures

7. ~~Loans Receivable~~ The composition of loans receivable as of September 30, 2020 and ~~Credit Disclosures~~December 31, 2019 is as follows (inthousands):

	2020			2019

Real estate - construction	$	45,521		$	47,895
Real estate - 1 to 4 family residential		211,239			201,510
Real estate - commercial		491,399			435,850
Real estate - agricultural		157,495			160,771
Commercial ¹		152,707			84,084
Agricultural		102,199			111,945
Consumer and other		16,539			18,791
		1,177,099			1,060,846
Less:
Allowance for loan losses		(15,932	)		(12,619	)
Deferred loan fees²		(2,104	)		(80	)
Loans receivable, net	$	1,159,063		$	1,048,147

¹ Commercial loan portfolio as of September 30, 2020 includes $79.6 million Payroll Protection Program ("PPP") loans

² Deferred loan fees as of September 30, 2020 includes $1.9 million of fees related to the PPP loans.

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA.

Table of Contents

Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, ~~2017~~ 2020 and ~~2016~~2019 is as ~~follows:~~follows (in thousands):

	Three Months Ended September 30, 2017																					Three Months Ended September 30, 2020
				1-4 Family																					1-4 Family
	Construction			Residential		Commercial		Agricultural								Consumer						Construction			Residential			Commercial		Agricultural									Consumer
	Real Estate			Real Estate		Real Estate		Real Estate		Commercial			Agricultural			and Other			Total			Real Estate			Real Estate			Real Estate		Real Estate			Commercial			Agricultural			and Other			Total
Balance, June 30, 2017	$	780		$	1,713	$	4,437	$	907	$	2,071		$	1,154		$	126		$	11,188
Balance, June 30, 2020																						$	849		$	2,505		$	6,864	$	1,713		$	1,994		$	1,830		$	250		$	16,005
Provision (credit) for loan losses		(74	)		15		155		36		(80	)		(34	)		39			57			(105	)		80			583		(15	)		(5	)		(14	)		18			542
Recoveries of loans charged-off		-			4		-		-		2			-			4			10			0			2			1		0			9			0			272			284
Loans charged-off		-			-		-		-		(109	)		-			(6	)		(115	)		0			(1	)		0		0			(582	)		(48	)		(268	)		(899	)
Balance, September 30, 2017	$	706		$	1,732	$	4,592	$	943	$	1,884		$	1,120		$	163		$	11,140
Balance, September 30, 2020																						$	744		$	2,586		$	7,448	$	1,698		$	1,416		$	1,768		$	272		$	15,932

	Nine Months Ended September 30, 2017																					Nine Months Ended September 30, 2020
				1-4 Family																				1-4 Family
	Construction			Residential		Commercial		Agricultural								Consumer						Construction		Residential			Commercial			Agricultural								Consumer
	Real Estate			Real Estate		Real Estate		Real Estate		Commercial			Agricultural			and Other			Total			Real Estate		Real Estate			Real Estate			Real Estate		Commercial			Agricultural			and Other			Total
Balance, December 31, 2016	$	908		$	1,711	$	3,960	$	861	$	1,728		$	1,216		$	123		$	10,507
Balance, December 31, 2019																						$	672	$	2,122		$	5,362		$	1,326	$	1,458		$	1,478		$	201		$	12,619
Provision (credit) for loan losses		(202	)		12		632		82		735			(96	)		59			1,222			71		477			2,527			372		573			338			66			4,424
Recoveries of loans charged-off		-			9		-		-		30			-			8			47			1		5			3			0		13			0			277			299
Loans charged-off		-			-		-		-		(609	)		-			(27	)		(636	)		0		(18	)		(444	)		0		(628	)		(48	)		(272	)		(1,410	)
Balance, September 30, 2017	$	706		$	1,732	$	4,592	$	943	$	1,884		$	1,120		$	163		$	11,140
Balance, September 30, 2020																						$	744	$	2,586		$	7,448		$	1,698	$	1,416		$	1,768		$	272		$	15,932

	Three Months Ended September 30, 2016																				Three Months Ended September 30, 2019
			1-4 Family																				1-4 Family
	Construction		Residential		Commercial			Agricultural							Consumer						Construction		Residential		Commercial		Agricultural							Consumer
	Real Estate		Real Estate		Real Estate			Real Estate		Commercial			Agricultural		and Other			Total			Real Estate		Real Estate		Real Estate		Real Estate		Commercial			Agricultural		and Other		Total
Balance, June 30, 2016	$	758	$	1,742	$	3,890		$	834	$	1,439		$	1,219	$	253		$	10,135
Balance, June 30, 2019																					$	721	$	1,847	$	4,906	$	1,301	$	1,590		$	1,332	$	172	$	11,869
Provision (credit) for loan losses		121		32		(89	)		-		169			12		(10	)		235			41		237		158		9		(112	)		10		36		379
Recoveries of loans charged-off		15		1		-			-		75			-		2			93			0		2		3		0		5			0		2		12
Loans charged-off		-		-		-			-		(1	)		-		(11	)		(12	)		0		0		0		0		(326	)		0		0		(326	)
Balance, September 30, 2016	$	894	$	1,775	$	3,801		$	834	$	1,682		$	1,231	$	234		$	10,451
Balance, September 30, 2019																					$	762	$	2,086	$	5,067	$	1,310	$	1,157		$	1,342	$	210	$	11,934

	Nine Months Ended September 30, 2016																						Nine Months Ended September 30, 2019
				1-4 Family																					1-4 Family
	Construction			Residential			Commercial		Agricultural								Consumer						Construction		Residential			Commercial		Agricultural								Consumer
	Real Estate			Real Estate			Real Estate		Real Estate		Commercial			Agricultural			and Other			Total			Real Estate		Real Estate			Real Estate		Real Estate		Commercial			Agricultural			and Other			Total
Balance, December 31, 2015	$	999		$	1,806		$	3,557	$	760	$	1,371		$	1,256		$	239		$	9,988
Balance, December 31, 2018																							$	699	$	1,820		$	4,615	$	1,198	$	1,777		$	1,384		$	191		$	11,684
Provision (credit) for loan losses		(135	)		(34	)		244		74		308			(25	)		9			441			63		265			437		112		(324	)		(42	)		34			545
Recoveries of loans charged-off		30			3			-		-		81			-			7			121			0		4			15		0		34			0			6			59
Loans charged-off		-			-			-		-		(78	)		-			(21	)		(99	)		0		(3	)		0		0		(330	)		0			(21	)		(354	)
Balance, September 30, 2016	$	894		$	1,775		$	3,801	$	834	$	1,682		$	1,231		$	234		$	10,451
Balance, September 30, 2019																							$	762	$	2,086		$	5,067	$	1,310	$	1,157		$	1,342		$	210		$	11,934

Table of Contents

Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 is as ~~follows:~~follows (in thousands):

2017			1-4 Family
2020																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	28	$	-	$	-	$	747	$	-	$	48	$	823	$	0	$	150	$	0	$	0	$	2	$	41	$	30	$	223
Collectively evaluated for impairment		706		1,704		4,592		943		1,137		1,120		115		10,317		744		2,436		7,448		1,698		1,414		1,727		242		15,709
Balance September 30, 2017	$	706	$	1,732	$	4,592	$	943	$	1,884	$	1,120	$	163	$	11,140
Balance September 30, 2020																	$	744	$	2,586	$	7,448	$	1,698	$	1,416	$	1,768	$	272	$	15,932

2016			1-4 Family
2019																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	76	$	-	$	-	$	644	$	-	$	-	$	720	$	0	$	209	$	0	$	0	$	0	$	0	$	0	$	209
Collectively evaluated for impairment		908		1,635		3,960		861		1,084		1,216		123		9,787		672		1,913		5,362		1,326		1,458		1,478		201		12,410
Balance December 31, 2016	$	908	$	1,711	$	3,960	$	861	$	1,728	$	1,216	$	123	$	10,507
Balance December 31, 2019																	$	672	$	2,122	$	5,362	$	1,326	$	1,458	$	1,478	$	201	$	12,619

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 is as follows (in thousands):

2017			1-4 Family
2020																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	692	$	703	$	-	$	3,250	$	-	$	85	$	4,730	$	165	$	1,332	$	11,046	$	1,868	$	949	$	977	$	51	$	16,388
Collectively evaluated for impairment		44,041		148,148		350,508		79,181		70,916		67,711		10,201		770,706		45,356		209,907		480,353		155,627		151,758		101,222		16,488		1,160,711

Balance September 30, 2017	$	44,041	$	148,840	$	351,211	$	79,181	$	74,166	$	67,711	$	10,286	$	775,436
Balance September 30, 2020																	$	45,521	$	211,239	$	491,399	$	157,495	$	152,707	$	102,199	$	16,539	$	1,177,099

2016			1-4 Family
2019																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	660	$	399	$	-	$	3,942	$	-	$	76	$	5,077	$	0	$	1,204	$	83	$	84	$	462	$	2,951	$	4	$	4,788
Collectively evaluated for impairment		61,042		148,847		315,303		73,032		70,436		76,994		12,054		757,708		47,895		200,306		435,767		160,687		83,622		108,994		18,787		1,056,058

Balance December 31, 2016	$	61,042	$	149,507	$	315,702	$	73,032	$	74,378	$	76,994	$	12,130	$	762,785
Balance December 31, 2019																	$	47,895	$	201,510	$	435,850	$	160,771	$	84,084	$	111,945	$	18,791	$	1,060,846

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company ~~will apply~~applies its normal loan review procedures to identify loans that should be evaluated for impairment.

Table of Contents

~~The following is a recap of impaired~~Impaired loans,, on a disaggregated basis, as of September 30, ~~2017~~ 2020 and December 31, ~~2016:~~ 2019 (in thousands):

	2017						2016						2020						2019
			Unpaid						Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-	$	-	$	-	$	165	$	165	$	-	$	0	$	0	$	-
Real estate - 1 to 4 family residential		610		750		-		452		473		-		386		436		-		460		796		-
Real estate - commercial		703		1,369		-		399		1,025		-		11,046		11,836		-		83		435		-
Real estate - agricultural		-		-		-		-		-		-		1,868		1,885		-		84		97		-
Commercial		127		150		-		2,747		2,672		-		947		1,567		-		462		517		-
Agricultural		-		-		-		-		-		-		448		605		-		2,951		3,071		-
Consumer and other		28		30		-		76		81		-		10		10		-		4		4		-
Total loans with no specific reserve:		1,468		2,299		-		3,674		4,251		-		14,870		16,504		-		4,044		4,920		-

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-		0		0		0		0		0		0
Real estate - 1 to 4 family residential		82		104		28		208		360		76		946		1,283		150		744		755		209
Real estate - commercial		-		-		-		-		-		-		0		0		0		0		0		0
Real estate - agricultural		-		-		-		-		-		-		0		0		0		0		0		0
Commercial		3,123		3,392		747		1,195		1,286		644		2		2		2		0		0		0
Agricultural		-		-		-		-		-		-		529		531		41		0		0		0
Consumer and other		57		60		48		-		-		-		41		43		30		0		0		0
Total loans with specific reserve:		3,262		3,556		823		1,403		1,646		720		1,518		1,859		223		744		755		209

Total
Real estate - construction		-		-		-		-		-		-		165		165		0		0		0		0
Real estate - 1 to 4 family residential		692		854		28		660		833		76		1,332		1,719		150		1,204		1,551		209
Real estate - commercial		703		1,369		-		399		1,025		-		11,046		11,836		0		83		435		0
Real estate - agricultural		-		-		-		-		-		-		1,868		1,885		0		84		97		0
Commercial		3,250		3,542		747		3,942		3,958		644		949		1,569		2		462		517		0
Agricultural		-		-		-		-		-		-		977		1,136		41		2,951		3,071		0
Consumer and other		85		90		48		76		81		-		51		53		30		4		4		0

	$	4,730	$	5,855	$	823	$	5,077	$	5,897	$	720	$	16,388	$	18,363	$	223	$	4,788	$	5,675	$	209

Table of Contents

~~The following is a recap of~~ ~~the average~~Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, ~~2017~~ 2020 and ~~2016:~~2019 (in thousands):

	Three Months Ended September 30,								Three Months Ended September 30,
	2017				2016				2020				2019
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-	$	83	$	0	$	0	$	0
Real estate - 1 to 4 family residential		631		18		481		-		305		0		364		4
Real estate - commercial		716		-		450		-		11,091		0		637		45
Real estate - agricultural		-		-		-		-		1,966		0		86		0
Commercial		139		2		67		-		735		21		240		0
Agricultural		-		-		11		-		813		340		2,206		0
Consumer and other		46		-		88		6		8		0		0		0
Total loans with no specific reserve:		1,532		20		1,097		6		15,001		361		3,533		49

With an allowance recorded:
Real estate - construction		-		-		-		-		0		0		0		0
Real estate - 1 to 4 family residential		128		-		626		-		957		0		341		0
Real estate - commercial		-		-		-		-		0		0		0		0
Real estate - agricultural		-		-		-		-		0		0		0		0
Commercial		3,263		-		1,003		2		627		0		1,267		0
Agricultural		-		-		-		-		531		0		0		0
Consumer and other		29		-		1		-		30		0		5		0
Total loans with specific reserve:		3,420		-		1,630		2		2,145		0		1,613		0

Total
Real estate - construction		-		-		-		-		83		0		0		0
Real estate - 1 to 4 family residential		759		18		1,107		-		1,262		0		705		4
Real estate - commercial		716		-		450		-		11,091		0		637		45
Real estate - agricultural		-		-		-		-		1,966		0		86		0
Commercial		3,402		2		1,070		2		1,362		21		1,507		0
Agricultural		-		-		11		-		1,344		340		2,206		0
Consumer and other		75		-		89		6		38		0		5		0

	$	4,952	$	20	$	2,727	$	8	$	17,146	$	361	$	5,146	$	49

Table of Contents

Nine Months Ended September 30,

2017

2016

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no specific reserve recorded:

Real estate - construction
$ - $ - $ - $ 31
Real estate - 1 to 4 family residential
535 27 438 1
Real estate - commercial
648 - 465 22
Real estate - agricultural
- - - -
Commercial
1,457 3 39 -
Agricultural
- - 11 -
Consumer and other
60 - 66 6
Total loans with no specific reserve:
2,700 30 1,019 60

With an allowance recorded:

Real estate - construction
16 2 - -
Real estate - 1 to 4 family residential
162 - 663 5
Real estate - commercial
- - 26 -
Real estate - agricultural
- - - -
Commercial
2,193 - 732 2
Agricultural
- - - -
Consumer and other
15 1 1 -
Total loans with specific reserve:
2,386 3 1,422 7

Total

Real estate - construction
16 2 - 31
Real estate - 1 to 4 family residential
697 27 1,101 6
Real estate - commercial
648 - 491 22
Real estate - agricultural
- - - -
Commercial
3,650 3 771 2
Agricultural
- - 11 -
Consumer and other
75 1 67 6

$ 5,086 $ 33 $ 2,441 $ 67

	Nine Months Ended September 30,
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	41	$	0	$	0	$	0
Real estate - 1 to 4 family residential		294		0		305		30
Real estate - commercial		8,221		0		384		105
Real estate - agricultural		1,202		6		79		0
Commercial		586		23		241		0
Agricultural		1,896		340		1,103		0
Consumer and other		26		0		0		0
Total loans with no specific reserve:		12,266		369		2,112		135

With an allowance recorded:
Real estate - construction		0		0		0		0
Real estate - 1 to 4 family residential		938		0		226		0
Real estate - commercial		244		0		0		0
Real estate - agricultural		0		0		0		0
Commercial		356		0		1,867		0
Agricultural		380		0		0		0
Consumer and other		15		0		10		1
Total loans with specific reserve:		1,933		0		2,103		1

Total
Real estate - construction		41		0		0		0
Real estate - 1 to 4 family residential		1,232		0		531		30
Real estate - commercial		8,465		0		384		105
Real estate - agricultural		1,202		6		79		0
Commercial		942		23		2,108		0
Agricultural		2,276		340		1,103		0
Consumer and other		41		0		10		1

	$	14,199	$	369	$	4,215	$	136

The interest foregone on nonaccrual loans for the three months ended September 30, ~~2017~~ 2020 and ~~2016~~2019 was approximately ~~$88,000~~$247,000 and ~~$46,000,~~$272,000, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, ~~2017~~ 2020 and ~~2016~~2019 was approximately ~~$289,000~~$747,000 and ~~$124,000,~~$389,000, respectively.

