The consolidated financial statements for the three and ninemonths ended ~~March 31,~~September 30, 2021 and 2020 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting of normal recurring 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 for the year ended December 31, 2020 (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 with an estimation of the fair value of a reporting unit.

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. AtThe Company completed a quantitative assessment of goodwill as of ~~March~~May 31, ~~2021,~~2020 ~~Company management has performed a goodwill impairment assessment and determined~~which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded there is 0 impairment of goodwill as of September 30, 2021.

New and Pending Accounting Pronouncements: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial 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. In October 2019, the FASB voted to approve amendments to the effective date of ASU No. 2016-13 for smaller reporting companies, 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, 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~~impact of ASU No. 2016-13 ~~are expected to impact~~on the Company’s financial ~~statements.~~statements are unknown at this time due to economic uncertainty due to the pandemic. The Company ~~is continuing~~will continue to evaluate the extent of the potential impact.

On ~~April~~July 14, 2021, the Company declared a cash dividend on its common stock, payable on ~~May 14,~~August 13, 2021 to stockholders of record as of ~~April~~July 30, 2021, equal to $0.26 per share; and on August 17, 2021, the Company declared a cash dividend on its common stock, payable on November 15, 2021 to stockholders of record as of November 1, 2021, equal to $0.26 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 months ended ~~March 31,~~September 30, 2021 and 2020 was 9,119,871 and 9,122,747, respectively. The weighted average outstanding shares for the nine months ended September 30, 2021 and ~~9,219,195,~~2020 were 9,121,778 and 9,156,805, respectively. The Company had 0no potentially dilutive securities outstanding during the periods presented.

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, 2020.

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.

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 ~~March 31,~~September 30, 2021 and December 31, 2020 (in thousands):

Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S. government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds 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.

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 ~~March 31,~~September 30, 2021 and December 31, 2020 (in thousands):

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of ~~March 31,~~September 30, 2021 and December 31, 2020 are as follows (in thousands):

* 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 following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of ~~March 31,~~September 30, 2021 and December 31, 2020 (in thousands):

The methodologies used to determine fair value as of ~~March 31,~~September 30, 2021 did not change from the methodologies described in the December 31, 2020 Annual Financial Statements.

Commitments to extend credit and standby letters of 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.

The amortized cost of securities available-for-sale and their approximate fair values as of ~~March 31,~~September 30, 2021 and December 31, 2020 are summarized below (in thousands):

The amortized cost and fair value of debt securities available-for-sale as of ~~March 31,~~September 30, 2021, 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).

Securities with a carrying value of ~~$203.4~~$218.6 million and $202.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

The proceeds and gains ~~and losses for~~on securities available-for-sale for the three and ninemonths ended ~~March 31,~~September 30, 2021 and 2020 are summarized below (in thousands):

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 ~~March 31,~~September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

Gross unrealized losses on debt securities totaled ~~$4.1~~$3.1 million as of ~~March 31,~~September 30, 2021. 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.

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7.	Loans Receivable and Credit Disclosures

The composition of loans receivable as of ~~March 31,~~September 30, 2021 and December 31, 2020 is as follows (in thousands):

		2021			2020			2021			2020

Real estate - construction	��	$	53,335		$	45,497		$	37,476		$	45,497
Real estate - 1 to 4 family residential			206,993			213,562			231,468			213,562
Real estate - commercial			497,155			496,357			519,112			496,357
Real estate - agricultural			145,228			151,992			153,247			151,992
Commercial ¹			127,440			122,535			85,569			122,535
Agricultural			95,891			102,586			101,087			102,586
Consumer and other			13,919			15,048			15,346			15,048
			1,139,961			1,147,577			1,143,305			1,147,577
Less:
Allowance for loan losses			(16,907	)		(17,215	)		(16,830	)		(17,215	)
Deferred loan fees and costs, net²			(2,843	)		(857	)
Deferred loan (fees) and costs, net²									(416	)		(857	)
Loans receivable, net		$	1,120,211		$	1,129,505		$	1,126,059		$	1,129,505

¹	Commercial loan portfolio includes ~~$59.2~~$14.8 million and $50.9 million of Paycheck Protection Program ("PPP") loans as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.
²	Deferred loan ~~fees~~(fees) and costs, net includes ~~$2.9~~$0.7 million and $0.9 million of ~~net~~fees, ~~and~~net of costs, related to the PPP loans as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020,and expanded by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted December 27, 2020 and the American Rescue Plan Act, enacted March 11, 2021, 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.

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Activity in the allowance for loan losses, on a disaggregated basis, for the three and ninemonths ended ~~March 31,~~September 30, 2021 and 2020 is as follows (in thousands):

	Three Months Ended March 31, 2021																						Three Months Ended September 30, 2021
			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, 2020	$	725	$	2,581		$	8,930	$	1,595		$	1,453		$	1,696		$	235		$	17,215
Balance, June 30, 2021																							$	738		$	2,603		$	8,889	$	1,614		$	1,140	$	1,675		$	234		$	16,893
Provision (credit) for loan losses		143		(431	)		118		(97	)		(79	)		(82	)		2			(426	)		(156	)		59			33		(36	)		64		(59	)		1			(94	)
Recoveries of loans charged-off		0		263			1		0			1			0			4			269			0			1			1		0			1		43			1			47
Loans charged-off		0		(30	)		0		0			(113	)		0			(8	)		(151	)		0			(4	)		0		0			0		0			(12	)		(16	)
Balance, March 31, 2021	$	868	$	2,383		$	9,049	$	1,498		$	1,262		$	1,614		$	233		$	16,907
Balance, September 30, 2021																							$	582		$	2,659		$	8,923	$	1,578		$	1,205	$	1,659		$	224		$	16,830

Three Months Ended March 31, 2020

1-4 Family

Construction

Residential

Commercial

Agricultural

Consumer

Real Estate

Real Estate

Real Estate

Real Estate

Commercial

Agricultural

and Other

Total

Balance, December 31, 2019
$ 672 $ 2,122 $ 5,362 $ 1,326 $ 1,458 $ 1,478 $ 201 $ 12,619
Provision for loan losses
80 214 1,220 237 212 337 16 2,316
Recoveries of loans charged-off
1 0 1 0 2 0 3 7
Loans charged-off
0 0 (31 ) 0 0 0 (2 ) (33 )
Balance, March 31, 2020
$ 753 $ 2,336 $ 6,552 $ 1,563 $ 1,672 $ 1,815 $ 218 $ 14,909

	Nine Months Ended September 30, 2021
				1-4 Family
	Construction			Residential			Commercial			Agricultural									Consumer
	Real Estate			Real Estate			Real Estate			Real Estate			Commercial			Agricultural			and Other			Total
Balance, December 31, 2020	$	725		$	2,581		$	8,930		$	1,595		$	1,453		$	1,696		$	235		$	17,215
Provision (credit) for loan losses		(143	)		(155	)		(10	)		(17	)		(138	)		(85	)		8			(540	)
Recoveries of loans charged-off		0			267			3			0			3			48			8			329
Loans charged-off		0			(34	)		0			0			(113	)		0			(27	)		(174	)
Balance, September 30, 2021	$	582		$	2,659		$	8,923		$	1,578		$	1,205		$	1,659		$	224		$	16,830

	Three Months Ended September 30, 2020
				1-4 Family
	Construction			Residential			Commercial		Agricultural									Consumer
	Real Estate			Real Estate			Real Estate		Real Estate			Commercial			Agricultural			and Other			Total
Balance, June 30, 2020	$	849		$	2,505		$	6,864	$	1,713		$	1,994		$	1,830		$	250		$	16,005
Provision (credit) for loan losses		(105	)		80			583		(15	)		(5	)		(14	)		17			541
Recoveries of loans charged-off		0			2			1		0			9			0			273			285
Loans charged-off		0			(1	)		0		0			(582	)		(48	)		(268	)		(899	)
Balance, September 30, 2020	$	744		$	2,586		$	7,448	$	1,698		$	1,416		$	1,768		$	272		$	15,932

	Nine Months Ended September 30, 2020
			1-4 Family
	Construction		Residential			Commercial			Agricultural								Consumer
	Real Estate		Real Estate			Real Estate			Real Estate		Commercial			Agricultural			and Other			Total
Balance, December 31, 2019	$	672	$	2,122		$	5,362		$	1,326	$	1,458		$	1,478		$	201		$	12,619
Provision for loan losses		71		477			2,527			372		573			338			66			4,424
Recoveries of loans charged-off		1		5			3			0		13			0			277			299
Loans charged-off		0		(18	)		(444	)		0		(628	)		(48	)		(272	)		(1,410	)
Balance, September 30, 2020	$	744	$	2,586		$	7,448		$	1,698	$	1,416		$	1,768		$	272		$	15,932

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Allowance for loan losses disaggregated on the basis of impairment analysis method as of ~~March 31,~~September 30, 2021 and December 31, 2020 is as follows (in thousands):

2021			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
Individually evaluated for impairment	$	0	$	17	$	1,486	$	0	$	0	$	120	$	33	$	1,656	$	0	$	40	$	1,326	$	0	$	18	$	132	$	23	$	1,539
Collectively evaluated for impairment		868		2,366		7,563		1,498		1,262		1,494		200		15,251		582		2,619		7,597		1,578		1,187		1,527		201		15,291
Balance March 31, 2021	$	868	$	2,383	$	9,049	$	1,498	$	1,262	$	1,614	$	233	$	16,907
Balance September 30, 2021																	$	582	$	2,659	$	8,923	$	1,578	$	1,205	$	1,659	$	224	$	16,830

2020			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	0	$	150	$	1,486	$	0	$	115	$	40	$	28	$	1,819
Collectively evaluated for impairment		725		2,431		7,444		1,595		1,338		1,656		207		15,396
Balance December 31, 2020	$	725	$	2,581	$	8,930	$	1,595	$	1,453	$	1,696	$	235	$	17,215

~~Table of Contents~~

Loans receivable disaggregated on the basis of impairment analysis method as of ~~March 31,~~September 30, 2021 and December 31, 2020 is as follows (in thousands):

2021

1-4 Family

Construction

Residential

Commercial

Agricultural

Consumer

Real Estate

Real Estate

Real Estate

Real Estate

Commercial

Agricultural

and Other

Total

Individually evaluated for impairment
$ 167 $ 399 $ 10,157 $ 1,091 $ 817 $ 747 $ 46 $ 13,424
Collectively evaluated for impairment
53,168 206,594 486,998 144,137 126,623 95,144 13,873 1,126,537

Balance March 31, 2021
$ 53,335 $ 206,993 $ 497,155 $ 145,228 $ 127,440 $ 95,891 $ 13,919 $ 1,139,961

2021			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	0	$	1,000	$	9,954	$	576	$	295	$	638	$	30	$	12,493
Collectively evaluated for impairment		37,476		230,468		509,158		152,671		85,274		100,449		15,316		1,130,812

Balance September 30, 2021	$	37,476	$	231,468	$	519,112	$	153,247	$	85,569	$	101,087	$	15,346	$	1,143,305

2020			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	167	$	1,340	$	10,258	$	1,664	$	940	$	859	$	45	$	15,273
Collectively evaluated for impairment		45,330		212,222		486,099		150,328		121,595		101,727		15,003		1,132,304

Balance December 31, 2020	$	45,497	$	213,562	$	496,357	$	151,992	$	122,535	$	102,586	$	15,048	$	1,147,577

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.