TheNonaccrual loans at September 30, 2020 and December 31, 2019 were $16,388,000 and $4,788,000 respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of ~~$3,098,000~~$11,480,000 as of September 30, ~~2017,~~ 2020, all of which were included in impaired and nonaccrual loans. The Company had TDRs of ~~$3,672,000~~$1,171,000 as of December 31, ~~2016,~~ 2019, all of which were included in impaired and nonaccrual loans.

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T~~he following table sets forth information on the~~The Company’s ~~TDRs,~~TDR, on a disaggregated basis, occurring in the three and nine months ended September 30, ~~2017~~ 2020 and ~~2016:~~ 2019, is as follows (dollarsin ~~thousands)~~thousands):

	Three Months Ended September 30,												Three Months Ended September 30,
	2017						2016						2020						2019
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification				Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment		Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-		0	$	0	$	0		0	$	0	$	0
Real estate - 1 to 4 family residential		-		-		-		-		-		-		0		0		0		3		1,035		1,035
Real estate - commercial		-		-		-		-		-		-		1		10,157		10,157		0		0		0
Real estate - agricultural		-		-		-		-		-		-		0		0		0		0		0		0
Commercial		-		-		-		-		-		-		0		0		0		0		0		0
Agricultural		-		-		-		-		-		-		3		56		56		0		0		0
Consumer and other		-		-		-		-		-		-		1		27		27		0		0		0

		-	$	-	$	-		-	$	-	$	-		5	$	10,240	$	10,240		3	$	1,035	$	1,035

	Nine Months Ended September 30,												Nine Months Ended September 30,
	2017						2016						2020						2019
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification				Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment		Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-		0	$	0	$	0		0	$	0	$	0
Real estate - 1 to 4 family residential		-		-		-		-		-		-		0		0		0		3		1,035		1,035
Real estate - commercial		-		-		-		-		-		-		2		10,341		10,341		0		0		0
Real estate - agricultural		-		-		-		-		-		-		0		0		0		0		0		0
Commercial		2		93		99		3		702		705		1		61		61		0		0		0
Agricultural		-		-		-		-		-		-		3		56		56		0		0		0
Consumer and other		-		-		-		3		70		70		1		27		27		0		0		0

		2	$	93	$	99		6	$	772	$	775		7	$	10,485	$	10,485		3	$	1,035	$	1,035

During the three ~~and nine~~ months ended September 30, ~~2017,~~ 2020, the Company granted concessions to ~~two~~three borrowers ~~that~~facing financial difficulties which were ~~experiencing~~unrelated to COVID-19. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate. During the nine months ended September 30, 2020, the Company granted concessions to five borrowers facing financial difficulties. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate. During the three and nine months ended September 30, 2019, the Company granted concessions to one borrower with three1-4 family residential contracts facing financial difficulties. The loans were ~~extended beyond their~~originated with terms less than normal ~~terms and on one loan the interest was capitalized.~~related to collateral.

~~During~~There were no TDR loans that were modified during the ~~three~~twelve months ended September 30, ~~2016, the Company did not grant any concessions to any borrowers facing financial difficulties.~~ ~~During the nine months ended September 30, 2016, the Company granted concessions to two borrowers experiencing financial difficulties with six loans.~~2020 and 2019 that had payment defaults. The ~~three consumer loans were extended beyond normal terms at an interest rate below a market interest rate. The three commercial operating loans were extended beyond normal terms.~~

~~The~~ Company considers TDR loans to have payment default when it is past due 60 days or more.

Table of Contents

~~No TDR modified during the twelve months ended~~ ~~September 30, 2017 and 2016 had payment defaults.~~

~~A $530,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans.~~ There were ~~$257,000~~$15,000 and $31,000 of net charge-offs related to TDRs for the three and nine months ended September 30, ~~2017.~~2020, respectively. There were no$275,000 of net charge-offs related to TDRs for the three and nine months ended September 30, ~~2016.~~2019.

Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the FDIC, (the "agencies") issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

As of September 30, 2020, the Company had executed 199 COVID-19 related loan modifications under these rules on a total outstanding principal balance of $127.5 million. Of those loans, 100 loans with a total outstanding principal balance of $94.8 million remain on deferral, including $11.7 million of loans that were less than 30 days past due after the modification period expired. The remaining loans of $32.7 million have been returned to a normal payment status. These loans did not have financial difficulty prior to the COVID-19 pandemic and were generally modified for principal and interest payment deferral or interest only payments for up to six months. Modified loans continue to accrue interest and are evaluated for past due status based on the revised payment terms.

Table of Contents

AnAn aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, ~~2017~~ 2020 and December 31, ~~2016,~~ 2019, is as ~~follows:~~follows (in thousands):

2017			90 Days								90 Days
2020															90 Days								90 Days
	30-89		or Greater		Total						or Greater		30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing		Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	205	$	-	$	205	$	43,836	$	44,041	$	-	$	26	$	165	$	191	$	45,330	$	45,521	$	0
Real estate - 1 to 4 family residential		1,065		476		1,541		147,299		148,840		81		763		385		1,148		210,091		211,239		131
Real estate - commercial		312		398		710		350,501		351,211		-		176		75		251		491,148		491,399		0
Real estate - agricultural		377		-		377		78,804		79,181		-		1,014		1,835		2,849		154,646		157,495		33
Commercial		129		429		558		73,608		74,166		-		104		647		751		151,956		152,707		0
Agricultural		207		-		207		67,504		67,711		-		574		472		1,046		101,153		102,199		0
Consumer and other		43		32		75		10,211		10,286		-		37		36		73		16,466		16,539		16

	$	2,338	$	1,335	$	3,673	$	771,763	$	775,436	$	81	$	2,694	$	3,615	$	6,309	$	1,170,790	$	1,177,099	$	180

2016			90 Days								90 Days
2019															90 Days								90 Days
	30-89		or Greater		Total						or Greater		30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing		Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	-	$	-	$	-	$	61,042	$	61,042	$	-	$	1,796	$	0	$	1,796	$	46,099	$	47,895	$	0
Real estate - 1 to 4 family residential		1,577		35		1,612		147,895		149,507		19		811		290		1,101		200,409		201,510		188
Real estate - commercial		1,420		-		1,420		314,282		315,702		-		387		0		387		435,463		435,850		0
Real estate - agricultural		-		-		-		73,032		73,032		-		422		0		422		160,349		160,771		0
Commercial		84		747		831		73,547		74,378		-		518		237		755		83,329		84,084		0
Agricultural		-		-		-		76,994		76,994		-		666		2,587		3,253		108,692		111,945		62
Consumer and other		36		3		39		12,091		12,130		3		146		6		152		18,639		18,791		5

	$	3,117	$	785	$	3,902	$	758,883	$	762,785	$	22	$	4,746	$	3,120	$	7,866	$	1,052,980	$	1,060,846	$	255

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The credit risk profile by internally assigned grade, on a disaggregated basis, asas of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 is as ~~follows:~~follows (in thousands):

2017	Construction		Commercial		Agricultural
2020													Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	41,032	$	329,263	$	57,569	$	59,420	$	42,695	$	529,979	$	39,626	$	380,297	$	113,790	$	132,487	$	76,116	$	742,316
Watch		3,009		17,927		18,984		10,020		23,828		73,768		5,730		74,178		34,810		14,820		23,843		153,381
Special Mention		-		189		1,234		-		-		1,423		0		3,200		0		0		0		3,200
Substandard		-		3,129		1,394		1,478		1,188		7,189		0		22,678		7,027		4,451		1,263		35,419
Substandard-Impaired		-		703		-		3,248		-		3,951		165		11,046		1,868		949		977		15,005

	$	44,041	$	351,211	$	79,181	$	74,166	$	67,711	$	616,310	$	45,521	$	491,399	$	157,495	$	152,707	$	102,199	$	949,321

2016	Construction		Commercial		Agricultural
2019													Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	57,420	$	288,107	$	51,720	$	59,506	$	57,415	$	514,168	$	41,073	$	387,274	$	118,692	$	62,655	$	90,083	$	699,777
Watch		3,245		22,833		15,251		9,512		18,938		69,779		6,822		29,209		32,780		16,147		15,248		100,206
Special Mention		-		204		4,228		96		75		4,603		0		4,581		0		0		0		4,581
Substandard		377		4,159		1,833		1,322		566		8,257		0		14,703		9,215		4,820		3,663		32,401
Substandard-Impaired		-		399		-		3,942		-		4,341		0		83		84		462		2,951		3,580

	$	61,042	$	315,702	$	73,032	$	74,378	$	76,994	$	601,148	$	47,895	$	435,850	$	160,771	$	84,084	$	111,945	$	840,545

The credit risk profile based on payment activity, on a disaggregated basis, asas of September 30, ~~2017~~ 2020 and December 31, ~~2016~~ 2019 is as ~~follows:~~follows (in thousands):

2017	1-4 Family
2020							1-4 Family
	Residential		Consumer				Residential		Consumer
	Real Estate		and Other		Total		Real Estate		and Other		Total

Performing	$	148,069	$	10,202	$	158,271	$	209,778	$	16,472	$	226,250
Non-performing		771		84		855		1,461		67		1,528

	$	148,840	$	10,286	$	159,126	$	211,239	$	16,539	$	227,778

2016	1-4 Family
2019							1-4 Family
	Residential		Consumer				Residential		Consumer
	Real Estate		and Other		Total		Real Estate		and Other		Total

Performing	$	148,828	$	12,051	$	160,879	$	200,117	$	18,782	$	218,899
Non-performing		679		79		758		1,393		9		1,402

	$	149,507	$	12,130	$	161,637	$	201,510	$	18,791	$	220,301

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Goodwill

8. As a result of the acquisition of ISSB in 2019, goodwill of $2.7 million was recognized. Goodwill

G~~oodwill~~ recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of ISSB. For income tax purposes, goodwill associated with ISSB is amortized over a fifteen year period. Goodwill for this acquisition and previous acquisitions is not amortized but is evaluated for impairment at least annually. ~~For income tax purposes, goodwill is amortized over fifteen years.~~

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10.

Intangible assets

~~9. Intangible assets~~

In conjunction with the acquisition of ISSB in 2019, the Company recorded $1.9 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at September 30, ~~2017~~ 2020 and December 31, ~~2016:~~ 2019 (in thousands):

	2017				2016				2020				2019
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	2,518	$	1,793	$	2,518	$	1,563	$	6,411	$	3,336	$	6,411	$	2,745
Customer list		474		65		412		14		535		301		535		242

Total	$	2,992	$	1,858	$	2,930	$	1,577	$	6,946	$	3,637	$	6,946	$	2,987

The weighted average life of the intangible assets is 33.7 years as of September 30, ~~2017~~ 2020 and 4.2 years as of December 31, ~~2016.~~2019.

The following sets forth the activity related to the intangible assets for the three and nine months ended September 30, ~~2017~~ 2020 and ~~2016:~~2019 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Beginning intangible asset, net
$ 1,212 $ 1,122 $ 1,353 $ 1,309
Adjustment to intangible asset
12 - 62 -
Amortization
(90 ) (86 ) (281 ) (273 )

Ending intangible asset, net
$ 1,134 $ 1,036 $ 1,134 $ 1,036

E~~stimated remaining amortization expense on core deposit intangible for the years ending December 31~~^st ~~is as follows:~~ ~~(in thousands)~~

2017
$ 85
2018
319
2019
196
2020
139
2021
139
2022
133
2023
123

$ 1,134

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

Beginning intangible assets, net	$	3,525		$	2,375		$	3,959		$	2,678
Amortization		(216	)		(124	)		(650	)		(427	)

Ending intangible assets, net	$	3,309		$	2,251		$	3,309		$	2,251

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Estimated remaining amortization expense on intangible assets for the years ending December 31 is as follows (in thousands):

2020	$	176
2021		628
2022		574
2023		502
2024		337
2025		301
After		791

Total	$	3,309

~~10.~~

11.

Pledged Collateral Related to Securities Sold Under Repurchase Agreements

The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements ~~and term repurchase agreements~~ as of September 30, ~~2017~~ 2020 and December 31, ~~2016:~~ 2019 (in thousands):

	2017						2016
	Remaining Contractual Maturity of the Agreements
	Overnight		Greater than		Total		Overnight		Greater than		Total
			90 days						90 days
													2020		2019
Securities sold under agreements to repurchase:
U.S. government treasuries	$	1,485	$	-	$	1,485	$	1,476	$	-	$	1,476	$	2,078	$	3,528
U.S. government agencies		48,363		-		48,363		46,557		-		46,557		39,851		35,557
U.S. government mortgage-backed securities		24,514		-		24,514		30,376		-		30,376		14,046		19,614

Total	$	74,362	$	-	$	74,362	$	78,409	$	-	$	78,409

Term repurchase agreements (Other borrowings):
U.S. government agencies	$	-	$	15,174	$	15,174	$	-	$	15,068	$	15,068
U.S. government mortgage-backed securities		-		-		-		-		354		354

Total	$	-	$	15,174	$	15,174	$	-	$	15,422	$	15,422

Total pledged collateral	$	74,362	$	15,174	$	89,536	$	78,409	$	15,422	$	93,831	$	55,975	$	58,699

In the event the repurchase agreements exceed the estimated fair value of the pledged securities available-for-sale, the Company has unpledged securities available-for-sale that may be pledged on the repurchase agreements.

12.

Income Taxes

The tax effects of temporary differences related to income taxes are included in deferred income taxes. The change in deferred income taxes since December 31, 2019 is due primarily to the increase in the unrealized gains on investment securities.

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13.