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Impaired loans, on a disaggregated basis, as of ~~March 31,~~September 30, 2021 and December 31, 2020 (in thousands):

	2021						2020						2021						2020
			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	$	167	$	167	$	-	$	167	$	167	$	-	$	0	$	0	$	-	$	167	$	167	$	-
Real estate - 1 to 4 family residential		306		360		-		416		475		-		694		747		-		416		475		-
Real estate - commercial		141		168		-		242		578		-		127		142		-		242		578		-
Real estate - agricultural		1,091		1,140		-		1,664		1,698		-		576		631		-		1,664		1,698		-
Commercial		817		1,560		-		274		318		-		238		271		-		274		318		-
Agricultural		343		533		-		377		542		-		323		523		-		377		542		-
Consumer and other		4		5		-		8		10		-		7		9		-		8		10		-
Total loans with no specific reserve:		2,869		3,933		-		3,148		3,788		-		1,965		2,323		-		3,148		3,788		-

With an allowance recorded:
Real estate - construction		0		0		0		0		0		0		0		0		0		0		0		0
Real estate - 1 to 4 family residential		93		98		17		924		1,278		150		306		316		40		924		1,278		150
Real estate - commercial		10,016		10,157		1,486		10,016		10,157		1,486		9,827		10,081		1,326		10,016		10,157		1,486
Real estate - agricultural		0		0		0		0		0		0		0		0		0		0		0		0
Commercial		0		0		0		666		1,247		115		57		58		18		666		1,247		115
Agricultural		404		411		120		482		484		40		315		315		132		482		484		40
Consumer and other		42		44		33		37		39		28		23		24		23		37		39		28
Total loans with specific reserve:		10,555		10,710		1,656		12,125		13,205		1,819		10,528		10,794		1,539		12,125		13,205		1,819

Total
Real estate - construction		167		167		0		167		167		0		0		0		0		167		167		0
Real estate - 1 to 4 family residential		399		458		17		1,340		1,753		150		1,000		1,063		40		1,340		1,753		150
Real estate - commercial		10,157		10,325		1,486		10,258		10,735		1,486		9,954		10,223		1,326		10,258		10,735		1,486
Real estate - agricultural		1,091		1,140		0		1,664		1,698		0		576		631		0		1,664		1,698		0
Commercial		817		1,560		0		940		1,565		115		295		329		18		940		1,565		115
Agricultural		747		944		120		859		1,026		40		638		838		132		859		1,026		40
Consumer and other		46		49		33		45		49		28		30		33		23		45		49		28

	$	13,424	$	14,643	$	1,656	$	15,273	$	16,993	$	1,819	$	12,493	$	13,117	$	1,539	$	15,273	$	16,993	$	1,819

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Average recorded investment and interest income recognized on impaired loans for the three and ninemonths ended ~~March 31,~~September 30, 2021 and 2020 (in thousands):

	Three Months Ended March 31,								Three Months Ended September 30,
	2021				2020				2021				2020
	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	$	167	$	0	$	0	$	0	$	0	$	0	$	83	$	0
Real estate - 1 to 4 family residential		361		0		283		0		813		8		305		0
Real estate - commercial		192		297		5,351		0		132		0		11,091		0
Real estate - agricultural		1,378		25		439		6		602		0		1,966		0
Commercial		546		0		437		0		255		0		735		21
Agricultural		360		13		2,979		0		318		0		813		340
Consumer and other		6		0		44		0		6		0		8		0
Total loans with no specific reserve:		3,010		335		9,533		6		2,126		8		15,001		361

With an allowance recorded:
Real estate - construction		0		0		0		0		0		0		0		0
Real estate - 1 to 4 family residential		509		0		919		0		164		0		957		0
Real estate - commercial		10,016		0		488		0		9,922		0		0		0
Real estate - agricultural		0		0		0		0		0		0		0		0
Commercial		333		0		84		0		29		0		627		0
Agricultural		443		0		228		0		327		0		531		0
Consumer and other		40		0		0		0		30		0		30		0
Total loans with specific reserve:		11,341		0		1,719		0		10,472		0		2,145		0

Total
Real estate - construction		167		0		0		0		0		0		83		0
Real estate - 1 to 4 family residential		870		0		1,202		0		977		8		1,262		0
Real estate - commercial		10,208		297		5,839		0		10,054		0		11,091		0
Real estate - agricultural		1,378		25		439		6		602		0		1,966		0
Commercial		879		0		521		0		284		0		1,362		21
Agricultural		803		13		3,207		0		645		0		1,344		340
Consumer and other		46		0		44		0		36		0		38		0

	$	14,351	$	335	$	11,252	$	6	$	12,598	$	8	$	17,146	$	361

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	Nine Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	84	$	0	$	41	$	0
Real estate - 1 to 4 family residential		587		19		294		0
Real estate - commercial		162		297		8,221		0
Real estate - agricultural		990		25		1,202		6
Commercial		400		0		586		23
Agricultural		339		14		1,896		340
Consumer and other		6		0		26		0
Total loans with no specific reserve:		2,568		355		12,266		369

With an allowance recorded:
Real estate - construction		0		0		0		0
Real estate - 1 to 4 family residential		336		0		938		0
Real estate - commercial		9,969		0		244		0
Real estate - agricultural		0		0		0		0
Commercial		181		0		356		0
Agricultural		385		0		380		0
Consumer and other		35		0		15		0
Total loans with specific reserve:		10,906		0		1,933		0

Total
Real estate - construction		84		0		41		0
Real estate - 1 to 4 family residential		923		19		1,232		0
Real estate - commercial		10,131		297		8,465		0
Real estate - agricultural		990		25		1,202		6
Commercial		581		0		942		23
Agricultural		724		14		2,276		340
Consumer and other		41		0		41		0

	$	13,474	$	355	$	14,199	$	369

The interest foregone on nonaccrual loans for the three months ended ~~March 31,~~September 30, 2021 and 2020 was approximately ~~$199~~$154 thousand and ~~$189~~$247 thousand, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2021 and 2020 was approximately $523 thousand and $747 thousand, respectively.

Nonaccrual loans at ~~March 31,~~September 30, 2021 and December 31, 2020 were ~~$13.4~~$12.5 million and $15.3 million, respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of ~~$10.5~~$10.6 million as of ~~March 31,~~September 30, 2021, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $11.3 million as of December 31, 2020, all of which were included in impaired and nonaccrual loans.

2021

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The Company’s ~~TDR,~~TDRs, on a disaggregated basis, occurring in the three and ninemonths ended ~~March 31,~~September 30, 2021 and 2020, iswere as follows (dollars in thousands):

	Three Months Ended March 31,												Three Months Ended September 30,
	2021						2020						2021						2020
			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		0	$	0	$	0		0	$	0	$	0
Real estate - 1 to 4 family residential		2		153		153		0		0		0		0		0		0		0		0		0
Real estate - commercial		0		0		0		1		184		184		0		0		0		1		10,157		10,157
Real estate - agricultural		0		0		0		0		0		0		0		0		0		0		0		0
Commercial		1		58		58		1		61		61		1		6		6		0		0		0
Agricultural		0		0		0		0		0		0		0		0		0		3		56		56
Consumer and other		0		0		0		0		0		0		0		0		0		1		27		27

		3	$	211	$	211		2	$	245	$	245		1	$	6	$	6		5	$	10,240	$	10,240

	Nine Months Ended September 30,
	2021						2020
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		0	$	0	$	0		0	$	0	$	0
Real estate - 1 to 4 family residential		3		578		578		0		0		0
Real estate - commercial		0		0		0		2		10,341		10,341
Real estate - agricultural		0		0		0		0		0		0
Commercial		2		64		64		1		61		61
Agricultural		0		0		0		3		56		56
Consumer and other		0		0		0		1		27		27

		5	$	642	$	642		7	$	10,485	$	10,485

During the three months ended ~~March 31,~~September 30, 2021, the Company granted concessions to ~~two~~one borrower facing financial difficulties which was unrelated to COVID-19. The loan was restructured with a lower interest rate and accrued interest was waived. During the three months ended September 30, 2020, the Company granted concessions to three borrowers facing financial difficulties which were 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, 2021, the Company granted concessions to four borrowers facing financial difficulties. The loans were restructured ~~for an extended maturity without principal reductions~~with a lower interest rate or an amortization ~~period~~periods longer than a typical loan. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Company granted concessions to ~~two~~five ~~related~~ borrowers ~~in the hospitality industry that are~~ facing financial difficulties. ~~One loan was secured by commercial real estate and the~~ ~~second~~ ~~loan was secured by a commercial operating note.~~ Payments on these loans were deferred for ~~six~~ ~~months~~an extended period of time and the interest rate was reduced below the market interest rate.

There were 0no TDR loans that were modified during the ~~three~~ ~~months ended~~ ~~March 31, 2021~~ ~~and~~ twelve months ended ~~March 31,~~September 30, 2021 that had payment defaults. The Company considers TDR loans to have payment default when it is past due 60 days or more.

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There were ~~$262 thousand of~~no net ~~recoveries~~charge-offs and ~~$16~~$15 thousand of net charge-offs related to TDRs for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. There were $262 thousand of net recoveries and $31 thousand of net charge-offs related to TDRs for the nine months ended September 30, 2021 and 2020, respectively. No additional specific reserve was provided for the three and ninemonths ended ~~March 31,~~September 30, 2021 and ~~March 31,~~ 2020.

Section 4013 of the CARES Act, “Temporary Relief From TDRs,” 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. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID-19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement provided 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.

~~Table of Contents~~

As of ~~March~~December 31, ~~2021,~~2020, the Company had 524 COVID-19 related loan modifications still in the modification period with a total outstanding principal balance of ~~$15.4~~$45.9 million. As of September 30, 2021, substantially all the remaining COVID-19 related loan modifications have returned to normal payment status. Modified loans ~~continue~~continued to accrue interest and ~~are~~were evaluated for past due status based on the revised payment terms.

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An aging analysis of the recorded investments in loans, on a disaggregated basis, as of ~~March 31,~~September 30, 2021 and December 31, 2020, is as follows (in thousands):

2021			90 Days								90 Days				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	$	26	$	167	$	193	$	53,142	$	53,335	$	0	$	140	$	0	$	140	$	37,336	$	37,476	$	0
Real estate - 1 to 4 family residential		1,223		104		1,327		205,666		206,993		5		1,080		170		1,250		230,218		231,468		84
Real estate - commercial		117		0		117		497,038		497,155		0		0		0		0		519,112		519,112		0
Real estate - agricultural		622		592		1,214		144,014		145,228		0		1,139		0		1,139		152,108		153,247		0
Commercial		203		552		755		126,685		127,440		0		495		0		495		85,074		85,569		0
Agricultural		158		382		540		95,351		95,891		0		136		315		451		100,636		101,087		0
Consumer and other		9		18		27		13,892		13,919		0		56		0		56		15,290		15,346		0

	$	2,358	$	1,815	$	4,173	$	1,135,788	$	1,139,961	$	5	$	3,046	$	485	$	3,531	$	1,139,774	$	1,143,305	$	84

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

Real estate - construction	$	169	$	167	$	336	$	45,161	$	45,497	$	0
Real estate - 1 to 4 family residential		1,523		176		1,699		211,863		213,562		6
Real estate - commercial		152		56		208		496,149		496,357		0
Real estate - agricultural		574		1,618		2,192		149,800		151,992		0
Commercial		283		3		286		122,249		122,535		3
Agricultural		79		458		537		102,049		102,586		30
Consumer and other		18		16		34		15,014		15,048		0

	$	2,798	$	2,494	$	5,292	$	1,142,285	$	1,147,577	$	39

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The credit risk profile by internally assigned grade, on a disaggregated basis, as of ~~March 31,~~September 30, 2021 and December 31, 2020 is as follows (in thousands):

2021	Construction		Commercial		Agricultural								Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	48,042	$	352,434	$	112,595	$	109,898	$	77,925	$	700,894	$	35,797	$	381,055	$	125,868	$	72,151	$	84,960	$	699,831
Watch		3,773		84,589		25,420		13,057		16,316		143,155		326		79,194		21,037		8,077		14,717		123,351
Special Mention		1,353		22,396		173		42		0		23,964		1,353		24,687		167		1,370		0		27,577
Substandard		0		27,579		5,949		3,626		903		38,057		0		24,222		5,599		3,676		772		34,269
Substandard-Impaired		167		10,157		1,091		817		747		12,979		0		9,954		576		295		638		11,463