Regulatory Matters

~~11. Regulatory Matters~~On September 30, 2020, the Banks qualified for and elected to use the community bank leverage ratio (CBLR) framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 8%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year and will again increase to 9% beginning January 1, 2022. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The Company and the ~~Banks~~Banks’ capital amounts and ratios as of September 30, 2020 and December 31, 2019 are as ~~follows:~~follows (dollars in thousands):

To Be Well

Capitalized Under

For Capital

Prompt Corrective

Actual

Adequacy Purposes *

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2017:

Total capital (to risk- weighted assets):

Consolidated
$ 175,203 17.7 % $ 91,324 9.25 % N/A N/A
Boone Bank & Trust
15,325 16.7 8,486 9.25 $ 9,174 10.0 %
First National Bank
81,177 15.4 48,867 9.25 52,829 10.0
Reliance State Bank
26,957 15.9 15,661 9.25 16,931 10.0
State Bank & Trust
20,217 16.5 11,337 9.25 12,256 10.0
United Bank & Trust
14,903 20.4 6,741 9.25 7,288 10.0

Tier 1 capital (to risk- weighted assets):

Consolidated
$ 163,536 16.6 % $ 71,578 7.25 % N/A N/A
Boone Bank & Trust
14,419 15.7 6,651 7.25 $ 7,339 8.0 %
First National Bank
75,221 14.2 38,301 7.25 42,263 8.0
Reliance State Bank
24,947 14.7 12,275 7.25 13,545 8.0
State Bank & Trust
18,680 15.2 8,886 7.25 9,805 8.0
United Bank & Trust
14,084 19.3 5,284 7.25 5,830 8.0

Tier 1 capital (to average- weighted assets):

Consolidated
$ 163,536 12.1 % $ 53,995 4.00 % N/A N/A
Boone Bank & Trust
14,419 10.5 5,484 4.00 $ 6,855 5.0 %
First National Bank
75,221 10.0 29,942 4.00 37,428 5.0
Reliance State Bank
24,947 12.2 8,147 4.00 10,184 5.0
State Bank & Trust
18,680 11.9 6,297 4.00 7,871 5.0
United Bank & Trust
14,084 12.9 4,372 4.00 5,465 5.0

Common equity tier 1 capital (to risk-weighted assets):

Consolidated
$ 163,536 16.6 % $ 56,769 5.75 % N/A N/A
Boone Bank & Trust
14,419 15.7 5,275 5.75 $ 5,963 6.5 %
First National Bank
75,221 14.2 30,377 5.75 34,339 6.5
Reliance State Bank
24,947 14.7 9,735 5.75 11,005 6.5
State Bank & Trust
18,680 15.2 7,047 5.75 7,967 6.5
United Bank & Trust
14,084 19.3 4,190 5.75 4,737 6.5

* These ratios for September 30, 2017 include a capital conservation buffer of 1.25%, except for the Tier 1 capital to average weighted assets ratios.

						To Be Well
						Capitalized Under
						Prompt Corrective
	Actual					Action Provisions
	Amount		Ratio			Amount		Ratio

As of September 30, 2020:
Community Bank Leverage Ratio:
(Tier 1 capital to average assets for leverage ratio):
Boone Bank & Trust	$	13,770		9.5	%	$	11,642		8.0	%
First National Bank		84,275		8.8			76,901		8.0
Iowa State Savings Bank		21,251		9.5			17,883		8.0
Reliance State Bank		22,923		9.9			18,438		8.0
State Bank & Trust		16,181		8.9			14,590		8.0
United Bank & Trust		10,436		9.6			8,720		8.0

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To Be Well

Capitalized Under

For Capital

Prompt Corrective

Actual

Adequacy Purposes

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2016:

Total capital (to risk- weighted assets):

Consolidated
$ 170,358 17.2 % $ 85,241 8.625 % N/A N/A
Boone Bank & Trust
15,044 17.2 7,534 8.625 $ 8,735 10.0 %
First National Bank
78,322 15.3 44,279 8.625 51,338 10.0
Reliance State Bank
26,095 14.1 15,927 8.625 18,466 10.0
State Bank & Trust
20,170 16.4 10,590 8.625 12,278 10.0
United Bank & Trust
14,897 19.2 6,684 8.625 7,749 10.0

Tier 1 capital (to risk- weighted assets):

Consolidated
$ 159,325 16.1 % $ 65,475 6.625 % N/A N/A
Boone Bank & Trust
14,132 16.2 5,787 6.625 $ 6,988 8.0 %
First National Bank
72,750 14.2 34,011 6.625 41,070 8.0
Reliance State Bank
24,139 13.1 12,234 6.625 14,773 8.0
State Bank & Trust
18,633 15.2 8,134 6.625 9,822 8.0
United Bank & Trust
14,078 18.2 5,134 6.625 6,199 8.0

Tier 1 capital (to average- weighted assets):

Consolidated
$ 159,325 12.0 % $ 53,316 4.000 % N/A N/A
Boone Bank & Trust
14,132 10.2 5,529 4.000 $ 6,911 5.0 %
First National Bank
72,750 10.0 29,077 4.000 36,347 5.0
Reliance State Bank
24,139 11.5 8,374 4.000 10,467 5.0
State Bank & Trust
18,633 11.6 6,449 4.000 8,061 5.0
United Bank & Trust
14,078 12.5 4,523 4.000 5,654 5.0

Common equity tier 1 capital (to risk-weighted assets):

Consolidated
$ 159,325 16.1 % $ 50,650 5.125 % N/A N/A
Boone Bank & Trust
14,132 16.2 4,477 5.125 $ 5,678 6.5 %
First National Bank
72,750 14.2 26,311 5.125 33,370 6.5
Reliance State Bank
24,139 13.1 9,464 5.125 12,003 6.5
State Bank & Trust
18,633 15.2 6,292 5.125 7,981 6.5
United Bank & Trust
14,078 18.2 3,972 5.125 5,037 6.5

* These ratios for December 31, 2016 include a capital conservation buffer of 0.625%, except for the Tier 1 capital to average weighted assets ratios.

The Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes in July 2013. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive income. The final rules took effect for the Company and the Banks on January 1, 2015, subject to a transition period for certain parts of the rules.

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2019:
Total capital (to risk- weighted assets):
Consolidated	$	180,834		14.3	%	$	132,878		10.50	%		N/A		N/A
Boone Bank & Trust		14,205		14.1			10,610		10.50		$	10,105		10.0	%
First National Bank		87,375		13.9			66,180		10.50			63,028		10.0
Iowa State Savings Bank		20,610		14.2			15,208		10.50			14,483		10.0
Reliance State Bank		24,487		13.0			19,778		10.50			18,836		10.0
State Bank & Trust		16,800		13.5			13,115		10.50			12,490		10.0
United Bank & Trust		10,775		14.3			7,910		10.50			7,534		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	167,514		13.2	%	$	107,568		8.50	%		N/A		N/A
Boone Bank & Trust		13,274		13.1			8,589		8.50		$	8,084		8.0	%
First National Bank		80,665		12.8			53,574		8.50			50,423		8.0
Iowa State Savings Bank		20,151		13.9			12,311		8.50			11,587		8.0
Reliance State Bank		22,166		11.8			16,010		8.50			15,069		8.0
State Bank & Trust		15,233		12.2			10,617		8.50			9,992		8.0
United Bank & Trust		9,955		13.2			6,403		8.50			6,027		8.0

Tier 1 capital (to average- assets):
Consolidated	$	167,544		10.1	%	$	66,234		4.00	%		N/A		N/A
Boone Bank & Trust		13,274		9.5			5,604		4.00		$	7,005		5.0	%
First National Bank		80,665		9.3			34,702		4.00			43,378		5.0
Iowa State Savings Bank		20,151		9.5			8,453		4.00			10,567		5.0
Reliance State Bank		22,166		10.0			8,886		4.00			11,108		5.0
State Bank & Trust		15,233		9.5			6,384		4.00			7,980		5.0
United Bank & Trust		9,955		9.8			4,073		4.00			5,091		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	167,544		13.2	%	$	88,585		7.00	%		N/A		N/A
Boone Bank & Trust		13,274		13.1			7,074		7.00		$	6,568		6.5	%
First National Bank		80,665		12.8			44,120		7.00			40,968		6.5
Iowa State Savings Bank		20,151		13.9			10,138		7.00			9,414		6.5
Reliance State Bank		22,166		11.8			13,185		7.00			12,243		6.5
State Bank & Trust		15,233		12.2			8,743		7.00			8,119		6.5
United Bank & Trust		9,955		13.2			5,273		7.00			4,897		6.5

~~Table of Contents~~

~~Beginning in 2016, an additional capital conservation buffer w~~as added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and the Banks are sufficient to meet the fully phased-in conservation buffer.

1~~2. Subsequent Events~~
14.
Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, ~~2017,~~ 2020, but prior to November ~~8, 2017,~~ 5, 2020, that provided additional evidence about conditions that existed at September 30, ~~2017. There~~2020. Except for dividends declared on October 14, 2020, there were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, ~~2017.~~2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Ames National Corporation ~~(the~~(the “Company”) is a bank holding company established in 1975 that owns and operates ~~five~~six bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), ~~and~~ United Bank & Trust NA (United Bank) and Iowa State Savings Bank (Iowa State Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. ~~The Banks also offer~~Wealth management services includes financial planning and managing trust, agencies, estates and investment ~~services through a third-party broker-dealer.~~brokerage accounts. The Company employs ~~fourteen~~sixteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to ~~205~~265 full-time equivalent individuals employed by the Banks.

The ~~Company~~’sCompany’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the ~~Banks~~Banks; (v) gain on sale of loans; and ~~(v) Merchant~~(vi) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on ~~interest bearing~~interest-bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

~~Table of Contents~~

The Company had net income of ~~$3,928,000,~~$5,671,000, or ~~$0.42~~$0.62 per share, for the three months ended September 30, ~~2017,~~2020, compared to net income of ~~$3,804,000,~~$4,041,000, or ~~$0.41~~$0.44 per share, for the three months ended September 30, ~~2016.~~2019. The increase in earnings is primarily the result of a reduction in interest expense due to market rate decreases and the Iowa State Savings Bank acquisition.

~~The~~ ~~increase in quarterly earnings can be primarily attributed to an increase in loan interest income and a lower provision for loan losses, offset in part by increases in interest expense.~~

NetNet loan charge-offs ~~(recoveries)~~ totaled ~~$105,000~~$615,000 and ~~$(81,000)~~$314,000 for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. The provision for loan losses totaled ~~$57,000~~$542,000 and ~~$235,000~~$379,000 for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

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The Company had net income of $~~11,011,000,~~$13,654,000, or ~~$1.18~~$1.49 per share, for the nine months ended September 30, ~~2017,~~2020, compared to net income of ~~$11,710,000,~~$12,896,000, or ~~$1.26~~$1.40 per share, for the nine months ended September 30, ~~2016.~~ 2019.

The ~~decrease~~increase in ~~nine month~~ earnings ~~can be~~is primarily ~~attributed to a higher provision for loan losses and increases~~the result of the Acquisition, reduction in interest expense due to market rate decreases, and was partially offset ~~in part~~ by an increase in provision for loan ~~interest income.~~losses.

Net loan charge-offs ~~(recoveries)~~ totaled ~~$589,000~~$1,111,000 and ~~$(22,000)~~$295,000 for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. The provision for loan losses totaled ~~$1,222,000~~$4,424,000 and ~~$441,000~~$545,000 for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

The following management discussion and analysis will provide a review of important items relating to:

●	Challenges and COVID-19 Status, Risks and Uncertainties

●	Key Performance Indicators and Industry Results

●	~~Key Performance Indicators and Industry Results~~Critical Accounting Policies

●	~~Critical Accounting Policies~~Income Statement Review

●	~~Income Statement~~Balance Sheet Review

●	~~Balance Sheet Review~~

●	Asset Quality Review and Credit Risk Management

●	Liquidity and Capital Resources

●	~~Liquidity~~Forward-Looking Statements and ~~Capital Resources~~Business Risks

●	~~Forward-Looking Statements and Business Risks~~Non-GAAP Financial Measures

Challenges and COVID-19 Status, Risks and Uncertainties

~~Management has~~Prior to the onset of the COVID-19 pandemic during the first quarter of 2020, management had identified certain events or circumstances that may negatively impact the ~~Company~~’sCompany’s financial condition and results of operations in the future and ~~is attempting~~detailed its efforts to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March ~~13, 2017.~~10, 2020.

The Company conducts business in the State of Iowa and Iowa began to place significant restrictions on companies and individuals on March 9, 2020 as a result of the COVID-19 pandemic. The State of Iowa has eased many of the restrictions related to the COVID-19 pandemic. As an organization that focuses on community banking, we are concerned about the health of our customers, employees and local communities and keep that thought at the forefront of our decisions. The Company’s bank lobbies are open to the public, with business also being transacted through our drive up facilities, online, telephone or by appointment.

The onset of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing the Company and its operations, including the following:

●

As the economic slowdown continues to evolve due to the pandemic, some of the Company’s customers may experience decreased revenues, which may correlate to an inability to make timely loan payments or maintain payrolls. This, in turn, could adversely impact the revenues and earnings of the Company by, among other things, requiring further increases in the allowance for loan losses and increases in the level of charge-offs in the loan portfolio. As detailed herein, the Company recognized a significant increase in provision expense during the nine months ended September 30, 2020. The increase was due in part to the economic slowdown. Management anticipates additional increases in the allowance if the effects of the COVID-19 pandemic continue to negatively impact the loan portfolio.

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●

The Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of 0.0 – 0.25 percent.

●

Local and the State of Iowa’s elevated unemployment may continue to cause economic challenges to our consumer and commercial customers due to the economic effects of the COVID-19 pandemic. Higher levels of unemployment may adversely impact the revenues and earnings of the Company.

●

The Company anticipates a slowdown in demand for its products and services, including in the demand for traditional loans, although the timing of the recovery is uncertain.

●

Goodwill is currently evaluated for impairment quarterly and goodwill has been determined to not be impaired as of September 30, 2020. In the future goodwill may be impaired if the effects of the economic slowdown negatively impacts our net income and fair value, particularly of our most recent acquisition. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

●

The uncertain economic conditions has created significant volatility and disruption in the financial markets, and these conditions may require the Company to recognize an elevated level of other than temporary impairments on securities held in the Company’s investment portfolio as issuers of these securities are negatively impacted by the economic slowdown. Declines in fair value of securities held in the portfolio could also reduce the unrealized gains reported as part of the Company’s other comprehensive income.

●

Market interest rates have declined significantly and these reductions, especially if prolonged, could adversely affect the Company’s net interest income, net interest margin and earnings.

●

Dividends in the future may be reduced or eliminated if the COVID-19 pandemic has an adverse effect on net income, an unanticipated increase in deposits or other unidentified risks that may negatively affect the Company’s capital ratios.

We have taken numerous steps in response to the COVID-19 pandemic, including the following:

●

We have been actively working with loan customers to evaluate prudent loan modification terms. As of September 30, 2020, approximately $94.8 million, or 8.1%, of loans were in payment deferral status under COVID-19 related modifications. COVID-19 related modifications primarily involve a delay of principal and/or interest payments for up to six months.