	$	53,335	$	497,155	$	145,228	$	127,440	$	95,891	$	919,049	$	37,476	$	519,112	$	153,247	$	85,569	$	101,087	$	896,491

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

Pass	$	39,980	$	346,591	$	110,925	$	101,858	$	80,075	$	679,429
Watch		5,350		88,113		33,144		15,897		20,793		163,297
Special Mention		0		23,753		175		52		0		23,980
Substandard		0		27,642		6,084		3,788		859		38,373
Substandard-Impaired		167		10,258		1,664		940		859		13,888

	$	45,497	$	496,357	$	151,992	$	122,535	$	102,586	$	918,967

The credit risk profile based on payment activity, on a disaggregated basis, as of ~~March 31,~~September 30, 2021 and December 31, 2020 is as follows (in thousands):

2021	1-4 Family						1-4 Family
	Residential		Consumer				Residential		Consumer
	Real Estate		and Other		Total		Real Estate		and Other		Total

Performing	$	206,587	$	13,873	$	220,460	$	230,385	$	15,343	$	245,728
Non-performing		406		46		452		1,083		3		1,086

	$	206,993	$	13,919	$	220,912	$	231,468	$	15,346	$	246,814

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

Performing	$	212,282	$	15,003	$	227,285
Non-performing		1,280		45		1,325

	$	213,562	$	15,048	$	228,610

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8.	Intangible assets

The following sets forth the carrying amounts and accumulated amortization of the intangible assets at ~~March 31,~~September 30, 2021 and December 31, 2020 (in thousands):

	2021				2020				2021				2020
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	6,411	$	3,633	$	6,411	$	3,493	$	6,411	$	3,913	$	6,411	$	3,493
Customer list		535		340		535		320		535		379		535		320

Total	$	6,946	$	3,973	$	6,946	$	3,813	$	6,946	$	4,292	$	6,946	$	3,813

The weighted average remaining life of the intangible assets is approximately 4 years as of ~~March 31,~~September 30, 2021 and December 31, 2020.

The following sets forth the activity related to the intangible assets for the three and ninemonths ended ~~March 31,~~September 30, 2021 and ~~2019~~2020 (in thousands):

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
	2021			2020			2021			2020			2021			2020

Beginning intangible assets, net	$	3,133		$	3,959		$	2,813		$	3,525		$	3,133		$	3,959
Amortization		(160	)		(217	)		(159	)		(216	)		(479	)		(650	)

Ending intangible assets, net	$	2,973		$	3,742		$	2,654		$	3,309		$	2,654		$	3,309

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

2021	$	468	$	148
2022		574		575
2023		502		502
2024		337		337
2025		300		300
2026		268		268
After		524		524

Total	$	2,973	$	2,654

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9.	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 as of ~~March 31,~~September 30, 2021 and December 31, 2020 (in thousands):

	2021		2020		2021		2020
Securities sold under agreements to repurchase:
U.S. government treasuries	$	2,060	$	2,069	$	6,034	$	2,069
U.S. government agencies		36,445		39,362		38,985		39,362
U.S. government mortgage-backed securities		14,651		14,320		11,307		14,320

Total pledged collateral	$	53,156	$	55,751	$	56,326	$	55,751

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.

10.

Borrowings

On June 11, 2021, the Company entered into a promissory note and line of credit agreement with an unaffiliated bank, providing for a five-year four million dollar line of credit facility. The Company had no outstanding borrowings on the line of credit as of September 30, 2021.

11.

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, 2020 is due primarily to the decrease in the unrealized gains on investment securities.

~~11.~~12.

Commitments, Contingencies and Concentrations of Credit Risk

On April 16, 2021, the Company entered into a $1.7 million commitment with a contractor to build a new branch in West Des Moines, Iowa. The Company has $1.5 million of the commitment remaining at September 30, 2021.

13.

Regulatory Matters

On ~~March 31, 2020,~~ The Company and the Banks ~~qualified for~~are subject to various regulatory capital requirements administered by federal and ~~elected~~state banking agencies. Failure to ~~use~~meet minimum capital requirements (as shown in the ~~community bank leverage ratio (CBLR) framework. In order to qualify for the CBLR framework, a community banking organization must~~following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a ~~tier~~ 1 ~~leverage ratio~~direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of ~~greater than~~ ~~8%,~~ ~~less than~~ ~~$10~~ ~~billion in total consolidated~~their assets, liabilities and ~~limited~~certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts ~~of off-balance-sheet exposures~~ and ~~trading assets~~classifications are also subject to qualitative judgments by the regulators about components, risk weightings and ~~liabilities. On~~ ~~January 1, 2021~~ other factors. Management believed the ~~CBLR increased~~Company and the Banks met all capital adequacy requirements 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. If an electing banking organization fails to satisfy~~ ~~one~~ ~~or more of the qualifying criteria but maintains a leverage ratio of greater than~~ ~~8%,~~ ~~that banking organization would have a “grace period” of up to~~ ~~two~~ ~~quarters during~~ which it could continue to use the community bank leverage ratio framework and be deemed to meet the “well capitalized” capital ratio requirements. As long as the banking organization is able to return to compliance with all the qualifying criteria within ~~two~~ ~~quarters, it continues to be deemed to meet the “well capitalized” ratio requirements and be in compliance with the generally applicable capital rule. State Bank & Trust was below~~ ~~8.5%~~ ~~but greater than~~ 8%they were subject as of ~~March 31, 2021~~ September 30, 2021.~~and has a grace period of~~ ~~two~~ ~~quarters to return to compliance with all qualifying criteria of the CBLR.~~

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The Company and the Banks’ capital amounts and ratios as of ~~March 31,~~September 30, 2021 and December 31, 2020 are as follows (dollars in thousands):

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

As of March 31, 2021:
Community Bank Leverage Ratio:
(Tier 1 capital to average assets for leverage ratio):
As of September 30, 2021:
Total capital (to risk- weighted assets):
Consolidated											$	204,524		15.3	%	$	140,431		10.50	%		N/A		N/A
Boone Bank & Trust	$	14,162		9.4	%	$	12,790		8.5	%		15,611		16.0			10,269		10.50			9,780		10.0	%
First National Bank		88,178		8.5			88,123		8.5			101,785		14.7			72,926		10.50			69,454		10.0
Iowa State Savings Bank		21,947		9.3			20,057		8.5			23,755		16.5			15,102		10.50			14,383		10.0
Reliance State Bank		23,671		9.1			22,015		8.5			26,824		14.4			19,581		10.50			18,648		10.0
State Bank & Trust		17,292		8.4			17,485		8.5			20,327		15.0			14,247		10.50			13,568		10.0
United Bank & Trust		10,727		9.1			9,972		8.5			11,873		15.7			7,926		10.50			7,549		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated											$	187,806		14.0	%	$	113,682		8.50	%		N/A		N/A
Boone Bank & Trust												14,665		15.0			8,313		8.50			7,824		8.0	%
First National Bank												93,084		13.4			59,035		8.50			55,563		8.0
Iowa State Savings Bank												22,734		15.8			12,226		8.50			11,507		8.0
Reliance State Bank												24,491		13.1			15,851		8.50			14,919		8.0
State Bank & Trust												18,643		13.7			11,533		8.50			10,855		8.0
United Bank & Trust												10,927		14.5			6,417		8.50			6,039		8.0

Tier 1 capital (to average- assets):
Consolidated											$	187,806		9.2	%	$	81,851		4.00	%		N/A		N/A
Boone Bank & Trust												14,665		9.4			6,269		4.00			7,836		5.0	%
First National Bank												93,084		8.8			42,354		4.00			52,942		5.0
Iowa State Savings Bank												22,734		9.4			9,631		4.00			12,038		5.0
Reliance State Bank												24,491		9.1			10,731		4.00			13,413		5.0
State Bank & Trust												18,643		8.7			8,530		4.00			10,663		5.0
United Bank & Trust												10,927		9.1			4,799		4.00			5,999		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated											$	187,806		14.0	%	$	93,621		7.00	%		N/A		N/A
Boone Bank & Trust												14,665		15.0			6,846		7.00			6,357		6.5	%
First National Bank												93,084		13.4			48,617		7.00			45,145		6.5
Iowa State Savings Bank												22,734		15.8			10,068		7.00			9,349		6.5
Reliance State Bank												24,491		13.1			13,054		7.00			12,121		6.5
State Bank & Trust												18,643		13.7			9,498		7.00			8,819		6.5
United Bank & Trust												10,927		14.5			5,284		7.00			4,907		6.5

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

As of December 31, 2020:
Community Bank Leverage Ratio:
(Tier 1 capital to average assets for leverage ratio):

Boone Bank & Trust	$	13,967		9.2	%	$	12,170		8.0	%
First National Bank		86,071		8.6			80,393		8.0
Iowa State Savings Bank		21,610		9.4			18,321		8.0
Reliance State Bank		23,278		9.4			19,741		8.0
State Bank & Trust		16,564		8.5			15,657		8.0
United Bank & Trust		10,539		9.2			9,180		8.0

The Company and the Banks are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a capital conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At September 30, 2021, the capital ratios for the Company and the Banks were sufficient to meet the conservation buffer.

The Banks elected to stop reporting their capital ratios under the Community Bank Leverage Ratio as of September 30, 2021.

~~12.~~14.

Subsequent Events

On ~~April 14, 2021,~~ ~~the board of directors of the Company declared a cash dividend and authorized a stock repurchase program.~~

On ~~April 16, 2021,~~ ~~the Company entered into a commitment with a contractor to build a new branch in West Des Moines, Iowa for $1.7 million.~~

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after ~~March 31,~~September 30, 2021, but prior to ~~May 4,~~November 8, 2021, that provided additional evidence about conditions that existed at ~~March 31,~~September 30, 2021. There were no other significant events or transactions that provided evidence about conditions that did not exist at ~~March 31,~~September 30, 2021.

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~~Item 2.~~

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

Overview

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates 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), 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. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs 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 ~~257~~249 full-time equivalent individuals employed by the Banks.

The Company’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; (v) gain on sale of loans; and (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 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.

The Company had net income of ~~$6.0~~$6.7 million, or ~~$0.66~~$0.74 per share, for the three months ended ~~March 31,~~September 30, 2021, compared to net income of ~~$3.6~~$5.7 million, or ~~$0.39~~$0.62 per share, for the three months ended ~~March 31,~~September 30, 2020. The increase in earnings is primarily the result of a ~~decrease in provision for loan losses compared to the prior year due primarily to the onset of the COVID-19 pandemic in 2020 and a~~ reduction in interest expense due to declines in market interest ~~rates.~~rates and a decrease in provision for loan losses due to a higher level of provision in 2020 as a result of uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

Net loan recoveries totaled ~~$118~~$31 thousand for the three months ended ~~March 31,~~September 30, 2021 compared to net loan charge offs of ~~$26~~$614 thousand for the three months ended ~~March 31,~~September 30, 2020. A (credit) for loan losses of ($~~426)~~94) thousand was recognized for the three months ended ~~March 31,~~September 30, 2021 as compared to a ~~$2.3 million~~$541 thousand provision for loan loss for the three months ended ~~March 31,~~September 30, 2020. The credit for loan losses was primarily due to improving economic conditions. The provision for loan losses in 2020 was primarily due to uncertainties associated with the ~~onset of~~economic slow-down created by the COVID-19 pandemic.