●

We had 942 PPP loans with an aggregate outstanding balance of $79.6 million as of September 30, 2020. Borrowers have begun the process of filing for forgiveness with the SBA. When the borrower applies for loan forgiveness, the Bank has 60 days to submit the application to the SBA. The SBA then has 90 days to approve the loan forgiveness. We began receiving forgiveness payments from the SBA in October 2020 and expect the forgiveness process to extend into 2021

●

We have successfully deployed a modified working environment to emphasize the safety of our teams and continuity of our business processes. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. No material operational or internal control challenges or risks have been identified to date.

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Certain industries are widely expected to be particularly impacted by shutdowns, capacity restrictions, quarantines and social distancing in response to COVID-19 and efforts to contain it. As of September 30, 2020 approximately 8.4% of our loan portfolio is associated with the hospitality and entertainment industries. Because of the significant uncertainties related to the duration of the COVID-19 pandemic and its potential effects on our customers, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

Key Performance Indicators and Industry Results

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from ~~5,787~~5,066 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.

Selected Indicators for the Company and the Industry

	3 Months			9 Months																					3 Months			9 Months									Years Ended December 31,
	Ended			Ended			3 Months Ended						Years Ended December 31,												Ended			Ended			3 Months Ended
	September 30, 2017						June 30, 2017						2016						2015						September 30, 2020						June 30, 2020						2019						2018
	Company						Company			Industry*			Company			Industry			Company			Industry			Company						Company			Industry*			Company			Industry*			Company			Industry*

Return on assets		1.15	%		1.07	%		1.01	%		1.14	%		1.18	%		1.04	%		1.13	%		1.04	%		1.21	%		0.99	%		0.94	%		0.36	%		1.14	%		1.29	%		1.23	%		1.35	%

Return on equity		9.08	%		8.64	%		8.17	%		10.11	%		9.38	%		9.32	%		9.44	%		9.31	%		11.18	%		9.27	%		9.09	%		3.53	%		9.48	%		11.40	%		10.09	%		11.98	%

Net interest margin		3.29	%		3.25	%		3.25	%		3.22	%		3.36	%		3.13	%		3.33	%		3.07	%		3.21	%		3.16	%		3.10	%		2.81	%		3.21	%		3.36	%		3.23	%		3.40	%

Efficiency ratio		52.42	%		53.16	%		52.93	%		56.32	%		51.95	%		58.28	%		53.59	%		59.91	%		54.80	%		56.30	%		56.49	%		58.69	%		58.51	%		56.63	%		55.90	%		56.27	%

Capital ratio		12.70	%		12.41	%		12.37	%		9.69	%		12.60	%		9.48	%		12.00	%		9.59	%		10.80	%		10.69	%		10.35	%		8.77	%		12.05	%		9.66	%		12.18	%		9.70	%

*Latest available data

Key performances indicators include:

●	Return on Assets

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on a~~verage~~average assets was ~~1.15%~~1.21% and 1.10% for the three months ended September 30, ~~2017~~2020 and ~~2016.~~2019, respectively. This ratio increase was primarily the result of a reduction in interest expense due to market rate decreases.

●	Return on Equity

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at ~~9.08%~~11.18% and ~~8.91%~~8.74% for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. ~~The~~This ratio increase was primarily the result of a reduction in ~~this ratio in 2017 from the previous period is primarily~~interest expense due to ~~an increase in net income.~~market rate decreases.

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●	Net Interest Margin

The net interest margin for the three months ended September 30, ~~2017~~2020 and ~~2016~~2019 was ~~3.29%~~3.21% and ~~3.38%~~3.15%, respectively. The ratio is calculated by dividing tax equivalent net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. ~~The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.~~

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●	Efficiency Ratio

This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was ~~52.42%~~54.80% and ~~50.71%~~57.80% for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. The efficiency ratio ~~remained consistent with~~has slightly improved compared to the prior ~~periods.~~quarter last year.

●	Capital Ratio

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of ~~12.70%~~10.80% as of September 30, ~~2017~~2020 is significantly higher than the industry average of ~~9.69%~~8.77% as of June 30, ~~2017.~~2020.

Industry ~~Results~~Results:

The FDIC Quarterly Banking Profile reported the following results for the second quarter of ~~2017:~~2020

~~Higher~~Quarterly Net ~~Interest~~ Income ~~Lifts Industry Earnings~~Declines $43.7 Billion (70%) From 12 Months Ago

~~Higher~~Quarterly net ~~interest~~ income ~~and restrained growth in operating expenses helped lift banking industry profits in second quarter 2017. The 5,787~~for the 5,066 FDIC-insured commercial banks and savings institutions ~~insured~~totaled $18.8 billion during second quarter 2020, a decline of $43.7 billion (70%) from a year ago. The decline in net income reflects a continuation of uncertain economic activity, which drove an increase in provision expenses. Slightly less than half (47.5%) of all banks reported lower net income compared to a year ago. The average return on assets ratio was 0.36% for the current quarter, down 102 basis points from a year ago.

Net Interest Margin Declines to 2.81%

Net interest income was $131.5 billion in second quarter 2020, down $7.6 billion (5.4%) from a year ago. This marks the third consecutive quarter that net interest income declined on a year-over-year basis. Most of the decline was driven by the ~~FDIC~~three largest institutions, as less than half (42.2%) of all banks reported lower net interest income ~~of $48.3 billion~~from a year ago. The average net interest margin (NIM) for the ~~quarter, an~~banking industry declined below the 3% level, or down 58 basis point from a year ago to 2.81%. This is the lowest NIM ever reported in the Quarterly Banking Profile (QBP). The NIM compression was broad-based, as it declined for all five asset size groups featured in the QBP. The decline in NIM was caused by asset yields declining at a faster rate than funding costs, as low-yielding assets grew substantially.

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Noninterest Income Increases Nearly 7% From a Year Ago

With almost half (47.8%) of all banks increasing their noninterest income from a year ago, the aggregate noninterest income for the banking industry rose by $4.6 billion (6.9%) to $70.8 billion. The annual increase ~~of $4.7~~in noninterest income was attributable to higher trading revenue, which rose by $6.7 billion ~~(10.7%~~(80.2%) ~~compared with~~, and net gains on loan sales, which increased by $4.1 billion (110.8%).

Noninterest Expense Increases 6.2% From Second Quarter 2019

Noninterest expense rose to $122.3 billion in the second quarter, up $7.2 billion (6.2%) from a year ago. More than half (58.6%) of ~~2016.~~all banks reported year-over-year increases in noninterest expense. The annual increase in noninterest expense was attributable to higher salary and employee benefits (up $2.7 billion, or 4.8%) and goodwill impairment charges (up $2.5 billion). The average assets per employee increased from $8.8 million in second quarter 2019 to $10.2 million in second quarter 2020. Noninterest expense as a percentage of average assets declined by 16 basis points from a year ago to 2.37%, the lowest level ever reported in the QBP.

Provisions for Credit Losses Rise From 12 Months Ago

The continuation of weak economic activity and the recent implementation of the current expected credit losses (CECL) accounting methodology resulted in provisions for credit losses to increase by $49.1 billion (382.2%) or from $12.8 billion in second quarter 2019 to $61.9 billion this quarter. Quarter over quarter, provisions for credit losses rose by $9.2 billion (17.4%). During the second quarter, 253 banks used the CECL accounting standard. CECL adopters reported $56.3 billion in provisions for credit losses in second quarter, up 419.2% from a year ago, and non-CECL adopters reported $5.6 billion, up 207.3%. Almost two out of every three banks ~~63.4%~~(61.2%) reported ~~year-over-year earnings improvement, while only 4.1% were unprofitable, down~~yearly increases in provision for credit losses.

Average Net Charge-Off Rate Increases by 7 Basis Points From a Year Ago

The average net charge-off rate increased by 7 basis points from ~~4.6%~~ a year ~~earlier. The average return on assets (ROA) rose~~ago to ~~1.14% from 1.06% the year before. This is the highest quarterly ROA for the industry since second quarter 2007.~~

0.57%. Net ~~Interest Margins Improve~~

~~Net operating revenue—the sum of net interest income and total noninterest income—rose to $190.5~~charge-offs increased by $2.8 billion in the second quarter, an $11 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier. The increase in net interest income helped lift the industry’s net interest margin (NIM) to 3.22%, from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned to benefit from rising short-term interest rates. Noninterest income totaled $66.8 billion, up $654 million (1%(22.2%) from a year ~~earlier. Income from asset servicing~~ago, the largest percentage increase since first quarter 2010. The annual increase in total net chargeoffs was $1attributable to the commercial and industrial (C&I) loan portfolio, in which charge-offs increased by $2.4 billion ~~(93.9%) higher, while gains on asset sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%).~~

~~Noninterest Expense Growth Is Moderate~~

~~Banks set aside $12 billion in loan-loss provisions during the second quarter, up $273 million (2.3~~%) from the previous year. Slightly more than one-third of all banks—36.5%—increased their loss provisions versus second quarter 2016, while 32.2% reported lower provisions. Noninterest expenses totaled $108.6 billion, an increase of $3.5 billion (3.3%(128.5%). ~~Expenses for salaries and employee benefits were $2.1 billion (4.3%) higher than~~The C&I net charge-off rate rose by 31 basis points from a year ~~earlier, as~~ago to 0.64%, but remains well below the ~~total number~~post-crisis high of ~~employees rose by 48,019 (2.3%).~~2.72% reported in fourth quarter 2009.

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Noncurrent Loan ~~Balances Decline Further~~Rate Increases to 1.08%

The ~~amount of loans and leases that were~~average noncurrent~~—90~~ rate increased by 15 basis points from the previous quarter to 1.08%. Noncurrent loan balances (90 days or more past due or in nonaccrual ~~status—~~status) totaled $118.3 billion in the second quarter, an increase of $15.9 billion (15.5%) from the previous quarter. Less than half (41.6%) of all banks reported quarterly increases in noncurrent loan balances. The increase in noncurrent loan balances was led by 1–4 family residential mortgage loans (up $7.6 billion, or 19.5%) and C&I loan portfolio (up $6.1 billion, or 29%). The rise in noncurrent loan balances for 1–4 family residential mortgage loans reflects Ginnie Mae (GNMA) loans, which are guaranteed by the U.S. government, that have been brought back on banks’ books. The noncurrent rate for 1–4 family residential mortgage loans increased by 33 basis points to 2.09%, and for C&I the noncurrent rate rose by 18 basis points to 1.01%.

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Total Assets Expand 4.4% From the Previous Quarter

The banking industry reported total assets of $21.1 trillion in the second quarter, an increase of $884.6 billion (4.4%) from first quarter 2020. Cash and balances due from depository institutions increased by $478 billion (19.9%) to $2.9 trillion or 13.7% of total assets. Banks increased their securities holdings by $307.2 billion (7.3%), the largest quarterly dollar increase ever reported in the QBP. Most of this growth was attributable to U.S. Treasury securities, which rose by $173 billion (26.3%), and mortgage backed securities, which increased by $105.4 billion (4.1%).

Loan Balances Increase Modestly From the Previous Quarter, Driven by Paycheck Protection Program Lending

Total loan and lease balances increased by $33.9 billion (0.3%) from the previous quarter, led by C&I loan portfolio, which rose by $146.5 billion (5.8%). The rise in C&I loan portfolio was attributable to the implementation of the Small Business Administration-guaranteed Paycheck Protection Program (PPP), with $482.2 billion in PPP loans on banks’ balance sheets at the end of the quarter. The increase in total loan and lease balances was partially offset by consumer loans, which includes credit cards (down $67.1 billion, or 3.8%).

Deposits Expand by More Than $1 Trillion for Second Consecutive Quarter

Total deposit balances increased by $1.2 trillion (7.5%) from the previous quarter. Noninterest-bearing account balances rose by $637 billion (17.7%) and interest-bearing account balances rose by $575.3 billion (5.4%). Nondeposit liabilities declined by $330.9 billion (14%) from the previous quarter. The decline in nondeposit liabilities was attributable to lower Federal Home Loan Bank advances, which fell ~~for~~by $234.1 billion (38.2%). Over the ~~28th time~~past 12 months, total deposits rose by $2.9 trillion (20.8%), led by the increase of $2.4 trillion in the last 29 quarters, declining by $8.4 billion (6.7%) in the three months ended June 30. Noncurrent balances declined in all major loan categories during the quarter. Noncurrent residential mortgage loans fell by $4.8 billion (7.9%), while noncurrent C&I loans declined by $2.2 billion (9.5%). The average noncurrent loan rate fell from 1.34% to 1.23% during the quarter, the lowest since third quarter 2007.two quarters.

~~Banks Shift Their Reserve Allocations~~

~~Total loan-loss reserves posted a modest ($197~~ ~~million, 0.2%) decline during~~Equity Capital Rises From the second quarter. The industry’s coverage ratio of reserves to noncurrent loans and leases rose from 97.5% to 104.3%, the highest level since third quarter 2007. Banks with assets greater than $1 billion, which account for 90% of the industry’s loss reserves, increased their reserves for credit card losses by $1.4 billion (4.3%), while reducing their reserves for commercial loan losses by $1.1 billion (3.3%) and their reserves for residential real estate loan losses by $922 million (5.5%).

~~Retained Earnings Drive Capital Growth~~Previous Quarter

Equity capital ~~increased by $38.7~~totaled $2.1 trillion in the second quarter, an increase of $31.9 billion (2%(1.5%) ~~during~~from the previous quarter. Retained earnings contributed ~~$20~~$4.8 billion to ~~the growth~~equity formation in ~~capital, $322 million (1.6%) less than in~~the second quarter, ~~2016. Banks~~as net income of $18.8 billion exceeded declared ~~$28.3~~dividends of $14 billion. Nine insured institutions with $1.4 billion in dividends in the quarter, up $5 billion (21.4%) from the year-earlier quarter. Lower long-term interest rates contributed to an $8 billion improvement in accumulated other comprehensive income, which was reflected in the equity capital increase. At the end of the quarter, 99.4% of all FDIC-insured institutions, representing 99.96% of total ~~industry~~ assets ~~met or exceeded~~were below the requirements for the well-capitalized ~~banks,~~category as defined for Prompt Corrective Action purposes.

~~Banks Reduce~~ ~~Their Federal Reserve~~One New Bank ~~Balances~~

~~Industry assets surpassed $17 trillion for the first time at the end of the second quarter, rising by $100.8 billion (0.6~~%) during the three months ended June 30. Banks reduced their balances at Federal Reserve banks by $102.4 billion (8%). They also reduced their investment securities by $15 billion (0.4%), as U.S. Treasury securities fell by $49.9 billion (9.7%), and mortgage-backed securities rose by $38 billion (1.9%). Securities heldOpens in available-for-sale accounts declined by $59 billion (9.7%), while securities in held-to-maturity accounts increased by $44 billion (4.7%). Assets in trading accounts increased by $18.7 billion (3.2%) during the quarter. The percentage of industry assets maturing or repricing in more than three years remained unchanged from the first quarter, at 35.4%. The all-time high level for this percentage—35.5%—occurred at the end of fourth quarter 2016.