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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

●	Critical Accounting Policies

●	Non-GAAP Financial Measures

●	Income Statement Review

●	Balance Sheet Review

●	Asset Quality Review and Credit Risk Management

●	Liquidity and Capital Resources

●

~~● Challenges and COVID-19 Status, Risks and Uncertainties~~

~~● Key Performance Indicators and Industry Results~~

~~● Critical Accounting Policies~~

~~● Non-GAAP Financial Measures~~

~~● Income Statement Review~~

~~● Balance Sheet Review~~

~~● Asset Quality Review and Credit Risk Management~~

~~● Liquidity and Capital Resources~~

● Forward-Looking Statements and Business Risks

Challenges and COVID-19 Status, Risks and Uncertainties

Management has identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting 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 12, 2021.

The ~~onset and~~ continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our business and continuation of operations, including the following:

●

Although the economy ~~has started~~continues to rebound from the depths of the economic slowdown associated with the pandemic, some of the Company’s customers may continue to experience decreased revenues, shortage of labor or shortage of goods, 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. Management may increase the allowance if the effects of the COVID-19 pandemic ~~continue to~~ negatively impact the loan portfolio;

●

Market interest rates remain at historic lows and if prolonged, could adversely affect our net interest income, net interest margin and earnings;

●

We may experience a slowdown in demand for our products and services as the effects of the pandemic continue to linger, including the demand for traditional loans, although we believe any decline experienced to date has largely been offset by the new volume of PPP loans under the CARES Act and other governmental programs established in response to the pandemic. We had ~~1,117~~227 PPP loans with an aggregate outstanding balance of ~~$59.2~~$14.8 million as of ~~March 31,~~September 30, 2021;

●

As evidenced by the level of loans classified as substandard and watch as of ~~March 31,~~September 30, 2021, we continue to experience a higher risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, all of which may result in additional credit charges and other losses in our loan portfolio;

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●

Throughout the COVID-19 pandemic we ~~have been~~ actively ~~working~~worked with loan customers to evaluate prudent loan modification terms. As of ~~March 31,~~September 30, 2021, ~~approximately $15.4 million, or 1.35%, of loans were in payment deferral status under~~substantially all COVID-19 related ~~modifications;~~loan modifications have returned to normal payment status; and

●

In meeting our objective to maintain our capital levels and liquidity position through the COVID-19 pandemic, our Board of Directors may reduce or determine to altogether forego payment of future dividends in order to maintain and/or strengthen our capital and liquidity position.

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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 ~~5,001~~4,951 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
	Ended			Years Ended December 31,												3 Months			9 Months									Years Ended December 31,
	March, 31,															Ended			Ended			3 Months Ended
	2021			2020						2019						September 30, 2021						June 30, 2021						2020						2019
	Company			Company			Industry*			Company			Industry*			Company						Company			Industry*			Company			Industry*			Company			Industry*

Return on assets		1.19	%		1.01	%		0.72	%		1.14	%		1.29	%		1.29	%		1.20	%		1.12	%		1.24	%		1.01	%		0.72	%		1.14	%		1.29	%

Return on equity		11.52	%		9.48	%		6.88	%		9.48	%		11.38	%		12.60	%		11.85	%		11.39	%		12.37	%		9.48	%		6.88	%		9.48	%		11.38	%

Net interest margin		2.86	%		3.13	%		2.82	%		3.21	%		3.36	%		2.97	%		2.89	%		2.84	%		2.50	%		3.13	%		2.82	%		3.21	%		3.36	%

Efficiency ratio		55.70	%		55.83	%		59.78	%		58.51	%		56.63	%		51.35	%		54.30	%		56.01	%		61.01	%		55.83	%		59.78	%		58.51	%		56.63	%

Capital ratio		10.33	%		10.66	%		8.81	%		12.05	%		9.66	%		10.27	%		10.14	%		9.84	%		10.12	%		10.66	%		8.81	%		12.05	%		9.66	%

*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 average assets was ~~1.19%~~1.29% and ~~0.81%~~1.21% for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. This ratio increase was primarily the result of a decrease in the provision for loan loss and 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 ~~11.52%~~12.60% and ~~7.44%~~11.18% for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. This ratio increase was primarily the result of a decrease in the provision for loan loss and a reduction in interest expense due to market rate decreases.

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●	● Net Interest Margin

The net interest margin for the three months ended ~~March 31,~~September 30, 2021 and 2020 was ~~2.86%~~2.97% and ~~3.18%~~3.21%, 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.

●	● Efficiency Ratio

This ratio is calculated by dividing noninterest expense by the sum of 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 ~~55.70%~~51.35% and ~~57.73%~~54.80% for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. The efficiency ratio has ~~slightly~~ improved compared to the ~~prior~~same quarter last ~~year.~~year primarily due to a reduction in market interest rates on deposits and a decline in the number of employees.

●	● 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 ~~10.33%~~10.27% as of ~~March 31,~~September 30, 2021 is ~~significantly higher than~~similar to the industry average of ~~8.81%~~10.12% as of ~~December 31, 2020.~~June 30, 2021.

Industry Results:

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

~~Full-Year 2020 Net Income Declines 36.5% to $147.9 Billion~~

For the 5,001 FDIC-insured commercial banks and savings institutions, full-year 2020 net income totaled $147.9 billion, a decline of $84.9 billion (36.5%) from 2019. The decline was primarily attributable to higher provision expenses in the first half of 2020 tied to pandemic-related deterioration in economic activity. Provision expenses increased by $77.1 billion (140%), and net interest income declined by $20 billion (3.7%). Average net interest margin (NIM) declined by 54 basis points from 2019 to 2.82%, as the yield on average earning assets declined at a faster rate than the cost of funds. The average return on assets (ROA) ratio declined from 1.29% in 2019 to 0.72% in 2020.2021:

Quarterly Net Income ~~Increases 9.1% From~~Continued to Increase Year Over Year, Driven by a ~~Year Ago to $59.9 Billion~~Second Consecutive Quarter of Negative Provision Expense

~~Fourth quarter 2020 quarterly net~~Net income totaled ~~$59.9~~$70.4 billion in second quarter 2021, an increase of $5$51.9 billion ~~(9.1%~~(281%) from the same quarter a year ~~ago. The primary driver of higher net income this quarter was the reduction~~ago, driven by a $73 billion (117.3%) decline in provision ~~expenses. More than half~~expense. Two-thirds of all banks ~~(57.4%)~~(66.4 %) reported year-over-year ~~increases~~improvement in quarterly net income. The share of ~~unprofitable~~profitable institutions ~~remained relatively stable~~increased slightly, up 1.4% year over year to 95.8%. However, net income declined $6.4 billion (8.3%) from ~~a year ago at 7.3%~~first quarter 2021, driven by an increase in provision expense from first quarter 2021 (up $3.7 billion to negative $10.8 billion). The aggregate return on average ~~ROA~~assets ratio ~~was 1.11% during fourth quarter 2020, down 8~~of 1.24% rose 89 basis points from a year ago but ~~below~~fell 14 basis points from first quarter 2021.

Net Interest Margin Contracted Further to a ~~recent high~~New Record Low

The average net interest margin contracted 31 basis points from a year ago to 2.50%—the lowest level on record. The contraction is due to the year-over-year reduction in earning asset yields (down 53 basis points to 2.68%) outpacing the decline in average funding costs (down 22 basis points to 0.18%). Both ratios declined from first quarter 2021 to record lows. Aggregate net interest income declined $2.2 billion (1.7%) from second quarter 2020. Reductions in net interest income at the largest institutions drove the aggregate decline in net interest income, as more than three-fifths of ~~1.41% in third quarter 2018.~~all banks (64.1%) reported higher net interest income compared with a year ago.

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~~Net Interest Margin Remains Unchanged From Third Quarter and at a Record Low Level~~

The banking industry reported aggregate net interest income of $131.3 billion during the fourth quarter, a decline of $5.4 billion (3.9%) from a year ago. This marks the fifth consecutive quarter that net interest income declined. Almost 43% of all banks reported annual declines in net interest income. The average NIM was 2.68% in fourth quarter 2020, unchanged from the third quarter but down 60 basis points from fourth quarter 2019. Banks of all asset size groups featured in the Quarterly Banking Profile (QBP) reported average NIM compression relative to a year ago, as the contraction in earning asset yields exceeded the decline in funding costs. At fourth quarter 2020, both earning asset yields and funding costs dropped to the lowest levels ever reported in the QBP.

Noninterest Income ~~Expands 6.5% From the Year-Ago Quarter~~Continued to Increase Despite Lower Trading Revenue

Noninterest income ~~rose by $4.3~~increased (up $5 billion, ~~(6.5%~~or 7.1%) from ~~a year ago, with nearly 61% of all banks reporting annual increases. The annual~~second quarter 2020 due to improvement in several categories. During the year ending second quarter 2021, “all other noninterest ~~income was led by the growth~~income” rose $7.9 billion (27.5%), offsetting both a $5.9 billion (42.1%) decline in trading revenue and a reduction in net gains on loan sales ~~which rose by $3.9~~of $1.5 billion ~~(104%~~(19.7 %). Increased income from service charges on deposit accounts (up $1.5 billion, or 21.5%), and ~~net gains on sales of other assets, which increased by $1.6 billion. Trading revenue, which was the largest dollar contributor to the overall increase in noninterest income during~~fiduciary activities (up $1.2 billion, or 13.1%) from second quarter 2020 ~~declined for~~also supported the ~~second consecutive quarter and was down $799.7 million (11%~~year-over-year improvement in noninterest income. More than two-thirds of all institutions (69.6%) ~~from fourth quarter 2019.~~reported higher noninterest income compared with the year-ago quarter.

Noninterest Expense ~~Increases Almost 3% From~~Relative to Average Assets Declined to a ~~Year Ago~~Record Low

Noninterest expense rose $3.7 billion (3%) year over year, led by ~~$3.3 billion (2.7%) from a year ago, as almost two-thirds~~an increase in salary and benefit expense and “all other noninterest expense.” Nearly three-fourths of all banks ~~(66.4%~~(74.5%) reported ~~annual increases. The rise in~~higher noninterest expense ~~was driven by higher salary and employee benefit expenses, which expanded by $3.7 billion (6.6%). The~~year over year. Higher average assets per employee (up $0.9 million) also increased ~~from $9 million in fourth quarter 2019 to $10.6 million in fourth quarter 2020.~~

~~Provisions for Credit Losses Decline to the Lowest Level Since Second Quarter 1995~~

~~With the improving economic outlook, provisions for credit losses decreased by $11.4 billion (76.5%)~~ from a year ago to ~~$3.5~~$11.1 million. However, noninterest expense as a percentage of average assets continued to decline, reaching a record low of 2.23%, down 14 basis points from the year-ago quarter.

Net Operating Revenue to Average Assets Continued to Decline

Net operating revenue (net interest income plus noninterest income) increased $2.8 billion (1.4%) from the year-ago quarter as improvement in noninterest income offset the decline in net interest income. However, growth in average assets and declining net interest income contributed to a 29 basis point decline in the ratio of quarterly net operating revenue to average assets. The ratio stood at 3.62% for the quarter—the lowest level since ~~second~~third quarter ~~1995. The decline in provisions~~1984.

Provision Expense Was Negative for the Second Consecutive Quarter

Provisions for credit losses ~~was not broad-based, as less~~(provisions) increased $3.7 billion from first quarter 2021 but declined $73 billion (117.3%) from the year-ago quarter to negative $10.8 billion. More than ~~one-third (31.2%)~~three-fifths of all ~~banks~~institutions (63.3%) reported ~~year-over-year declines. In~~lower provisions compared with the ~~fourth quarter, 279 banks used the current expected credit losses (CECL) accounting standard and~~year-ago quarter. Nearly 14% of institutions reported an ~~aggregate $1.4 billion~~increase in provisions ~~for credit losses, down $ 11.2 billion (88.9%) from a year ago. For non-CECL adopters, provisions for credit losses totaled $2.1 billion, down $186.6 million (8.2%) from a year ago.~~

~~The Net Charge-Off Rate Falls 13 Basis Points From Fourth Quarter 2019~~during the same period, while the remaining institutions reported no material change.

The net ~~charge-off rate~~number of banks that have adopted current expected credit loss (CECL) accounting fell by 131 to 319 from first quarter 2021. CECL adopters reported aggregate negative provisions of $10.7 billion in second quarter, an increase of $4.3 billion from the previous quarter and a reduction of $67.6 billion from one year ago. Provisions for banks that have not adopted CECL accounting totaled negative $128.1 million (a reduction of $530.6 million from a quarter ago and $5.2 billion from one year ago).

Allowance for Loan and Lease Losses to Total Loans Remained Higher Than Pre-Pandemic Level

The allowance for loan and lease losses (ALLL) as a percentage of total loans and leases declined 41 basis points to 1.80% from ~~fourth~~the year-ago quarter ~~2019~~due to ~~0.41%. Net charge-offs totaled $11.2 billion, down $2.8 billion (19.7%) from a year ago. The year-over-year decline in net charge-offs was driven by~~negative provisions, but ALLL remains higher than the reduction in credit card loan charge offs (down $3.4 billion, or 39.7%). Net charge-offs on nonfarm nonresidential (NFNR) properties increased by $657.9 million (348.3%) from a year ago. The net charge-off rate for NFNR properties increased by 17 basis points from a year ago to 0.22% but remained below the highlevel of ~~1.40%~~1.18% reported in fourth quarter ~~2010. The net charge-off rate for~~2019. Similarly, the ~~commercial and industrial (C&I) loan portfolio increased by 4 basis~~ALLL as a percentage of loans that are 90 days or more past due or in nonaccrual status (coverage ratio) declined 27 percentage points from ~~a year ago~~the year-ago quarter to ~~0.47%, below~~178% but continued to exceed the ~~recent high~~financial crisis average of ~~0.64% in second~~79.1%. All insured institutions except the largest Quarterly Banking Profile asset size group (greater than $250 billion) reported higher aggregate coverage ratios compared with first quarter ~~2020.~~2021.

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~~The~~ Noncurrent ~~Loan Rate Expands Modestly~~Loans Continued to ~~1.18%~~Decline Quarter Over Quarter

~~The noncurrent rate rose by 1 basis point from third quarter 2020 to 1.18%. Noncurrent loan balances (90~~Loans that were 90 days or more past due or in nonaccrual ~~status) increased by $944.9 million (0.7%~~status (noncurrent loans) continued to decline (down $13.2 billion, or 10.8%) from first quarter 2021, supporting a 12 basis point reduction in the noncurrent rate to 1.01%. Noncurrent 1–4 family residential loans declined most among loan categories from the previous ~~quarter. One-third~~quarter (down $5.9 billion, or 10.9%), followed by noncurrent commercial and industrial (C&I) loans (down $3.1 billion, or 13.9%). Three-fifths of all banks ~~(33.3%)~~ reported ~~quarterly increases~~a reduction in noncurrent ~~loan balances.~~ loans compared with first quarter 2021.

The ~~quarterly increase in noncurrent loan balances was led by NFNR properties (up $2.1~~Net Charge-Off Rate Declined Further to a Record Low

Net charge-offs continued to decline for the fourth consecutive quarter (down $8.3 billion, or ~~15.7%) and credit card balances (up $1.4 billion, or 17%~~53.2%). ~~The noncurrent~~In second quarter, the net charge-off rate ~~for NFNR properties increased by 13~~fell 30 basis points to ~~1.00%~~0.27%, a record low. A decline in ~~the fourth quarter 2020, while the noncurrent rate for~~net charge-offs of credit card ~~balances rose by 13 basis points to 1.16%.~~loans (down $3.3 billion, or 39.8 %) and C&I loans (down $2.9 billion, or 69.7%) drove three-fourths (75.5%) of the reduction in net charge-offs from the year-ago quarter. More than half of all banks (51.6%) reported a decline in net charge-offs from a year ago.

Total Assets ~~Increase 3.1% From the Previous Quarter~~Increased, Especially Those With Maturities of More Than Five Years

Total assets increased ~~by $664~~$224.8 billion ~~(3.1%~~(1%) from ~~third~~first quarter ~~2020. The banking industry’s liquidity position continued~~2021 to ~~strengthen.~~$22.8 trillion. More than four-fifths (86.1%) of all banks reported an increase in assets with contractual maturities greater than five years compared with a quarter ago. Cash and balances due from depository institutions ~~rose by $357~~declined $108 billion ~~(12.6%~~(3%), ~~and security holdings posted a record high quarterly dollar increase of $321.4~~while securities rose $248.9 billion ~~(6.7%~~(4.5%). ~~Mortgage-backed~~Growth in mortgage-backed securities ~~increased by $244.9~~(up $122.7 billion, ~~(8.8%~~or 3.8%) and U.S. Treasury securities (up $91.2 billion, or 8.5%) continued to spur quarterly increases in total securities. Growth in held-to-maturity securities from first quarter 2021 (up $273.6 billion, or 16.8%) outpaced that of available-for-sale (AFS) securities (down $27.3 billion, or 0.7%).

Quarterly Loan Balances ~~Decline From~~Grew for the ~~Previous~~First Time Since Second Quarter ~~Led by Lower Commercial and Industrial Lending Activity~~2020

Total loan and lease balances totaled $10.9 trillion in fourth quarter 2020, $47.7 billion (0.4%) less than third quarter 2020. The quarterly decline in total loan and leases balances was led by the C&I loan portfolio, which fell by $103.8 billion (4.1%). Small Business Administration-guaranteed Paycheck Protection Program loans declined by $83.9 billion (17.1%) from the previous quarter. The decline in the C&I loan portfolio was partially offset by increases in loans to nondepository financial institutions (up $30.2 billion, or 5.5%) and credit card balances (up $25.6 billion, or 3.2%). Total loanLoan and lease balances increased ~~by $345~~$33.2 billion (3.3%) from a year ago, the lowest annual growth rate since fourth quarter 2013. The annual increase in total loan and lease balances was driven by the C&I loan portfolio, which rose by $232.8 billion (10.6%), primarily in the first half of 2020.

~~Deposits Increase 4.1% From Third Quarter 2020~~

Total deposit balances rose by $706.9 billion (4.1%) between the third and fourth quarters of 2020. While the quarterly growth in deposits is below the levels reported in the first half of 2020, it is the third largest quarterly dollar increase ever reported in the QBP. Interest-bearing account balances rose by $399.2 billion (3.5%), and noninterest-bearing account balances expanded by $220.5 billion (5%). Deposits in accounts with balances larger than $250,000 increased by $467.5 billion (5.4%) from the previous quarter. Nondeposit liabilities fell by $124.2 billion (11.1%(0.3%) from the previous quarter, ~~led by Federal Home Loan Bank advances that declined by $48.5~~the first quarterly increase in loan balances since second quarter 2020. An increase in credit card loan balances (up $30.9 billion, ~~(15.9%~~or 4.1%). and an increase in auto loan balances (up $18.9 billion, or 3.8%) drove this growth. Half (50.3%) of all institutions reported a quarterly increase in total loans.

~~Equity Capital Increases Almost 2% From~~Compared with second quarter 2020, loan and lease balances contracted slightly (down $133.9 billion, or 1.2%), driven by a reduction in C&I loans (down $360.4 billion, or 13.4%). An increase in “all other loans” (up $182.8 billion, or 18.2%) mitigated the ~~Previous Quarter~~annual contraction in total loan balances. Compared with the year-ago quarter, more than half (52.8%) of all institutions reported a decline in total loans, but more than three-quarters (76.4%) of all institutions reported an increase in unused commitments to lend.

~~Equity capital totaled $2.2 trillion~~Deposits Continued to Grow but at a Moderated Pace in ~~fourth~~Second Quarter 2021

Deposits grew $271.9 billion (1.5%) in second quarter, ~~2020, up $41.9 billion (1.9%)~~down from the growth rate of 3.6% reported in first quarter 2021. The deposit growth rate in second quarter is near the long-run average growth rate of 1.2%. Deposits above $250,000 continued to drive the quarterly increase (up $297.8 billion, or 3.1%) and offset a decline in deposits below $250,000 (down $53.6 billion, or 0.7%). Noninterest-bearing deposit growth (up $175 billion, or 3.5%) continued to outpace that of interest-bearing deposits (up $53.3 billion, or 0.4 %), with more than half of banks (57.3%) reporting higher noninterest-bearing deposit balances compared with the previous quarter. Declared dividends totaled $21.8 billion, down $27.4 billion (55.7%) from fourth quarter 2019. Seven insured institutions with $498.4 million in total assets were below the requirements for the well-capitalized category as defined for Prompt Corrective Action.

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Equity Capital Growth Remained Strong

Equity capital rose $55.3 billion (2.5%) from first quarter 2021. Retained earnings contributed $33.9 billion to equity formation despite a decline in retained earnings from first quarter (down $19.1 billion, or 36%). Banks distributed 51.9% of second quarter earnings as dividends, which were up $12.7 billion (53%) from a quarter ago. Nearly one-third (32%) of banks reported higher dividends compared with the year-ago quarter. The number of institutions with capital ratios that did not meet Prompt Corrective Action requirements for the well-capitalized category increased by three to nine from first quarter 2021.

Three New Banks ~~Open~~Opened in ~~Fourth~~Second Quarter ~~2020~~2021

The number of FDIC-insured ~~commercial banks and savings~~ institutions ~~that filed quarterly Call Reports~~ declined from ~~5,033~~4,978 in ~~third~~first quarter ~~2020~~2021 to ~~5,001 in fourth~~4,951. During second quarter ~~2020. Three~~2021, three new banks ~~were added, 31~~opened, 28 institutions ~~were absorbed by mergers,~~merged with other FDIC-insured institutions, two banks ~~failed, one bank sold most of its assets to a credit union,~~ceased operations, and ~~one bank did not file in time for this analysis. For full-year 2020, six new banks were added, 168 institutions were absorbed by mergers, and four~~no banks failed. The number of ~~institutions~~banks on the FDIC’s “Problem Bank List” ~~remained unchanged~~declined by four from ~~the previous~~first quarter ~~at 56.~~to 51. Total assets of problem banks ~~increased~~declined $8.4 billion (15.4%) from ~~$53.9 billion in third~~first quarter ~~2020~~ to ~~$55.8 billion in fourth quarter 2020.~~$45.8 billion.

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, 2020 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’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’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 economic disruption and uncertainties resulting from 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.

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

~~Table of Contents~~

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

The Company’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.

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 economic disruption and uncertainties resulting from the COVID-19 pandemic, it is at least reasonably possible that changes in management’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 four 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 ~~March 31,~~September 30, 2021, 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.~~value. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

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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 March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
		2021			2020				2021			2020			2021			2020
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:	Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:							Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)		$	13,664		$	13,046			$	14,652		$	14,160		$	42,488		$	40,886
Tax-equivalent adjustment ⁽¹⁾			225			241				193			237			636			732
Net interest income on an FTE basis (non-GAAP)			13,889			13,287				14,845			14,397			43,124			41,618
Average interest-earning assets		$	1,941,859		$	1,669,356			$	1,999,147		$	1,796,452		$	1,989,226		$	1,754,518
Net interest margin on an FTE basis (non-GAAP)			2.86	%		3.18	%			2.97	%		3.21	%		2.89	%		3.16	%

(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.