~~The Annual Loan Growth Rate Slows for a Third Consecutive~~Second Quarter

~~Total loans and lease~~s increased by $161.2 billion (1.7%) during the second quarter. All major loan categories posted increases, led by residential mortgage loans (up $35.1 billion, 1.8%), credit card balances (up $23.6 billion, 3.1%), and C&I loans (up $22.1 billion, 1.1%). Unused loan commitments increased by $25.9 billion (0.4%). For the 12 months ended June 30, total loans and leases increased by $337.6 billion (3.7%), while unused loan commitments rose by $274.8 billion (3.9%). The 12-month growth rate for total loans and leases has slowed in each of the last three quarters. A year ago, the 12-month loan growth rate was 6.7%. The 12-month growth rate in unused loan commitments has slowed for six consecutive quarters. In 2015, unused commitments increased 6.6%.

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~~The~~ ~~Number of Banking Employees Rises 2.3% Over the Past Year~~ 2020

The number of FDIC-insured commercial banks and savings institutions reporting ~~financial results fell~~declined from 5,116 to ~~5,787 in the~~5,066 during second quarter ~~from 5,856 in the first quarter. During the second quarter,~~ ~~three insured institutions failed, while 62~~2020. One new bank was added, 47 institutions were absorbed by ~~mergers. No new reporters were added during the quarter.~~mergers, and one bank failed. Additionally, three institutions, who did not report this quarter, sold a majority of their assets and are in process of ceasing operations. The number of institutions on the FDIC’s ~~Problem~~“Problem Bank ~~List~~List” declined ~~for a 25th consecutive~~from 54 in first quarter ~~from 112~~2020 to ~~105. This is the smallest number~~52, falling to near historic lows. Total assets of problem banks ~~since March 31, 2008, and is almost 90% below the peak of 888 at the end of March 2011. The number of full-time equivalent employees rose by 11,663 (0.6%)~~increased from $44.5 billion to ~~2,093,278 during the quarter, which was 48,019 higher than second quarter 2016 (2.3%). This is still 5.9% below the peak of 2,223,383 employees in first quarter 2007.~~$48.1 billion.

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Critical Accounting Policies

The discussion contained in this Item 2 and other disclosures included within this report are based,, in part, on the Company’s audited December 31, ~~2016~~2019 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

The ~~Company~~’sCompany’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill impairment to be the Company’s most critical accounting policies.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the ~~Company~~’sCompany’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including the onset of the COVID-19 pandemic, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of thethe Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.

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Fair Value and Other-Than-Temporary Impairment of Investment Securities

The ~~Company~~’sCompany’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

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Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, including the onset of the COVID-19 pandemic, it is at least reasonably possible that changes in ~~management~~’smanagement’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

Goodwill

Goodwill arose in connection with twofour acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At September 30, ~~2017,~~2020, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation. Goodwill may be impaired in the future if the effects of the COVID-19 pandemic negatively impacts our net income and fair value, particularly of our most recent acquisition. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP (dollars in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)	$	14,160		$	10,814		$	40,886		$	32,715
Tax-equivalent adjustment ⁽¹⁾		237			251			732			827
Net interest income on an FTE basis (non-GAAP)		14,397			11,065			41,618			33,542
Average interest-earning assets	$	1,796,452		$	1,403,303		$	1,754,519		$	1,399,302
Net interest margin on an FTE basis (non-GAAP)		3.21	%		3.15	%		3.16	%		3.20	%

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

Table of Contents

Income Statement Review for the Three Months ended September 30, 201720 and 20169

The following highlights a comparative discussion of the major components of net income and their impact for the three ~~month~~smonths ended September 30, ~~2017~~2020 and ~~2016:~~2019:

AVERAGE BALANCES AND INTEREST RATES

The following two tables are used to calculate the ~~Company~~’sCompany’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on ~~interest bearing~~interest-bearing liabilities. The net interest margin is equal to ~~the~~ interest income less ~~the~~ interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

AVERAGE BALANCE SHEETS AND INTEREST RATES

Three Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

ASSETS

(dollars in thousands)

Interest-earning assets

Loans 1

Commercial
$ 77,788 $ 920 4.73 % $ 88,265 $ 1,014 4.59 %
Agricultural
67,951 922 5.43 % 73,879 900 4.87 %
Real estate
623,214 6,756 4.34 % 555,002 6,131 4.42 %
Consumer and other
10,514 132 5.03 % 21,513 191 3.56 %

Total loans (including fees)
779,467 8,730 4.48 % 738,659 8,236 4.46 %

Investment securities

Taxable
275,498 1,558 2.26 % 259,212 1,425 2.20 %
Tax-exempt 2
230,249 1,862 3.23 % 249,400 2,045 3.28 %
Total investment securities
505,747 3,420 2.70 % 508,612 3,470 2.73 %

Interest bearing deposits with banks and federal funds sold
27,183 115 1.69 % 25,533 87 1.36 %

Total interest-earning assets
1,312,397 $ 12,265 3.74 % 1,272,804 $ 11,793 3.71 %

Noninterest-earning assets
49,366 55,732

TOTAL ASSETS
$ 1,361,763 $ 1,328,536

AVERAGE BALANCE SHEETS AND INTEREST RATES

~~1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.~~

	Three Months Ended September 30,

	2020							2019

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	154,887	$	1,732		4.47	%	$	76,808	$	1,062		5.53	%
Agricultural		105,568		1,580		5.99	%		78,286		989		5.05	%
Real estate		890,097		9,324		4.19	%		713,796		8,255		4.63	%
Consumer and other		17,667		229		5.18	%		15,861		207		5.22	%

Total loans (including fees)		1,168,219		12,865		4.41	%		884,751		10,513		4.75	%

Investment securities
Taxable		362,553		1,987		2.19	%		277,264		1,672		2.41	%
Tax-exempt ⁽²⁾		164,010		1,128		2.75	%		177,431		1,197		2.70	%
Total investment securities		526,563		3,115		2.37	%		454,695		2,869		2.52	%

Interest-bearing deposits with banks and federal funds sold		101,670		176		0.69	%		63,857		401		2.51	%

Total interest-earning assets		1,796,452	$	16,156		3.60	%		1,403,303	$	13,783		3.93	%

Noninterest-earning assets		81,654							59,894

TOTAL ASSETS	$	1,878,106						$	1,463,197

~~2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%~~
(1) Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.
(2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

Table of Contents

AVERAGE BALANCE SHEETS AND INTEREST RATES

Three Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

LIABILITIES AND STOCKHOLDERS' EQUITY

(dollars in thousands)

Interest-bearing liabilities

Deposits

NOW, savings accounts and money markets
$ 712,550 $ 685 0.38 % $ 658,522 $ 325 0.20 %
Time deposits > $100,000
83,793 240 1.15 % 84,034 196 0.93 %
Time deposits < $100,000
113,112 244 0.86 % 123,648 233 0.75 %
Total deposits
909,455 1,169 0.51 % 866,204 754 0.35 %
Other borrowed funds
71,266 292 1.64 % 94,504 274 1.16 %

Total Interest-bearing liabilities
980,721 1,461 0.60 % 960,708 1,028 0.43 %

Noninterest-bearing liabilities

Demand deposits
200,934 188,419
Other liabilities
7,132 8,710

Stockholders' equity
172,976 170,699

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,361,763 $ 1,328,536

Net interest income
$ 10,804 3.29 % $ 10,765 3.38 %

Spread Analysis

Interest income/average assets
$ 12,265 3.60 % $ 11,793 3.55 %
Interest expense/average assets
$ 1,461 0.43 % $ 1,028 0.31 %
Net interest income/average assets
$ 10,804 3.17 % $ 10,765 3.24 %

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended September 30,

	2020								2019

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,027,277	$	586			0.23	%	$	777,506	$	1,451			0.75	%
Time deposits		272,361		1,133			1.66	%		226,972		1,097			1.93	%
Total deposits		1,299,638		1,719			0.53	%		1,004,478		2,548			1.01	%
Other borrowed funds		37,597		40			0.42	%		43,204		170			1.57	%

Total interest-bearing liabilities		1,337,235		1,759			0.53	%		1,047,682		2,718			1.04	%

Noninterest-bearing liabilities
Noninterest-bearing checking		325,339								221,586
Other liabilities		12,689								8,975

Stockholders' equity		202,843								184,954

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,878,106							$	1,463,197


Net interest income			$	14,397			3.21	%			$	11,065			3.15	%

Spread Analysis
Interest income/average assets	$	16,156		3.44	%				$	13,783		3.77	%
Interest expense/average assets	$	1,759		0.37	%				$	2,718		0.74	%
Net interest income/average assets	$	14,397		3.07	%				$	11,065		3.02	%

Net Interest Income

For the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, the Company's net interest margin adjusted for tax exempt income was ~~3.29%~~3.21% and ~~3.38%~~3.15%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, ~~2017~~2020 totaled ~~$10,152,000~~$14,160,000 compared to ~~$10,050,000~~$10,814,000 for the three months ended September 30, ~~2016.~~2019.

For the three months ended September 30, ~~2017,~~2020, interest income increased ~~$535,000,~~$2,387,000, or 5%18%, when compared to the same period in ~~2016.~~2019. The increase from ~~2016~~2019 was primarily ~~attributable~~due to ~~higher average balance~~the Acquisition, organic loan growth including PPP loans and to a lesser extent $313,000 of ~~loans. The higher average balances of~~additional interest recognized on loans ~~were due primarily to favorable economic conditions~~previously recorded as nonaccrual, offset in ~~our market areas.~~part by a reduction in interest rates on loans.

Interest expense ~~increased $433,000,~~decreased $959,000, or ~~42%~~35%, for the three months ended September 30, ~~2017~~2020 when compared to the same period in ~~2016.~~2019. The ~~higher~~lower interest expense for the period is primarily attributable to ~~higher~~a decrease in market interest rates on ~~core deposits due to competitive pressures.~~deposits.

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Provision for Loan Losses

~~The Company~~’sA provision for loan losses of $542,000 was ~~$57,000 and $235,000~~recognized for the three months ended September 30, ~~2017 and 2016, respectively.~~2020 as compared to $379,000 for the three months ended September 30, 2019. Net loan charge offs totaled $615,000 for the three months ended September 30, 2020 compared to $314,000 for the three months ended September 30, 2019. The ~~decrease~~increase in the provision for loan losses was primarily due ~~primarily~~ to anthe economic slowdown associated with COVID-19 and to a lesser extent loan growth and the increase in ~~specific reserves for one loan in 2016. Net loan charge-offs (recoveries) were $105,000~~net charge-offs.

Noninterest Income and ~~$(81,000)~~Expense

Noninterest income for the three months ended September 30, ~~2017 and 2016, respectively. The increase net charge-offs related primarily~~2020 totaled $2,795,000 as compared to one commercial operating customer relationship. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.

~~Noninterest~~ ~~Income and Expense~~

N~~oninterest income decreased $144,000~~$2,119,000 for the three months ended September 30, ~~2017 compared to the same period in 2016.~~2019, an increase of 32%. The ~~decrease~~increase in noninterest income iswas primarily due to ~~a slowdown in the refinance~~gains on sale of ~~home~~ loans held for sale ~~resulting~~from increased refinancing volume in ~~lower gains on~~a low interest rate environment and to a lesser extent the sale of loans, offset in part by a 9% increase in wealth management income. The increase in wealth management income is primarily due to an revenue increases associated with an acquisition and higher revenues related to increases in assets under management, offset in part by lower one time estate fees. Exclusive of realized securities gains, noninterest income was 6% lower in the third quarter of 2017 compared to the same period in 2016.Acquisition.

~~Non~~interest expense increased $184,000 or 3% for the three months ended September 30, 2017 compared to the same period in 2016 primarily as a result of lower other real estate owned income and higher occupancy costs. The decrease in other real estate income was due to the continuing lower levels of other real estate owned. The higher occupancy costs were primarily related to an increase in property tax expense. The efficiency ratio was 52.42% for the third quarter of 2017 as compared to 50.71% in 2016.

~~Income Taxes~~

~~The provision for income taxes~~ Noninterest expense for the three months ended September 30, ~~2017~~2020 totaled $9,291,000 compared to $7,475,000 recorded for the three months ended September 30, 2019, an increase of 24%. Most of the increase was related to the Acquisition. Excluding the Acquisition, the increases were related to salaries and ~~2016~~employee benefits, FDIC insurance assessments and the amortization of the investment in Federal New Market Tax Credit projects. The increase in salaries and employee benefits, excluding the Acquisition, was ~~$1,730,000~~primarily due to normal increases in salaries and ~~$1,903,000, respectively, representing an~~other employee benefits including health insurance costs. The increase in FDIC insurance assessments was due to the receipt of a small bank credit in 2019 as the deposit insurance reserve ratio exceeded 1.35%. The remaining credit was fully utilized by the second quarter of 2020. The efficiency ratio was 54.8% for the third quarter of 2020 as compared to 57.8% in the third quarter of 2019.

Income Taxes

Income tax expense for the three months ended September 30, 2020 totaled $1,451,000 compared to $1,038,000 recorded for the three months ended September 30, 2019. The effective tax rate ~~of 31%~~was 20% for the three months ended September 30, 2020 and ~~33%, respectively.~~2019. The lower ~~effective tax rate~~ than ~~the~~ expected tax rate ~~of 35% for both periods is~~in 2020 and 2019 was due primarily ~~due~~ to tax-exempt interest ~~income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effective~~income and New Market Tax Credits which further lowered the tax rate in ~~2016.~~2020.