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Income Statement Review for the Three Months ended ~~March 31,~~September 30, 2021 and 2020

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended ~~March 31,~~September 30, 2021 and 2020:

AVERAGE BALANCES AND INTEREST RATES

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. 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 liabilities. The net interest margin is equal to interest income less 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	AVERAGE BALANCE SHEETS AND INTEREST RATES															AVERAGE BALANCE SHEETS AND INTEREST RATES

		Three Months Ended March 31,															Three Months Ended September 30,

		2021							2020								2021							2020

		Average		Revenue/		Yield/			Average		Revenue/		Yield/				Average		Revenue/		Yield/			Average		Revenue/		Yield/
		balance		expense		rate			balance		expense		rate				balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial		$	122,006	$	1,712		5.61	%	$	85,400	$	1,081		5.06	%		$	96,436	$	2,411		10.00	%	$	154,887	$	1,732		4.47	%
Agricultural			92,362		989		4.28	%		110,296		1,699		6.16	%			98,942		1,014		4.10	%		105,568		1,580		5.99	%
Real estate			908,212		9,112		4.01	%		862,650		9,557		4.43	%			934,427		8,936		3.83	%		890,097		9,324		4.19	%
Consumer and other			14,172		171		4.83	%		18,483		250		5.41	%			15,167		169		4.46	%		17,667		229		5.18	%

Total loans (including fees)			1,136,752		11,984		4.22	%		1,076,829		12,587		4.68	%			1,144,972		12,530		4.38	%		1,168,219		12,865		4.41	%

Investment securities
Taxable			453,939		1,989		1.75	%		303,865		1,821		2.40	%			598,634		2,256		1.51	%		362,553		1,987		2.19	%
Tax-exempt ⁽²⁾			162,496		1,069		2.63	%		170,487		1,152		2.70	%			146,805		918		2.50	%		164,010		1,128		2.75	%
Total investment securities			616,435		3,058		1.98	%		474,352		2,973		2.51	%			745,439		3,174		1.70	%		526,563		3,115		2.37	%

Interest-bearing deposits with banks and federal funds sold			188,672		178		0.38	%		118,175		517		1.75	%			108,736		168		0.62	%		101,670		176		0.69	%

Total interest-earning assets			1,941,859	$	15,220		3.14	%		1,669,356	$	16,077		3.85	%			1,999,147	$	15,872		3.18	%		1,796,452	$	16,156		3.60	%

Noninterest-earning assets			81,154							81,546								76,490							81,654

TOTAL ASSETS		$	2,023,013						$	1,750,902							$	2,075,637						$	1,878,106

(1) Average loan ~~balance includes~~balances include 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%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

Three Months Ended March 31,

2021

2020

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
$ 1,156,088 $ 479 0.17 % $ 955,890 $ 1,284 0.54 %
Time deposits
252,035 815 1.29 % 282,833 1,366 1.93 %
Total deposits
1,408,123 1,294 0.37 % 1,238,723 2,650 0.86 %
Other borrowed funds
40,692 37 0.36 % 50,190 139 1.11 %

Total interest-bearing liabilities
1,448,815 1,331 0.37 % 1,288,913 2,789 0.87 %

Noninterest-bearing liabilities

Noninterest-bearing checking
354,595 260,092
Other liabilities
10,571 10,711

Stockholders' equity
209,032 �� 191,186

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 2,023,013 $ 1,750,902

Net interest income (FTE)⁽³⁾
$ 13,889 2.86 % $ 13,288 3.18 %

Spread Analysis (FTE)

Interest income/average assets
$ 15,220 3.01 % $ 16,077 3.67 %
Interest expense/average assets
$ 1,331 0.26 % $ 2,789 0.64 %
Net interest income/average assets
$ 13,889 2.75 % $ 13,288 3.04 %

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended September 30,

	2021								2020

	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	$	1,212,084	$	467			0.15	%	$	1,027,277	$	586			0.23	%
Time deposits		227,760		526			0.92	%		272,361		1,133			1.66	%
Total deposits		1,439,844		993			0.28	%		1,299,638		1,719			0.53	%
Other borrowed funds		38,863		34			0.35	%		37,597		40			0.42	%

Total interest-bearing liabilities		1,478,707		1,027			0.28	%		1,337,235		1,759			0.53	%

Noninterest-bearing liabilities
Noninterest-bearing checking		373,973								325,339
Other liabilities		9,786								12,689

Stockholders' equity		213,171								202,843

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,075,637							$	1,878,106


Net interest income (FTE)⁽³⁾			$	14,845			2.97	%			$	14,397			3.21	%

Spread Analysis (FTE)
Interest income/average assets	$	15,872		3.06	%				$	16,156		3.44	%
Interest expense/average assets	$	1,027		0.20	%				$	1,759		0.37	%
Net interest income/average assets	$	14,845		2.86	%				$	14,397		3.07	%

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Net Interest Income

For the three months ended ~~March 31,~~September 30, 2021 and 2020, the Company's net interest margin adjusted for tax exempt income was ~~2.86%~~2.97% and ~~3.18%~~3.21%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended ~~March 31,~~September 30, 2021 totaled ~~$13.7~~$14.7 million compared to ~~$13.0~~$14.2 million for the three months ended ~~March 31,~~September 30, 2020.

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For the three months ended ~~March 31,~~September 30, 2021, interest income declined ~~$840~~$239 thousand, or 5%2%, when compared to the same period in 2020. The reduction is primarily due to lower market interest rates, offset in part by an increase in the average balance of interest-earning assets ~~$840 thousand~~and $1.7 million of fees recognized in commercial loan interest income from Paycheck Protection Program (PPP) loans ~~and $335~~as compared to $615 thousand of ~~interest income recognized due to~~fees during the ~~payoff~~same period of ~~nonaccrual loans.~~2020. The increase in average balances of interest-earning assets was primarily driven by the deployment of increased deposits.

Interest expense declined ~~$1.5 million,~~$731 thousand, or ~~52%~~42%, for the three months ended ~~March 31,~~September 30, 2021 when compared to the same period in 2020. The lower interest expense for the period is primarily attributable to a decline in market interest rates and was offset in part by increases in average deposit balances. The increase in deposit balances was due primarily to government stimulus programs.

Provision (Credit) for Loan Losses

A (credit) for loan losses of ($94) thousand was recognized for the three months ended September 30, 2021 as compared to a provision for loan losses of $541 thousand for the three months ended September 30, 2020. Net loan recoveries totaled $31 thousand for the three months ended September 30, 2021 compared to net loan charge offs of $614 thousand for the three months ended September 30, 2020. The (credit) for loan losses was primarily due to improving economic conditions. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

Noninterest Income and Expense

Noninterest income for the three months ended September 30, 2021 totaled $2.7 million as compared to $2.8 million for the three months ended September 30, 2020, a decrease of 4%. The decrease in noninterest income was primarily due to a decrease in gains on sale of residential loans held for sale as refinancing has slowed.

Noninterest expense for the three months ended September 30, 2021 totaled $8.9 million compared to $9.3 million recorded for the three months ended September 30, 2020, a decrease of 4%. The decrease is primarily due to a reduction in salaries and benefits primarily due to a decline in the number of employees, offset in part by normal increases in salaries and other benefits, including health insurance. The efficiency ratio was 51.4% for the third quarter of 2021 as compared to 54.8% in the third quarter of 2020.

Income Taxes

Income tax expense for the three months ended September 30, 2021 totaled $1.8 million compared to $1.5 million recorded for the three months ended September 30, 2020. The effective tax rate was 21% and 20% for the three months ended September 30, 2021 and 2020, respectively. The lower than expected tax rate in 2021 and 2020 was due primarily to tax-exempt interest income and New Markets Tax Credits.

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Income Statement Review for the Nine Months ended September 30, 2021 and 2020

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2021 and 2020:

AVERAGE BALANCES AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2021							2020

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	113,448	$	6,281		7.38	%	$	128,638	$	4,455		4.62	%
Agricultural		96,173		2,999		4.16	%		109,038		4,601		5.63	%
Real estate		918,384		26,845		3.90	%		878,105		28,252		4.29	%
Consumer and other		14,768		516		4.66	%		18,113		713		5.25	%

Total loans (including fees)		1,142,773		36,641		4.28	%		1,133,894		38,021		4.47	%

Investment securities
Taxable		533,161		6,457		1.61	%		328,081		5,725		2.33	%
Tax-exempt ⁽²⁾		156,969		3,028		2.57	%		170,413		3,488		2.73	%
Total investment securities		690,130		9,485		1.83	%		498,494		9,213		2.46	%

Interest-bearing deposits with banks and federal funds sold		156,323		515		0.44	%		122,131		889		0.97	%

Total interest-earning assets		1,989,226	$	46,641		3.13	%		1,754,519	$	48,123		3.66	%

Noninterest-earning assets		76,434							82,377

TOTAL ASSETS	$	2,065,660						$	1,836,896

(1) Average loan balances include 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%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2021								2020

	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	$	1,198,914	$	1,435			0.16	%	$	1,003,378	$	2,668			0.35	%
Time deposits		239,691		1,976			1.10	%		277,691		3,599			1.73	%
Total deposits		1,438,605		3,411			0.32	%		1,281,069		6,267			0.65	%
Other borrowed funds		39,927		106			0.35	%		46,164		238			0.69	%

Total interest-bearing liabilities		1,478,532		3,517			0.32	%		1,327,233		6,505			0.65	%

Noninterest-bearing liabilities
Noninterest-bearing checking		367,698								301,434
Other liabilities		9,880								11,941

Stockholders' equity		209,550								196,288

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,065,660							$	1,836,896


Net interest income (FTE)⁽³⁾			$	43,124			2.89	%			$	41,618			3.16	%

Spread Analysis (FTE)
Interest income/average assets	$	46,641		3.01	%				$	48,123		3.49	%
Interest expense/average assets	$	3,517		0.23	%				$	6,505		0.47	%
Net interest income/average assets	$	43,124		2.78	%				$	41,618		3.02	%

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Net Interest Income

For the nine months ended September 30, 2021 and 2020, the Company's net interest margin adjusted for tax exempt income was 2.89% and 3.16%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2021 totaled $42.5 million compared to $40.9 million for the nine months ended September 30, 2020.

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For the nine months ended September 30, 2021, interest income declined $1.4 million, or 3%, when compared to the same period in 2020. The decrease is primarily due to a reduction in interest rates, offset in part by $3.9 million of fees recognized in commercial loan interest income from PPP loans during the nine months ended September 30, 2021 as compared to $1.2 million of fees recognized during the same period of 2020.

Interest expense declined $3.0 million, or 46%, for the nine months ended September 30, 2021 when compared to the same period in 2020. The lower interest expense for the period is primarily attributable to a decline in market interest rates and offset in part by increases in average deposit balances.

Provision (credit) for Loan Losses

A (credit) for loan losses of ($~~426)~~540) thousand was recognized for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 as compared to a provision for loan losses of ~~$2.3~~$4.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Net loan recoveries totaled ~~$118~~$155 thousand for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to net loan charge offs of ~~$26 thousand~~$1.1 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. The (credit) for loan losses in 2021 was primarily due to loan recoveries and a reduction in a specific ~~reserve due to the payoff of an impaired loan and lower loan balances from year-end.~~reserve. The provision for loan losses in 2020 was primarily due to uncertainties associated with the ~~onset of~~economic slow-down created by the COVID-19 pandemic.

Noninterest Income and Expense

Noninterest income for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 totaled ~~$2.5~~$7.8 million as compared to ~~$2.6~~$7.9 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, a decrease of 5%1%. Wealth management income increased, but was offset by a decrease in securities gains when comparing periods. The ~~lower level of noninterest~~increase in wealth management income was primarily ~~due~~related to ~~securities gains recognized~~growth in the ~~first quarter of 2020 with no corresponding gains for the same period in 2021. The lower security gains were partially offset~~assets under management, fueled by ~~an increase in gains on sale of residential loans held for sale from increased refinancing in~~ a ~~low interest rate environment.~~favorable equity market and new account relationships.

Noninterest expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 totaled ~~$9.0~~$27.3 million compared to ~~$9.1~~$27.4 million recorded for the ~~three~~nine months ended ~~March 31, 2020, a~~September 30, 2020. Most of the decrease ~~of 1%. The decrease is primarily due~~was related to ~~lower~~ salaries and employee benefits ~~and was partially offset by an increase in data processing costs. The decrease in salaries and employee benefits is~~primarily due to a reduction in the number of ~~personnel~~employees and increased deferred loan costs associated with PPP loan volume, offset in part by normal ~~salary~~increases in salaries and ~~benefit increases.~~other benefits, including health insurance. This decrease was offset by an increase in FDIC insurance assessments and data processing costs. The efficiency ratio was ~~55.7%~~54.3% and 56.3% for the ~~first quarter of~~nine months ended September 30, 2021 ~~as compared to 57.7% in the first quarter of 2020.~~and 2020, respectively.

Income Taxes

Income tax expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 totaled ~~$1.6~~$4.9 million compared to ~~$756 thousand~~$3.2 million recorded for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. The effective tax rate was 21% and ~~18%~~19% for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively. The lower than expected tax rate in 2021 and 2020 was due primarily to tax-exempt interest income and New Markets Tax Credits.

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Balance Sheet Review

As of ~~March 31,~~September 30, 2021, total assets were $2.1 billion, a ~~$124.2~~$120.7 million increase compared to December 31, 2020. ~~The~~This increase in assets is primarily due to investment securities ~~PPP~~ and ~~commercial real estate loans, and growth in interest-bearing deposits in financial institutions. This increase in assets~~ was funded by growth in our deposits due in part to federal government stimulus programs and a lack of other desirable fixed income alternatives for our customers.

Investment Portfolio

The investment portfolio totaled ~~$672.3~~$765.4 million as of ~~March 31,~~September 30, 2021, an increase of ~~$75.3~~$168.4 million from the December 31, 2020 balance of $597.0 million. The increase in securities available-for-sale is primarily due to purchases of treasuries and ~~mortgage-backed securities~~municipals as deposit growth ~~was greater than~~exceeded loan growth.

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of ~~March 31,~~September 30, 2021, gross unrealized losses of ~~$4.1~~$3.1 million, are considered to be temporary in nature due to the interest rate environment 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 expects full principal and interest to be collected. Therefore, the Company does not consider these investments to have other-than-temporary impairment as of ~~March 31,~~September 30, 2021.

At ~~March 31,~~September 30, 2021, the Company’s investment securities portfolio included securities issued by ~~296~~287 government municipalities and agencies located within 2627 states with a fair value of ~~$262.5~~$276.7 million. At December 31, 2020, the Company’s investment securities portfolio included securities issued by 279 government municipalities and agencies located within 24 states with a fair value of $251.6 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. Storm Lake, Iowa, general obligation bonds with a fair value of ~~$8.1~~$7.8 million (approximately ~~3.1%~~2.8% 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 ~~March 31,~~September 30, 2021; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the city of Storm Lake.

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.

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The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of ~~March 31,~~September 30, 2021 and December 31, 2020 identifying the state in which the issuing government municipality or agency operates (in thousands):

	2021				2020				2021				2020
			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	$	71,608	$	72,697	$	69,943	$	72,442	$	71,457	$	73,002	$	69,943	$	72,442
Nebraska		15,015		14,899		15,019		15,446		19,635		19,671		15,019		15,446
Texas		12,251		12,613		11,253		11,927		14,810		15,196		11,253		11,927
Washington		10,199		10,407		7,329		7,702		11,038		11,293		7,329		7,702
Oregon		6,786		6,919		6,783		7,047
Other (2021: 15 states; 2020: 13 states)		29,931		30,188		25,231		25,942
Other (2021: 16 states; 2020: 14 states)										41,670		42,217		32,014		32,989

Total general obligation bonds	$	145,790	$	147,723	$	135,558	$	140,506	$	158,610	$	161,379	$	135,558	$	140,506

Revenue bonds:
Iowa	$	66,182	$	66,943	$	65,461	$	67,048	$	63,282	$	64,240	$	65,461	$	67,048
Texas		10,560		10,814		8,625		9,189		11,910		12,260		8,625		9,189
Nebraska		8,547		8,413		6,588		6,753		8,537		8,507		6,588		6,753
Washington		5,543		5,471		5,548		5,642
Other (2021: 17 states; 2020: 16 states)		22,634		23,115		21,658		22,446
Other (2021: 19 states; 2020: 17 states)										29,580		30,266		27,206		28,088

Total revenue bonds	$	113,466	$	114,756	$	107,880	$	111,078	$	113,309	$	115,273	$	107,880	$	111,078

Total obligations of states and political subdivisions	$	259,256	$	262,479	$	243,438	$	251,584	$	271,919	$	276,652	$	243,438	$	251,584

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As of ~~March 31,~~September 30, 2021 and December 31, 2020, 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 6 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 (in thousands):

	2021				2020				2021				2020
			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	$	33,297	$	33,573	$	32,654	$	33,380	$	31,282	$	31,826	$	32,654	$	33,380
Water		21,903		22,303		21,934		22,660		20,677		21,143		21,934		22,660
College and universities, primarily dormitory revenues		12,921		13,161		11,332		11,810		15,013		15,347		11,332		11,810
Sewer		11,293		11,370		11,302		11,724		14,258		14,435		11,302		11,724
Leases		8,998		9,122		7,050		7,253		7,788		7,944		7,050		7,253
Electric power & light revenues		7,068		7,200		7,075		7,279		6,134		6,305		7,075		7,279
Other		17,986		18,027		16,533		16,972		18,157		18,273		16,533		16,972

Total revenue bonds by revenue source	$	113,466	$	114,756	$	107,880	$	111,078	$	113,309	$	115,273	$	107,880	$	111,078

Loan Portfolio

The loan portfolio, net of the allowance for loan losses, totaled ~~$1.12~~$1.126 billion and ~~$1.13~~$1.130 billion as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The decrease ~~in loans~~ was primarily due to ~~the agriculture loan portfolios,~~a reduction in PPP and construction loans, offset in part by ~~growth~~an increase in the commercial real estate and 1-4 family residential loan portfolio. ~~The Company continues to issue government guaranteed loans under the Paycheck Protection Program (“PPP”).~~ The PPP loans totaled ~~$59.2~~$14.8 million and $50.9 million as of ~~March~~September 30, 2021 and December 31, ~~2021.~~2020, respectively. The PPP loans bear an interest rate of 1.0% and generally have a two to five year maturity. The Small Business Administration has provided fees to financial institutions to originate the PPP loans with recognition of the fees over the life of the loans. The Company has ~~$2.9 million~~$652 thousand of unrecognized net PPP loan fees ~~and costs~~ as of ~~March 31,~~September 30, 2021. Management expects ~~most of~~ these loans to be forgiven and the net fees ~~and costs~~ associated with these loans will be accelerated into interest income.

Deposits

Deposits totaled $1.84 billion and $1.72 billion as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. The change in deposits since December 31, 2020 was ~~primarily~~ due to increases ~~in account balances~~across all types except certificates of ~~retail, commercial, and public funds.~~deposits which continue to decline due to the current rate environment. Balance fluctuations were primarily due to government stimulus programs and normal customer activity, as customers’ liquidity needs vary at any given time. 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 guidelines. Deposit levels may be impacted in future periods by additional government stimulus or distressed economic conditions.

Dividends Payable

There was $2.4 million of dividends payable as of September 30, 2021 as compared to no dividends payable as of September 30, 2020. For the quarter ended September 30, 2021 the dividend was declared on August 17, 2021 and will be paid in the fourth quarter of 2021. For the quarter ended September 30, 2020 the dividend was not declared until October 14, 2020 and was paid in the fourth quarter of 2020. In the past, dividends were declared in one quarter and then paid in the subsequent quarter, we returned to this practice in the third quarter of 2021.

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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, 2020.

Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which on ~~March 31,~~September 30, 2021 totaled ~~$1.12~~$1.126 billion compared to ~~$1.13~~$1.130 billion as of December 31, 2020. Net loans comprise ~~53%~~54% of total assets as of ~~March 31,~~September 30, 2021. The 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 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 ~~1.18%~~1.11% at ~~March 31,~~September 30, 2021, as compared to 1.33% at December 31, 2020. The decrease in the level of problem loans is due primarily to payoffs of nonaccrual ~~loans in the first quarter of 2021.~~loans. The Company’s level of problem loans as a percentage of total loans at ~~March 31,~~September 30, 2021 of ~~1.18%~~1.11% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of ~~December 31, 2020,~~June 30, 2021, of ~~0.66%~~0.60%, most recent available.

Impaired loans totaled ~~$13.4~~$12.5 million as of ~~March 31,~~September 30, 2021 and have decreased ~~$1.9~~$2.8 million as compared to the impaired loans of $15.3 million as of December 31, 2020. The decrease is primarily due to payoffs of nonaccrual ~~loans in the first quarter of 2021.~~loans.

The Company had TDRs of ~~$10.5~~$10.6 million as of ~~March 31,~~September 30, 2021 and $11.3 million as of December 31, 2020, all of which were included in impaired and nonaccrual loans.

TDRs 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 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 TDRs,” 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. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID-19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement provided 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.

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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. No additional specific reserve was provided for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020. The Company had no charge-offs and $262 thousand of recoveries for TDR’s for the three and ~~$16~~nine months ended September 30, 2021, respectively. The Company had $15 thousand and $31 thousand of charge-offs for TDR’s for the three and nine months ended ~~March 31, 2021 and~~September 30, 2020, respectively. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in 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 continues to be a strong reason that the credit should not be placed on nonaccrual. As of ~~March 31,~~September 30, 2021, nonaccrual loans totaled ~~$13.4~~$12.5 million and there were $5$84 thousand of loans past due 90 days and still accruing. This compares to nonaccrual loans of $15.3 million and loans past due 90 days and still accruing totaled $39 thousand as of December 31, 2020. The decrease in nonaccrual loans is due primarily to payoffs of nonaccrual loans. Real estate owned totaled ~~$227~~$768 thousand and $218 thousand as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

The agricultural real estate and agricultural operating loan portfolio classifications remain elevated. The watch and special mention loans in these categories totaled ~~$41.9~~$35.9 million as of ~~March 31,~~September 30, 2021 as compared to $54.1 million as of December 31, 2020. This decrease is generally due to payments received from various agricultural customers. The substandard and impaired loans in these categories totaled ~~$8.7~~$7.3 million and $9.5 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

The watch and special mention loans classified as commercial real estate totaled ~~$107.0~~$103.9 million as of ~~March 31,~~September 30, 2021 as compared to $111.9 million as of December 31, 2020. The substandard and impaired commercial real estate loans totaled ~~$37.7~~$34.2 million and $37.9 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

The allowance for loan losses as a percentage of outstanding loans as of ~~March 31,~~September 30, 2021 was ~~1.48%~~1.47%, as compared to 1.50% at December 31, 2020. The allowance for loan losses totaled ~~$16.9~~$16.8 million and $17.2 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. PPP loans are government guaranteed and the impact on the allowance for loan loss was not significant.

The allowance for loan losses is management’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 decrease in the allowance for loan losses is mainly due to net loan recoveries and a reduction in a specific reserve, ~~and lower~~offset in part by higher loan balances from ~~year-end.~~year-end excluding PPP loans. Additional increases in the allowance for loan losses are possible 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 worsen 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’ 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.