Table of Contents

Income Statement Review for the Nine Months ended September 30,~~, 2017~~ 2020 and ~~2016~~2019

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, ~~2017~~2020 and ~~2016:~~2019:

AVERAGE BALANCES AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

Nine Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

ASSETS

(dollars in thousands)

Interest-earning assets

Loans 1

Commercial
$ 77,471 $ 2,613 4.50 % $ 94,121 $ 3,192 4.52 %
Agricultural
69,093 2,703 5.22 % 75,211 2,754 4.88 %
Real estate
612,845 19,620 4.27 % 528,179 17,595 4.44 %
Consumer and other
11,121 411 4.92 % 21,897 584 3.56 %

Total loans (including fees)
770,530 25,347 4.39 % 719,408 24,125 4.47 %

Investment securities

Taxable
271,913 4,637 2.27 % 262,604 4,393 2.23 %
Tax-exempt 2
241,160 5,875 3.25 % 253,688 6,335 3.33 %
Total investment securities
513,073 10,512 2.73 % 516,292 10,728 2.77 %

Interest bearing deposits with banks and federal funds sold
36,633 365 1.33 % 34,930 297 1.13 %

Total interest-earning assets
1,320,236 $ 36,224 3.66 % 1,270,630 $ 35,150 3.69 %

Noninterest-earning assets
49,268 54,989

TOTAL ASSETS
$ 1,369,504 $ 1,325,619

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2020							2019

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	128,638	$	4,455		4.62	%	$	81,022	$	3,301		5.43	%
Agricultural		109,038		4,601		5.63	%		80,424		3,576		5.93	%
Real estate		878,105		28,252		4.29	%		713,449		24,523		4.58	%
Consumer and other		18,113		713		5.25	%		16,403		623		5.06	%

Total loans (including fees)		1,133,894		38,021		4.47	%		891,298		32,023		4.79	%

Investment securities
Taxable		328,081		5,725		2.33	%		261,456		4,715		2.40	%
Tax-exempt ⁽²⁾		170,413		3,488		2.73	%		196,129		3,942		2.68	%
Total investment securities		498,494		9,213		2.46	%		457,585		8,657		2.52	%

Interest-bearing deposits with banks and federal funds sold		122,131		889		0.97	%		50,419		929		2.46	%

Total interest-earning assets		1,754,519	$	48,123		3.66	%		1,399,302	$	41,609		3.96	%

Noninterest-earning assets		82,377							55,522

TOTAL ASSETS	$	1,836,896						$	1,454,824

~~1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.~~

Table of Contents

AVERAGE BALANCE SHEETS AND INTEREST RATES

Nine Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

LIABILITIES AND STOCKHOLDERS' EQUITY

(dollars in thousands)

Interest-bearing liabilities

Deposits

NOW, savings accounts and money markets
$ 717,946 $ 1,819 0.34 % $ 663,891 $ 965 0.19 %
Time deposits > $100,000
82,956 671 1.08 % 86,632 590 0.91 %
Time deposits < $100,000
115,646 714 0.82 % 125,745 704 0.75 %
Total deposits
916,548 3,204 0.47 % 876,268 2,259 0.34 %
Other borrowed funds
75,662 863 1.52 % 84,261 796 1.26 %

Total Interest-bearing liabilities
992,210 4,067 0.55 % 960,529 3,055 0.42 %

Noninterest-bearing liabilities

Demand deposits
200,020 190,176
Other liabilities
7,319 7,606

Stockholders' equity
169,955 167,308

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,369,504 $ 1,325,619

Net interest income
$ 32,157 3.25 % $ 32,095 3.37 %

Spread Analysis

Interest income/average assets
$ 36,224 3.53 % $ 35,150 3.54 %
Interest expense/average assets
$ 4,067 0.40 % $ 3,055 0.31 %
Net interest income/average assets
$ 32,157 3.13 % $ 32,095 3.23 %

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2020								2019

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,003,378	$	2,668			0.35	%	$	784,985	$	4,584			0.78	%
Time deposits		277,691		3,599			1.73	%		221,275		2,929			1.76	%
Total deposits		1,281,069		6,267			0.65	%		1,006,260		7,513			1.00	%
Other borrowed funds		46,164		238			0.69	%		42,530		554			1.74	%

Total interest-bearing liabilities		1,327,233		6,505			0.65	%		1,048,790		8,067			1.03	%

Noninterest-bearing liabilities
Noninterest-bearing checking		301,434								218,229
Other liabilities		11,941								8,388

Stockholders' equity		196,288								179,417

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,836,896							$	1,454,824


Net interest income			$	41,618			3.16	%			$	33,542			3.20	%

Spread Analysis
Interest income/average assets	$	48,123		3.49	%				$	41,609		3.81	%
Interest expense/average assets	$	6,505		0.47	%				$	8,067		0.74	%
Net interest income/average assets	$	41,618		3.02	%				$	33,542		3.07	%

Net Interest Income

For the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, the Company's net interest margin adjusted for tax exempt income was ~~3.25%~~3.16% and ~~3.37%~~3.20%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, ~~2017~~2020 totaled ~~$30,100,000~~$40,886,000 compared to ~~$29,877,000~~$32,715,000 for the nine months ended September 30, ~~2016.~~2019.

For the nine months ended September 30, ~~2017,~~2020, interest income increased ~~$1,235,000,~~$6,610,000, or 4%16%, when compared to the same period in ~~2016.~~2019. The increase from ~~2016~~2019 was primarily ~~attributable~~due to ~~higher average balance of~~the Acquisition and organic loan growth including PPP loans, offset in part by ~~lower yields on loans. The higher average balances of loans were due primarily to favorable economic conditions~~a reduction in ~~our market areas. The lower yields on loans were due primarily to competitive pressures.~~interest rates.

~~Table of Contents~~

Interest expense ~~increased $1,012,000,~~decreased $1,562,000, or ~~33%~~19%, for the nine months ended September 30, ~~2017~~2020 when compared to the same period in ~~2016.~~2019. The ~~higher~~lower interest expense for the period is primarily attributable to ~~higher~~a decrease in market interest rates on ~~core deposits due to competitive pressures.~~deposits.

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Provision for Loan Losses

~~The Company~~’sA provision for loan losses of $4,424,000 was ~~$1,222,000 and $441,000~~recognized for the nine months ended September 30, ~~2017 and 2016, respectively.~~2020 as compared to $545,000 for the nine months ended September 30, 2019. Net loan charge offs totaled $1,111,000 for the nine months ended September 30, 2020 compared to $295,000 for the nine months ended September 30, 2019. The increase in the provision for loan losses was primarily due ~~primarily~~ to the economic slowdown associated with COVID-19 and to a lesser extent loan growth and the increase in the specific reserve for one commercial credit and growth in the loan portfolio. Net loan charge-offs (recoveries) were $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The increase in the net loan charge-offs were related primarily to commercial operating loans with construction contractors. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.charge-offs.

Noninterest Income and Expense

Noninterest income ~~decreased $63,000~~ for the nine months ended September 30, ~~2017~~2020 totaled $7,854,000 as compared to the same period in 2016. The decrease in noninterest income is primarily due to decreases in gain on sale of loans and service fees, offset in part by an increase in security gains and other noninterest income. The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue. The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterest income was 5% lower$6,258,000 for the nine months ended September 30, ~~2017 compared~~2019, an increase of 26%. The increase in noninterest income was primarily due to an increase in gains on sale of loans held for sale due to increased refinancing volume in a low interest rate environment, security gains, and the ~~same period in 2016.~~Acquisition.

Noninterest expense~~increased $504,000 or 3%~~ for the nine months ended September 30, ~~2017~~2020 totaled $27,440,000 compared to the same period in 2016 primarily as a result of normal salary and benefit increases and higher data processing costs. Data processing increases were due to increasing technology costs. The efficiency ratio was 53.16%$22,150,000 for the nine months ended September 30, ~~2017 as compared~~2019, an increase of 24%. Most of the increase was related to ~~51.99%~~the Acquisition. Excluding the Acquisition, the increases were related to salaries and employee benefits and the amortization of the investment in ~~same period~~Federal New Market Tax Credit projects. The increase in ~~2016.~~salaries and employee benefits, excluding the Acquisition, was primarily due to normal increases in salaries and other employee benefits including health insurance costs. The efficiency ratio was 56.3% and 56.8% for the nine months ended September 30, 2020 and 2019, respectively.

Income Taxes

~~The provision for income taxes~~Income tax expense for the nine months ended September 30, ~~2017~~2020 and ~~2016 was $4,662,000~~2019 totaled $3,222,000 and ~~$5,087,000, respectively, representing an~~$3,381,000, respectively. The effective tax rate ~~of 30%~~was 19% and ~~30%,~~21% for the nine months ended September 30, 2020 and 2019, respectively. The lower ~~effective~~than expected tax rate ~~than the expected income tax rate of 35% for both periods is~~in 2020 and 2019 was due primarily ~~due~~ to tax-exempt interest ~~income.~~income and New Market Tax Credits further lowered the tax rate in 2020.

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Balance Sheet Review

As of September 30, ~~2017,~~2020, total assets were ~~$1,364,940,000,~~$1,910,395,000, a ~~$1,513,000 decrease~~$173,212,000 increase compared to December 31, ~~2016.~~2019. The ~~decrease~~increase in assets, primarily securities available-for-sale and loans, was ~~due~~funded primarily ~~to a decrease in cash and due from banks and securities available for sale, offset~~ by ~~an increase in loans.~~deposits.

Investment Portfolio

The ~~investment~~investment portfolio totaled ~~$506,610,000~~$548,818,000 as of September 30, ~~2017, a decrease~~2020, an increase of ~~$9,469,000~~$68,975,000 from the December 31, ~~2016~~2019 balance of ~~$516,080,000.~~$479,843,000. The ~~decrease~~increase in ~~the investment portfolio was~~securities available-for-sale is primarily due to ~~sales, calls~~purchases of municipal, mortgage-backed securities, and corporate bonds, offset in part by maturities ~~of state and political subdivision bonds.~~in the U.S. Government Agency portfolio.

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On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, ~~2017,~~2020, gross unrealized losses of ~~$783,000,~~$91,000, are considered to be temporary in nature due to the interest rate environment of ~~2017~~2020 and other general economic factors. As a result of the economic slowdown resulting from the COVID-19 pandemic, certain bonds in the investment portfolio may become other-than-temporarily impaired and could negatively affect the Company’s net income. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.

At September 30, ~~2017,~~2020, the Company’s investment securities portfolio included securities issued by ~~266~~275 government municipalities and agencies located within 2423 states with a fair value of ~~$243.4~~$233.6 million. At December 31, ~~2016,~~2019, the Company’s investment securities portfolio included securities issued by ~~286~~251 government municipalities and agencies located within 2518 states with a fair value of ~~$264.4~~$195.3 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. ~~The~~Storm Lake, Iowa, general obligation bonds with a fair value of $8.2 million (approximately 3.5% of the fair value of the government municipalities and agencies) represent the largest exposure to any one municipality or agency for the Company as of September 30, ~~2017 was $4.4 million (approximately 2.0%~~2020; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the ~~fair value~~city of ~~the governmental municipalities and agencies) represented by the Dubuque, Iowa Community School District to be repaid by sales tax revenues and property taxes.~~Storm Lake.

The ~~Company~~’sCompany’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.

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The following table summarizes the total general obligation and revenue bonds in the ~~Company~~’sCompany’s investment securities portfolios as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 identifying the state in which the issuing government municipality or agency ~~operates.~~operates (~~Dollars in~~in thousands):

	2017				2016				2020				2019
			Estimated				Estimated				Estimated				Estimated
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value

Obligations of states and political subdivisions:
General Obligation bonds:
Iowa	$	60,493	$	60,732	$	75,142	$	74,408	$	67,161	$	68,964	$	58,457	$	59,072
Nebraska										12,273		12,597		3,414		3,427
Texas		12,188		12,359		11,091		11,065		10,246		10,829		11,243		11,382
Pennsylvania		8,720		8,795		8,728		8,654
Washington		6,640		6,609		7,221		6,957		8,356		8,730		6,530		6,629
Other (2017: 16 states; 2016: 17 states)		24,150		24,601		28,064		28,258
Oregon										6,780		7,064		3,441		3,505
Other (2020: 13 states; 2019: 12 states)										24,736		25,462		19,208		19,432

Total general obligation bonds	$	112,191	$	113,096	$	130,246	$	129,342	$	129,552	$	133,646	$	102,293	$	103,447

Revenue bonds:
Iowa	$	118,886	$	120,175	$	126,750	$	126,964	$	66,293	$	67,803	$	78,281	$	78,624
Other (2017: 9 states; 2016: 10 states)		10,073		10,167		8,208		8,142
Texas										8,629		9,213		480		476
Other (2020: 16 states; 2019: 12 states)										22,100		22,901		12,691		12,755

Total revenue bonds	$	128,959	$	130,342	$	134,958	$	135,106	$	97,022	$	99,917	$	91,452	$	91,855

Total obligations of states and political subdivisions	$	241,150	$	243,438	$	265,204	$	264,448	$	226,574	$	233,563	$	193,745	$	195,302

As of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from ~~primarily 5~~7 primary revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following ~~table.~~table (in thousands):

	2017				2016				2020				2019
			Estimated				Estimated				Estimated				Estimated
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value

Revenue bonds by revenue source
Sales tax	$	72,894	$	73,917	$	77,586	$	78,085	$	31,734	$	32,260	$	37,928	$	38,173
Water		14,139		14,218		11,283		11,296		21,117		21,792		7,271		7,272
College and universities, primarily dormitory revenues		10,457		10,538		14,105		13,907		11,647		12,182		14,016		14,103
Leases		9,062		9,098		9,106		8,960		7,484		7,697		7,291		7,351
Electric		8,428		8,545		8,446		8,459
Electric power & light revenues										6,127		6,291		4,370		4,405
Sewer										5,274		5,554		4,612		4,645
Tax increment financing										5,063		5,413		2,545		2,428
Other		13,979		14,026		14,432		14,399		8,576		8,728		13,419		13,478

Total revenue bonds by revenue source	$	128,959	$	130,342	$	134,958	$	135,106	$	97,022	$	99,917	$	91,452	$	91,855

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Loan Portfolio

The l~~oan~~loan portfolio, net of the allowance for loan losses, totaled ~~$764,229,000, $768,208,000~~$1,159,063,000 and ~~$752,182,000~~$1,048,147,000 as of September 30, ~~2017, June 30, 2017~~2020 and December 31, ~~2016,~~2019, respectively. The increase in ~~the loan portfolio since December 31, 2016 is~~loans was primarily due to ~~steady loan demand, in~~government guaranteed loans under the ~~Ames~~Paycheck Protection Program (“PPP”). The PPP loans totaled $79.6 million as of September 30, 2020. The PPP loans bear an interest rate of 1.0% and ~~Des Moines markets. Loan demand~~generally have a two-year maturity. The Small Business Administration has ~~softened in~~provided fees to financial institutions to originate the ~~third quarter~~PPP loans with recognition of ~~2017.~~

~~Table~~the fees over the life of ~~Contents~~

the loans. Management expects most of these loans to be forgiven and the fees associated with these loans will be accelerated into interest income.

Deposits

Deposits totaled $~~1,114,538,000, $1,126,771,000~~$1,660,173,000 and ~~$1,109,409,000~~$1,493,175,000 as of September 30, ~~2017, June 30, 2017~~2020 and December 31, ~~2016,~~2019, respectively. The ~~increase~~change in deposits since December 31, ~~2016~~2019 was primarily due to increases in account balances of noninterest-bearing commercial checking accounts, interest-bearing public funds ~~NOW account balances. The decrease in deposits since June 30, 2017 was~~checking accounts and retail savings accounts. Balance fluctuations were primarily due to ~~decreases~~normal customer activity, as customers’ liquidity needs vary at any given time. In addition, funds disbursed under the PPP program were deposited into customer accounts and may impact overall deposit fluctuations as customers spend those funds according to the PPP rules. Deposit levels may decrease in ~~retail NOW~~future periods as a result of the distressed economic conditions in our market areas related to the COVID-19 pandemic and ~~public funds money market account balances.~~the low interest rate environment.

S~~ecurities~~Securities Sold Under Agreements to Repurchase

S~~ecurities~~Securities sold under agreements to repurchase totaled ~~$39,001,000~~$30,492,000 as of September 30, ~~2017,~~2020, a decrease of ~~$19,336,000,~~$11,542,000, or ~~33%~~27%, from the December 31, ~~2016~~2019 balance of ~~$58,337,000.~~$42,034,000. The decrease inwas primarily due to ~~withdrawals from three commercial accounts.~~account balances that transferred to interest-bearing checking.

Dividends Payable

There were no dividends payable as of September 30, 2020 as compared to $2,213,000 as of December 31, 2019. In the past, dividends were declared in one quarter and then paid in the subsequent quarter. For the quarter ended September 30, 2020 the dividend was not declared until October 14, 2020 and will be paid in the fourth quarter of 2020.

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, ~~2016.~~2019.

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Asset Quality Review and Credit Risk Management

The ~~Company~~’sCompany’s credit risk is historically centered in the loan portfolio, which on September 30, ~~2017~~2020 totaled ~~$764,229,000~~$1,159,063,000 compared to ~~$752,182,000~~$1,048,147,000 as of December 31, ~~2016.~~2019. Net loans comprise ~~56%~~61% of total assets as of September 30, ~~2017.~~2020. The ~~object~~objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of ~~a transaction~~an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was ~~0.62%~~1.44% at September 30, ~~2017,~~2020, as compared to ~~0.67%~~0.48% at December 31, ~~2016 and 0.40% at September 30, 2016.~~2019. The increase in the level of problem loans is due primarily to the deterioration of one loan relationship in the hospitality portfolio. The Company’s level of problem loans as a percentage of total loans at September 30, ~~2017~~2020 of ~~0.62%~~1.44% is ~~lower than~~higher as compared to the ~~Company’s~~Iowa State Average peer group ~~(339 bank holding companies with assets~~ of ~~$1 billion to $3 billion) of 0.72%~~FDIC insured institutions as of June 30, ~~2017.~~2020, of 0.85%, most recent available.

I~~mpaired~~Impaired loans ~~net of specific reserves,~~ totaled ~~$3,907,000~~$16,388,000 as of September 30, ~~2017~~2020 and have ~~decreased $450,000~~increased $11,600,000 as compared to the impaired loans of ~~$4,357,000~~$4,788,000 as of December 31, ~~2016.~~2019. The increase is primarily due to one hospitality loan relationship.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.

The Company had TDRs of $~~3,098,000~~$11,480,000 as of September 30, ~~2017,~~2020 and $1,171,000 as of December 31, 2019, all of which were included in impaired and nonaccrual loans. ~~The Company had TDRs of $3,672,000 as of December 31, 2016, all of which were included in impaired and nonaccrual loans.~~

~~TDR~~sTDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least ~~six~~nine months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.

Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. In March 2020 various regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program was implemented.

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For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. ~~A $530,000 specific reserve was established in~~Specific reserves of $40,000 were provided for the three and nine months ended September 30, ~~2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs~~2020. No additional specific reserve was provided for the three and nine months ended September 30, ~~2017~~2019. The Company had $15,000 and ~~none~~$31,000 of charge-offs for TDR’s for the ~~same period~~three and nine months ended September 30, 2020, respectively. The Company had $275,000 of charge-offs for TDR’s for the three and nine months ended September 30, 2019. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in ~~2016.~~troubled debt restructurings or whose loans are on nonaccrual.

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there iscontinues to be a strong reason that the credit should not be placed on ~~non-accrual.~~nonaccrual. As of September 30, ~~2017, non-accrual~~2020, nonaccrual loans totaled ~~$4,726,000~~$16,388,000 and there ~~was one loan in the amount~~were $180,000 of ~~$81,000~~loans past due 90 days and still accruing. This compares to ~~non-accrual~~nonaccrual loans of ~~$5,077,000~~$4,788,000 and loans past due 90 days and still accruing totaled ~~$22,000~~$255,000 as of December 31, ~~2016. Other real~~2019. The increase in nonaccrual loans is due primarily to a hospitality loan. Real estate owned totaled ~~$385,000~~$621,000 and $4,004,000 as of September 30, ~~2017~~2020 and ~~$546,000 as of~~ December 31, ~~2016.~~2019, respectively.

The agricultural real estate and agricultural operating loan portfolio classifications remain ~~in a weakened position.~~elevated. The watch and special mention loans in these categories totaled ~~$44,046,000~~$58,653,000 as of September 30, ~~2017~~2020 as compared to ~~$38,492,000~~$48,028,000 as of December 31, ~~2016.~~2019. This increase is primarily due to one agricultural customer relationship. The substandard loans in these categories totaled ~~$2,582,000~~$11,135,000 as of September 30, ~~2017~~2020 as compared to ~~$2,399,000~~$15,913,000 as of December 31, ~~2016.~~2019. The Iowa agricultural economy was challenging for most of 2020 as a result of the price of commodities, including corn, soybeans, cattle, hogs and ethanol, along with export concerns. Crop yields were also negatively impacted in some markets as a result of the Derecho and drought conditions.

The watch and special mention loans classified as commercial real estate totaled $77,378,000 as of September 30, 2020 as compared to $33,790,000 as of December 31, 2019. This increase in ~~these categories is~~commercial real estate loans was due primarily ~~due~~ to the ~~impact on agricultural~~hospitality and entertainment loan portfolio. The substandard commercial real estate loans totaled $33,724,000 as of ~~low grain prices, mitigated by indications~~September 30, 2020 as compared to $14,786,000 as of ~~favorable yields in 2017.~~December 31, 2019.

The allowance for loan losses as a percentage of outstanding loans as of September 30, ~~2017~~2020 was ~~1.44%~~1.35%, as compared to ~~1.38%~~1.19% at December 31, ~~2016.~~2019. The allowance for loan losses totaled ~~$11,140,000~~$15,932,000 and ~~$10,507,000~~$12,619,000 as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. ~~Net charge-offs (recoveries) of loans totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively.~~

The allowance for loan losses is ~~management~~’smanagement’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans. The increase in the allowance for loan losses is mainly due to increased risk associated with the loan portfolio due to the economic slowdown associated with COVID-19 and to a lesser extent organic growth in the loan portfolio. Additional increases in the allowance for loan losses are anticipated if the effects of the COVID-19 conditions negatively impacts our loan portfolio. These increases may be due to increased charge-offs or an increase in the qualitative factors. The qualitative factors are considered as a part of our allowance for loan loss calculation and may deteriorate if the economic effects of COVID-19 continue in the State of Iowa and a resumption to typical social and economic activity is delayed.

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Liquidity and Capital Resources

Liquidity management is the process by which the Company, through its ~~Banks~~’Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities available-for-sale; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.

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As of September 30, ~~2017,~~2020, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.

The liquidity and capital resources d~~iscussion~~discussion will cover the following topics:

●	~~Review~~ ~~of the Company’s Current Liquidity Sources~~

●	Review of ~~Statements of Cash Flows~~the Company’s Current Liquidity Sources

●	~~Company Only Cash Flows~~

●	~~Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in~~ ~~Liquidity and Cash Flows Needs~~

●	~~Capital Resources~~

~~Review of the Company’s Current Liquidity Sources~~

~~Liquid assets of cash~~ and due from banks and interest-bearing deposits in financial institutions as of September 30, 2017 and December 31, 2016 totaled $58,574,000 and $61,215,000, respectively, and provide an adequate level of liquidity given current economic conditions.

~~Other sources of~~ liquidity available to the Banks as of September 30, 2017 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $183,824,000, with $19,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,571,000, with no outstanding federal fund purchase balances as of September 30, 2017. The Company had securities sold under agreements to repurchase totaling $39,001,000 and term repurchase agreements of $13,000,000 as of September 30, 2017.

~~Total investments as of~~ September 30, 2017 were $506,610,000 compared to $516,080,000 as of December 31, 2016. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2017.

The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio~~’s scheduled maturities and payments represent a significant source of liquidity.~~

Review of Statements of Cash Flows

●

~~Net c~~ash provided by operating activities for the nine months ended September 30, 2017 totaled $13,553,000 compared to $14,585,000 for the nine months ended September 30, 2016. The decrease in cash provided by operating activities was primarily due to lower net income.

~~Net~~ cash used in investing activities for the nine months ended September 30, 2017 was $4,184,000 compared to $14,181,000 for the nine months ended September 30, 2016. The decrease of $9,997,000 in cash used in investing activities was primarily due to a net decrease in the change in the loan portfolio of $26,204,000, offset in part by lower levels of proceeds from the sale of securities of $6,981,000 and a net increase in the change in the interest bearing deposits.

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~~Net cash~~ used in financing activities for the nine months ended September 30, 2017 totaled $15,759,000 compared to $3,105,000 for the nine months ended September 30, 2016. The change of $12,654,000 in net cash used in financing activities was primarily due to a decrease in securities sold under agreements to repurchase in 2017 of $19,336,000 as compared to a decrease of $4,432,000 in 2016 and a decrease in proceeds from short-term FHLB borrowings of $15,500,000, offset in part by an increase in deposits in 2017 of $5,129,000 as compared to a decrease of $12,358,000 in 2016. As of September 30, 2017, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Company Only Cash Flows

●

~~The Company~~’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,655,000 and $6,825,000 for the nine months ended September 30, 2017 and 2016, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.22 per share in 2017 from $0.21 per share in 2016.

~~The Company, on an unconsolidated basis, has interest bearing deposits totaling $13,287,000 as of September 30, 2017 that are presently available to provide additional liquidity to the Banks.~~

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

●

No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2017 that are of concern to management.

Capital Resources

~~The Company~~’s total stockholders’ equity as of September 30, 2017 totaled $173,329,000 and was $8,224,000 higher than the $165,105,000 recorded as of December 31, 2016. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reduced by dividends declared. The increase in other comprehensive income is created by lower market interest rates on the longer end of the interest yield curve compared to December 31, 2016, which resulted in higher fair values in the securities available-for-sale portfolio. At September 30, 2017 and December 31, 2016, stockholders’ equity as a percentage of total assets was 12.70% and 12.08%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2017.

Review of the Company’s Current Liquidity Sources

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions and federal funds sold as of September 30, 2020 and December 31, 2019 totaled $142,393,000 and $143,565,000, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.

Other sources of liquidity available to the Banks as of September 30, 2020 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $214,567,000, with $3,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $106,250,000, with no outstanding federal fund purchase balances as of September 30, 2020. The Company had securities sold under agreements to repurchase totaling $30,492,000 as of September 30, 2020.

Total investments as of September 30, 2020 were $548,818,000 compared to $479,843,000 as of December 31, 2019. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2020.

The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.

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Review of the Consolidated Statements of Cash Flows

Net cash provided by operating activities for the nine months ended September 30, 2020 totaled $21,323,000 compared to $14,339,000 for the nine months ended September 30, 2019, an increase of $6,984,000. This increase was primarily due to an increase in net income and the provision for loan losses.

Net cash used in investing activities for the nine months ended September 30, 2020 was $178,202,000 compared to $32,866,000 for the nine months ended September 30, 2019. The increase of $145,336,000 in cash used in investing activities was primarily due to a higher level of loans and purchases of investments, offset in part by increases in the proceeds from the maturities and calls of investments.

Net cash provided by financing activities for the nine months ended September 30, 2020 totaled $145,012,000 compared to $21,628,000 for the nine months ended September 30, 2019. The increase in cash provided by financing activities of $123,384,000 was primarily due to an increase in deposits, a lower amount of repayments of FHLB advances in 2020 as compared to 2019, and partially offset by changes in securities sold under repurchase agreements. As of September 30, 2020, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Review of Company Only Cash Flows

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,229,000 and $9,568,000 for the nine months ended September 30, 2020 and 2019, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.

The Company, on an unconsolidated basis, has interest-bearing deposits totaling $2,979,000 as of September 30, 2020.

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

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Capital Resources

The Company’s total stockholders’ equity as of September 30, 2020 totaled $206,037,000 and was $18,458,000 higher than the $187,579,000 recorded as of December 31, 2019. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared and stock repurchases. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2019, which resulted in higher fair values in the securities available-for-sale portfolio. At September 30, 2020 and December 31, 2019, stockholders’ equity as a percentage of total assets was 10.8%. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2020.

Forward-Looking Statements and Business Risks

The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: the substantial negative impact of the COVID-19 pandemic on national, regional and local economies in general and on our customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses resulting from the COVID-19 pandemic or as dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s annual report on Form 10-K. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should”, “forecasting” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

~~Table of Contents~~

~~Forward-Looking Statements and Business Risks~~

~~The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this~~ Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

~~The Company's market risk is comprised primarily of interest rate risk arising from its core banking~~ activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2017 changed significantly when compared to 2016.

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2020 changed significantly when compared to 2019. Uncertainty due to the federal governmental actions stemming from reactions to the COVID-19 pandemic, may cause market interest rates to deviate from historical norms.

Table of Contents

Item 4.

Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

~~As of the end of the period covered by this report, a~~n evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

~~There was no change in the Company's internal control over financial~~ ~~reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.~~

~~Table of Contents~~

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable

~~Not applicable~~

~~Item 1.A~~.Item 1.A.

Risk Factors

~~None.~~

The COVID-19 pandemic has adversely impacted, and is expected to continue adversely impacting, our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted at this time given the evolving nature of the pandemic, including the scope and duration of the pandemic, the short and long term effects on national, state and local economies and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has negatively impacted the national, Iowa and local economies in which the Company conducts business, created significant volatility and disruption in financial markets, and substantially increased unemployment levels. In addition, the pandemic resulted in temporary closures and slowdowns of many businesses and significant restrictions on companies and individuals beginning in Iowa on March 9, 2020. The State of Iowa has eased many of these restrictions related to the COVID-19 pandemic. As a result, the demand for our products and services may be significantly impacted, including the demand for new loans and deposits. Furthermore, the pandemic will likely result in the recognition of an elevated level of credit losses in our loan portfolios and continued increases in our allowance for loan losses, particularly if businesses remain closed or not fully operational, the impact on the Iowa and local economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold in our investment portfolio, as well as reductions in the unrealized gains component of other comprehensive income. Additionally, goodwill arising from recent bank acquisitions could become impaired if our net income and the fair value of the acquired assets decline due to the economic slowdown. Each of the foregoing events could negatively impact our revenues, earnings or both, as well as our financial condition.

Table of Contents

Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The Company, as a financial institution, is considered an essential business and, therefore, continues to operate and maintain our customer relationships. Changes in restrictions by governmental authorities may change the way the Company conducts its business. Current and future governmental actions may temporarily require the Company to conduct business related to foreclosures, repossessions, payments deferrals and other customer-related transactions differently. The Company could also take actions to preserve its capital levels, such as lowering or suspending dividends, in response to the COVID-19 pandemic.

The extent to which the COVID-19 pandemic impacts our business, prospects, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted at this time due to the evolving nature of the pandemic, including the scope and duration of the pandemic, the short and long term effects on national, state and local economies and actions taken by governmental authorities and other third parties in response to the pandemic.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

In November, 2016, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2017, there were 100,000 shares remaining to be purchased under the plan.

In November, 2019, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2020, there were no shares remaining to be purchased under the plan. Ames National Corporation completed the stock repurchase program in April, 2020 and the average price per share was $19.92.

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2020.

Total

Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The ~~following table provides information with respect~~Plan

July 1, 2020 to ~~purchase made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act~~ ~~of 1934), of the Company’s common stock during the three months ended September 30, 2017.~~

~~Total~~

~~Number~~

~~Maximum~~

~~of Shares~~

~~Number of~~

~~Purchased as~~

~~Shares that~~

~~Total~~

~~Part of~~

~~May Yet Be~~

~~Number~~

~~Average~~

~~Publicly~~

~~Purchased~~

~~of Shares~~

~~Price Paid~~

~~Announced~~

~~Under~~

~~Period~~

~~Purchased~~

~~Per Share~~

~~Plans~~

~~The Plan~~

~~July 1, 2017 to July 31, 2017~~July 31, 2020

August 1, 2020 to August 31, 2020

September 1, 2020 to September 30, 2020

~~100,000~~

~~August 1, 2017 to August 31, 2017~~

~~100,000~~

~~September 1, 2017 to September 30, 2017~~

~~100,000~~

Total

Table of Contents

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Mine Safety Disclosures

Not applicable

~~Table of Contents~~

Item 5.

Other information

Not applicable

Item 6.

Exhibits

2.1	Stock purchase agreement (incorporated by reference to Exhibit 2.1 to the Form 10-Q filed on August 7, 2019).

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

~~31.1~~

~~Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.~~

~~31.2~~

~~Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.~~

~~32.1~~

~~Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.~~

~~32.2~~

~~Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.~~

101.INS

Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL (1)

101.SCH

Inline XBRL Taxonomy Extension Schema Document (1)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)

1~~01.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document (1)~~

~~(1)~~ ~~These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933,~~104

Cover page Interactive Data File (formatted as ~~amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.~~Inline XBRL and combined in Exhibit 101.1)

(1) These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

Table of Contents

SIGNATURES

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

	~~AMES NATIONAL CORPORATION~~

~~DATE:~~ ~~November 8, 2017~~	~~By:~~	~~/s/ Thomas H. Pohlman~~

	~~Thomas H. Pohlman, Chief Executive Officer and President~~


	~~By:~~	~~/s/ John P. Nelson~~

	~~John P. Nelson, Chief Financial Officer and Executive Vice President~~

~~Table of Contents~~

	AMES NATIONAL CORPORATION

~~EXHIBIT INDEX~~DATE: November 5, 2020	By: /s/ John P. Nelson

	~~The following exhibits are filed herewith:~~John P. Nelson, Chief Executive Officer and President

	By: /s/ John L. Pierschbacher

	John L. Pierschbacher. Chief Financial Officer

~~Exhibit No.~~

~~Description~~

~~-----------~~

~~-------------------------------------------------------------------------------------------~~

~~31.1~~

~~Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002~~

~~31.2~~

~~Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002~~

~~32.1~~

~~Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350~~

~~32.2~~

~~Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350~~

~~101.INS~~

~~XBRL Instance Document (1)~~

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document (1)~~

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document (1)~~

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document (1)~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document (1)~~

~~101.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document (1)~~

~~(1)~~ These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	ATLO	NASDAQ

~~COMMON STOCK, $2.00 PAR VALUE~~	9,310,~~913~~
~~(Class)~~	~~(Shares Outstanding at October 27, 2017)~~

		Page

~~Part~~PART I.	~~Financial Information~~FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at September 30, ~~2017~~2020 and December 31, ~~2016~~2019	3

	Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	5

	Consolidated Statements of ~~Stockholders~~’Stockholders’ Equity for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49 52

Item 4.	Controls and Procedures	49 53

~~Part~~PART II.	~~Other Information~~ OTHER INFORMATION

Item 1.	Legal Proceedings	50 53

Item 1.A.	Risk Factors	50 53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50 54

Item 3.	Defaults Upon Senior Securities	50 55

Item 4.	Mine Safety Disclosures	50 55

Item 5.	Other Information	51 55

Item 6.	Exhibits	51 55

	Signatures	~~Signatures~~56	52

	September 30,		December 31,
ASSETS	2017		2016

Cash and due from banks	$	23,087,890	$	29,478,068
Interest bearing deposits in financial institutions		35,486,284		31,737,259
Securities available-for-sale		506,610,435		516,079,506
Loans receivable, net		764,228,850		752,181,730
Loans held for sale		279,800		242,618
Bank premises and equipment, net		15,595,418		16,049,379
Accrued income receivable		8,423,038		7,768,689
Other real estate owned		385,509		545,757
Deferred income taxes		1,817,543		3,485,689
Intangible assets, net		1,133,736		1,352,812
Goodwill		6,732,216		6,732,216
Other assets		1,159,533		799,306

Total assets	$	1,364,940,252	$	1,366,453,029

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Demand, noninterest bearing	$	202,368,921	$	212,074,792
NOW accounts		337,062,117		310,427,812
Savings and money market		380,454,650		381,852,433
Time, $250,000 and over		36,776,010		39,031,663
Other time		157,876,361		166,022,165
Total deposits		1,114,538,059		1,109,408,865

Securities sold under agreements to repurchase		39,001,050		58,337,367
Federal Home Loan Bank (FHLB) advances		19,000,000		14,500,000
Other borrowings		13,000,000		13,000,000
Dividends payable		2,048,401		1,955,292
Accrued expenses and other liabilities		4,023,858		4,146,262
Total liabilities		1,191,611,368		1,201,347,786

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of September 30, 2017 and December 31, 2016		18,621,826		18,621,826
Additional paid-in capital		20,878,728		20,878,728
Retained earnings		131,047,038		126,181,376
Accumulated other comprehensive income (loss) - net unrealized gain (loss) on securities available-for-sale		2,781,292		(576,687	)
Total stockholders' equity		173,328,884		165,105,243

Total liabilities and stockholders' equity	$	1,364,940,252	$	1,366,453,029

	September 30,		December 31,
ASSETS	2020		2019

Cash and due from banks	$	22,750,013	$	34,616,880
Interest-bearing deposits in financial institutions and federal funds sold		119,643,061		108,947,624
Securities available-for-sale		548,817,733		479,843,448
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost		3,148,191		3,138,900
Loans receivable, net		1,159,063,052		1,048,147,496
Loans held for sale		2,797,141		2,776,785
Bank premises and equipment, net		17,295,829		17,810,605
Accrued income receivable		12,172,766		11,788,409
Other real estate owned		620,909		4,003,684
Bank-owned life insurance		2,897,480		2,842,713
Deferred income taxes, net		0		1,151,016
Intangible assets, net		3,309,239		3,959,260
Goodwill		12,424,434		12,114,559
Other assets		5,455,601		6,041,126

Total assets	$	1,910,395,449	$	1,737,182,505

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Noninterest-bearing checking	$	337,487,550	$	267,441,988
Interest-bearing checking		504,329,496		461,857,728
Savings and money market		548,918,915		481,642,221
Time, $250,000 and over		66,910,762		74,206,421
Other time		202,526,378		208,026,740
Total deposits		1,660,173,101		1,493,175,098

Securities sold under agreements to repurchase		30,492,436		42,033,570
FHLB advances		3,000,000		5,000,000
Dividends payable		0		2,213,459
Deferred income taxes, net		1,697,985		0
Accrued expenses and other liabilities		8,995,285		7,180,906
Total liabilities		1,704,358,807		1,549,603,033

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,122,747 and 9,222,747 as of September 30, 2020 and December 31, 2019, respectively		18,245,494		18,445,494
Additional paid-in capital		17,001,736		18,794,141
Retained earnings		155,300,906		146,225,085
Accumulated other comprehensive income		15,488,506		4,114,752
Total stockholders' equity		206,036,642		187,579,472

Total liabilities and stockholders' equity	$	1,910,395,449	$	1,737,182,505

	Common Stock						Additional Paid-in			Retained			Accumulated Other Comprehensive Income,		Total Stockholders'
	Shares			Amount			Capital			Earnings			Net of Taxes		Equity

Balance, June 30, 2019		9,232,122		$	18,464,244		$	19,019,767		$	142,312,863		$	3,454,662	$	183,251,536
Net income		-			0			0			4,041,161			0		4,041,161
Other comprehensive income		-			0			0			0			1,328,538		1,328,538
Retirement of stock		(9,375	)		(18,750	)		(225,626	)		0			0		(244,376	)
Cash dividends declared, $0.24 per share		-			0			0			(2,213,459	)		0		(2,213,459	)
Balance, September 30, 2019		9,222,747		$	18,445,494		$	18,794,141		$	144,140,565		$	4,783,200	$	186,163,400


Balance, June 30, 2020		9,122,747		$	18,245,494		$	17,001,736		$	151,910,115		$	13,992,557	$	201,149,902
Net income		-			0			0			5,671,479			0		5,671,479
Other comprehensive income		-			0			0			0			1,495,949		1,495,949
Retirement of stock		-			0			0			0			0		0
Cash dividends declared, $0.25 per share		-			0			0			(2,280,688	)		0		(2,280,688	)
Balance, September 30, 2020		9,122,747		$	18,245,494		$	17,001,736		$	155,300,906		$	15,488,506	$	206,036,642

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes *					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of September 30, 2017:
Total capital (to risk- weighted assets):
Consolidated	$	175,203		17.7	%	$	91,324		9.25	%		N/A		N/A
Boone Bank & Trust		15,325		16.7			8,486		9.25		$	9,174		10.0	%
First National Bank		81,177		15.4			48,867		9.25			52,829		10.0
Reliance State Bank		26,957		15.9			15,661		9.25			16,931		10.0
State Bank & Trust		20,217		16.5			11,337		9.25			12,256		10.0
United Bank & Trust		14,903		20.4			6,741		9.25			7,288		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	163,536		16.6	%	$	71,578		7.25	%		N/A		N/A
Boone Bank & Trust		14,419		15.7			6,651		7.25		$	7,339		8.0	%
First National Bank		75,221		14.2			38,301		7.25			42,263		8.0
Reliance State Bank		24,947		14.7			12,275		7.25			13,545		8.0
State Bank & Trust		18,680		15.2			8,886		7.25			9,805		8.0
United Bank & Trust		14,084		19.3			5,284		7.25			5,830		8.0

Tier 1 capital (to average- weighted assets):
Consolidated	$	163,536		12.1	%	$	53,995		4.00	%		N/A		N/A
Boone Bank & Trust		14,419		10.5			5,484		4.00		$	6,855		5.0	%
First National Bank		75,221		10.0			29,942		4.00			37,428		5.0
Reliance State Bank		24,947		12.2			8,147		4.00			10,184		5.0
State Bank & Trust		18,680		11.9			6,297		4.00			7,871		5.0
United Bank & Trust		14,084		12.9			4,372		4.00			5,465		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	163,536		16.6	%	$	56,769		5.75	%		N/A		N/A
Boone Bank & Trust		14,419		15.7			5,275		5.75		$	5,963		6.5	%
First National Bank		75,221		14.2			30,377		5.75			34,339		6.5
Reliance State Bank		24,947		14.7			9,735		5.75			11,005		6.5
State Bank & Trust		18,680		15.2			7,047		5.75			7,967		6.5
United Bank & Trust		14,084		19.3			4,190		5.75			4,737		6.5

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016

Interest income:
Loans, including fees	$	8,729,702		$	8,236,401		$	25,345,116		$	24,124,973
Securities:
Taxable		1,557,872			1,425,366			4,637,498			4,392,602
Tax-exempt		1,210,510			1,329,071			3,819,380			4,117,893
Interest bearing deposits and federal funds sold		114,820			86,869			365,346			296,925
Total interest income		11,612,904			11,077,707			34,167,340			32,932,393

Interest expense:
Deposits		1,169,296			753,642			3,204,115			2,259,140
Other borrowed funds		292,054			274,297			862,798			796,006
Total interest expense		1,461,350			1,027,939			4,066,913			3,055,146

Net interest income		10,151,554			10,049,768			30,100,427			29,877,247

Provision for loan losses		57,277			234,703			1,221,620			440,787

Net interest income after provision for loan losses		10,094,277			9,815,065			28,878,807			29,436,460

Noninterest income:
Wealth management income		747,634			684,908			2,180,941			2,210,229
Service fees		401,237			426,711			1,126,122			1,228,416
Securities gains, net		37,881			64,917			498,560			296,110
Gain on sale of loans held for sale		179,553			339,501			544,095			773,512
Merchant and card fees		348,847			350,488			1,017,362			1,051,378
Other noninterest income		144,953			137,153			598,791			469,138
Total noninterest income		1,860,105			2,003,678			5,965,871			6,028,783

Noninterest expense:
Salaries and employee benefits		4,026,932			3,977,495			12,058,903			11,883,696
Data processing		807,419			824,429			2,481,331			2,366,293
Occupancy expenses, net		527,071			449,775			1,546,657			1,461,201
FDIC insurance assessments		111,987			109,289			326,958			434,808
Professional fees		307,484			296,720			919,157			889,721
Business development		262,408			239,917			722,869			696,033
Other real estate owned (income), net		(3,200	)		(91,173	)		(2,396	)		(87,564	)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

Interest and dividend income:
Loans, including fees	$	12,865,021	$	10,513,426	$	38,021,904	$	32,022,997
Securities:
Taxable		1,986,904		1,671,572		5,725,476		4,715,137
Tax-exempt		891,093		945,769		2,755,515		3,114,298
Other interest and dividend income		175,397		400,963		888,412		928,996
Total interest income		15,918,415		13,531,730		47,391,307		40,781,428

Interest expense:
Deposits		1,718,746		2,547,763		6,267,158		7,512,979
Other borrowed funds		39,787		170,082		238,314		553,930
Total interest expense		1,758,533		2,717,845		6,505,472		8,066,909

Net interest income		14,159,882		10,813,885		40,885,835		32,714,519

Provision for loan losses		541,844		378,789		4,424,475		545,203

Net interest income after provision for loan losses		13,618,038		10,435,096		36,461,360		32,169,316

Noninterest income:
Wealth management income		1,036,131		857,664		2,807,592		2,661,421
Service fees		380,620		400,919		1,126,857		1,158,348
Securities gains, net		0		15,141		429,925		17,031
Gain on sale of loans held for sale		646,589		289,033		1,486,047		685,790
Merchant and card fees		459,600		372,073		1,295,854		1,119,598
Other noninterest income		271,803		184,399		707,884		615,688
Total noninterest income		2,794,743		2,119,229		7,854,159		6,257,876

Noninterest expense:
Salaries and employee benefits		5,839,963		4,780,894		17,427,608		14,294,219
Data processing		1,209,973		1,085,951		3,737,426		2,849,396
Occupancy expenses, net		668,003		526,360		2,015,941		1,643,924
FDIC insurance assessments		135,859		1,698		185,716		193,593
Professional fees		407,118		386,339		1,148,597		1,158,168
Business development		307,386		310,786		753,075		827,561
Intangible asset amortization		215,575		124,243		650,021		427,221