As of ~~March 31,~~September 30, 2021, 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 discussion will cover the following topics:

●	Review of the Company’s Current Liquidity Sources

●	Review of Statements of Cash Flows

●	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 and federal funds sold as of ~~March 31,~~September 30, 2021 and December 31, 2020 totaled ~~$250.7~~$148.4 million and $191.5 million, 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 ~~March 31,~~September 30, 2021 include outstanding lines of credit with the FHLB of Des Moines, Iowa of ~~$226.2~~$306.6 million, with $3.0 million of outstanding FHLB advances. The Company also has a $4 million line of credit with an unaffiliated bank, with no outstanding borrowings as of September 30, 2021. Federal funds borrowing capacity at correspondent banks was ~~$108.1~~$107.9 million, with no outstanding federal fund purchase balances as of ~~March 31,~~September 30, 2021. The Company had securities sold under agreements to repurchase totaling ~~$41.4~~$36.3 million as of ~~March 31,~~September 30, 2021.

Total investments as of ~~March 31,~~September 30, 2021 were ~~$672.3~~$765.4 million compared to $597.0 million as of December 31, 2020. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of ~~March 31,~~September 30, 2021.

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 ~~three~~nine months ended ~~March 31,~~September 30, 2021 totaled ~~$9.4~~$23.7 million compared to ~~$11.7~~$21.3 million for the ~~three~~nine months ended ~~March 31, 2020, a decrease~~September 30, 2020. The increase of ~~$2.3 million.~~$2.4 million in cash provided by operating activities was primarily due to an increase in net income.

Net cash used in investing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 was ~~$138.9~~$134.7 million compared to ~~$68.3~~$178.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. The ~~increase~~decrease of ~~$70.6~~$43.5 million in cash used in investing activities was primarily due to ~~purchases of investments and an increase~~a decrease in interest-bearing deposits in financial institutions and ~~federal funds sold,~~loans, offset in part by ~~a decrease~~an increase in ~~loans.~~purchases of investments.

Net cash provided by financing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 totaled ~~$128.2~~$111.7 million compared to ~~$54.1~~$145.0 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. The ~~increase~~decrease in cash provided by financing activities of ~~$74.1~~$33.3 million was primarily due to ana lower increase in ~~deposits.~~deposits between periods. As of ~~March 31,~~September 30, 2021, 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 ~~$2.4~~$7.1 million and ~~$2.3~~$7.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, 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 ~~$2.4~~$2.1 million as of ~~March 31,~~September 30, 2021.

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

On April 16, 2021, the Company entered into a commitment with a contractor to build a new branch in West Des Moines, Iowa for $1.7 million. 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 ~~March 31,~~September 30, 2021 that are of concern to management.

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Capital Resources

The Company’s total stockholders’ equity as of ~~March 31,~~September 30, 2021 totaled ~~$204.4~~$210.4 million and was ~~$5.1 million lower~~$893 thousand more than the $209.5 million recorded as of December 31, 2020. The ~~decrease~~increase in stockholders’ equity was primarily ~~due a decrease~~the result of the retention of net income in ~~other comprehensive income and~~excess of dividends, ~~declared,~~ offset in part by ~~net~~a reduction in accumulated other comprehensive income. The decrease in other comprehensive income is created by higher market interest rates compared to December 31, 2020, which resulted in lower fair values in the securities available-for-sale portfolio. At ~~March 31,~~September 30, 2021 and December 31, 2020, stockholders’ equity as a percentage of total assets was ~~9.7%~~10.0% and 10.6%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of ~~March 31,~~September 30, 2021.

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.

~~Item 3.~~

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 2021 changed significantly when compared to 2020. 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.

4652

Table of Contents

~~Item 4.~~

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.

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

	Not applicable

Item 1.A.	Risk Factors

	Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the SEC on March 12, 2021.

~~Item 1.~~

~~Legal Proceedings~~

~~Not applicable~~

Table of Contents

~~Item 1.A.~~

~~Risk Factors~~

~~Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the SEC on March 12, 2021.~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

In April, 2021, 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, 2021, there were 75,397 shares remaining to be purchased under the plan.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, 2021.

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, 2021 to July 31, 2021

100,000

August 1, 2021 to August 31, 2021

100,000

September 1, 2021 to September 30, 2021

24,603

23.19

24,603

75,397

Total

24,603

Item 3.	Defaults Upon Senior Securities

	Not applicable

Item 4.	Mine Safety Disclosures

	Not applicable

Item 5.	Other information

	Not applicable

~~Not applicable~~

Table of Contents

~~Item 4.~~

~~Mine Safety Disclosures~~

~~Not applicable~~

~~Item 5.~~

~~Other information~~

~~Not applicable~~

Item 6.

Exhibits


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.

~~Table of Contents~~


101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (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)

104	Cover page Interactive Data File (formatted as 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.

4855

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:	~~May 4,~~ November 8, 2021	By: /s/ John P. Nelson

		John P. Nelson, Chief Executive Officer and President

		By: /s/ John L. Pierschbacher

		John L. Pierschbacher, Chief Financial Officer

4956

☒ [Mark One]
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934

	For the transition period from ____________ to ____________

Iowa	42-1039071
(State of Incorporation)	(I. R. S. Employer
	Identification Number)

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

					September 30,		December 31,
					2021		2020
	March 31,		December 31,		(unaudited)		(audited)
ASSETS	2021		2020

Cash and due from banks	$	23,557	$	24,819	$	25,607	$	24,819
Interest-bearing deposits in financial institutions and federal funds sold		227,159		166,704		122,786		166,704
Securities available-for-sale		672,344		596,999		765,423		596,999
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost		3,427		3,148		3,424		3,148
Loans receivable, net		1,120,211		1,129,505		1,126,059		1,129,505
Loans held for sale		598		1,621		378		1,621
Bank premises and equipment, net		17,049		17,340		16,929		17,340
Accrued income receivable		10,014		11,143		11,178		11,143
Other real estate owned		227		218
Bank-owned life insurance		2,933		2,916		2,968		2,916
Deferred income taxes, net		1,134		0		725		0
Intangible assets, net		2,973		3,133		2,654		3,133
Goodwill		12,424		12,424		12,424		12,424
Other assets		5,786		5,678		5,841		5,896

Total assets	$	2,099,836	$	1,975,648	$	2,096,396	$	1,975,648

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Noninterest-bearing checking	$	368,971	$	349,500	$	373,883	$	349,500
Interest-bearing checking		583,803		528,796		585,056		528,796
Savings and money market		643,335		581,224		654,345		581,224
Time, $250 and over		54,860		60,019		44,641		60,019
Other time		191,786		196,907		178,783		196,907
Total deposits		1,842,755		1,716,446		1,836,708		1,716,446

Securities sold under agreements to repurchase		41,421		37,293		36,277		37,293
FHLB advances		3,000		3,000		3,000		3,000
Dividends payable						2,366		0
Deferred income taxes, net		0		1,731		0		1,731
Accrued expenses and other liabilities		8,307		7,691		7,665		7,691
Total liabilities		1,895,483		1,766,161		1,886,016		1,766,161

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,122,747 as of March 31, 2021 and December 31, 2020		18,245		18,245
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,098,144 and 9,122,747 as of September 30, 2021 and December 31, 2020, respectively						18,196		18,245
Additional paid-in capital		17,002		17,002		16,480		17,002
Retained earnings		161,959		158,217		167,443		158,217
Accumulated other comprehensive income		7,147		16,023		8,261		16,023
Total stockholders' equity		204,353		209,487		210,380		209,487

Total liabilities and stockholders' equity	$	2,099,836	$	1,975,648	$	2,096,396	$	1,975,648

~~INDEX~~

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at ~~March 31,~~September 30, 2021 and December 31, 2020	3

	Consolidated Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020	5

	Consolidated Statements of Stockholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020	6

	Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2730

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4652

Item 4.	Controls and Procedures	4753

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	4753

Item 1.A.	Risk Factors	4753

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4754

Item 3.	Defaults Upon Senior Securities	4754

Item 4.	Mine Safety Disclosures	4754

Item 5.	Other Information	4754

Item 6.	Exhibits	4755

	Signatures	4956

													Accumulated						Common Stock						Additional Paid-in			Retained			Accumulated Other Comprehensive Income, Net of			Total Stockholders'
													Other						Shares			Amount			Capital			Earnings			Taxes			Equity
													Comprehensive			Total
Balance, June 30, 2020																				9,122,747		$	18,245		$	17,002		$	151,910		$	13,993		$	201,150
Net income																				-			0			0			5,672			0			5,672
Other comprehensive income																				-			0			0			0			1,496			1,496
Cash dividends declared, $0.25 per share																				-			0			0			(2,281	)		0			(2,281	)
Balance, September 30, 2020																				9,122,747		$	18,245		$	17,002		$	155,301		$	15,489		$	206,037
	Common Stock						Additional Paid-			Retained			Income, Net of			Stockholders'
	Shares			Amount			in Capital			Earnings			Taxes			Equity

Balance, December 31, 2019		9,222,747		$	18,445		$	18,795		$	146,224		$	4,115		$	187,579
Net income		-			0			0			3,555			0			3,555
Other comprehensive income		-			0			0			0			363			363
Retirement of stock		(34,153	)		(68	)		(639	)		0			0			(707	)
Cash dividends declared, $0.25 per share		-			0			0			(2,297	)		0			(2,297	)
Balance, March 31, 2020		9,188,594		$	18,377		$	18,156		$	147,482		$	4,478		$	188,493


Balance, December 31, 2020		9,122,747		$	18,245		$	17,002		$	158,217		$	16,023		$	209,487
Balance, June 30, 2021																				9,122,747		$	18,245		$	17,002		$	165,466		$	9,409		$	210,122
Net income		-			0			0			6,023			0			6,023			-			0			0			6,714			0			6,714
Other comprehensive (loss)		-			0			0			0			(8,876	)		(8,876	)		-			0			0			0			(1,148	)		(1,148	)
Cash dividends declared, $0.25 per share		-			0			0			(2,281	)		0			(2,281	)
Balance, March 31, 2021		9,122,747		$	18,245		$	17,002		$	161,959		$	7,147		$	204,353
Repurchase and retirement of stock																				(24,603	)		(49	)		(522	)		0			0			(571	)
Cash dividends declared, $0.52 per share																				-			0			0			(4,737	)		0			(4,737	)
Balance, September 30, 2021																				9,098,144		$	18,196		$	16,480		$	167,443		$	8,261		$	210,380

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

2021

U.S. government treasuries	$	45,701	$	45,701	$	0	$	0	$	138,035	$	138,035	$	0	$	0
U.S. government agencies		109,101		0		109,101		0		113,568		0		113,568		0
U.S. government mortgage-backed securities		181,697		0		181,697		0		158,766		0		158,766		0
State and political subdivisions		262,479		0		262,479		0		276,652		0		276,652		0
Corporate bonds		73,366		0		73,366		0		78,402		0		78,402		0

	$	672,344	$	45,701	$	626,643	$	0	$	765,423	$	138,035	$	627,388	$	0

2020

U.S. government treasuries	$	12,053	$	12,053	$	0	$	0	$	12,053	$	12,053	$	0	$	0
U.S. government agencies		111,199		0		111,199		0		111,199		0		111,199		0
U.S. government mortgage-backed securities		150,195		0		150,195		0		150,195		0		150,195		0
State and political subdivisions		251,584		0		251,584		0		251,584		0		251,584		0
Corporate bonds		71,968		0		71,968		0		71,968		0		71,968		0

	$	596,999	$	12,053	$	584,946	$	0	$	596,999	$	12,053	$	584,946	$	0

2021:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	45,829	$	285	$	(413	)	$	45,701
U.S. government agencies		106,288		3,237		(424	)		109,101
U.S. government mortgage-backed securities		181,313		2,225		(1,841	)		181,697
State and political subdivisions		259,256		4,535		(1,312	)		262,479
Corporate bonds		70,128		3,329		(91	)		73,366
	$	662,814	$	13,611	$	(4,081	)	$	672,344

	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020
Proceeds from sales of securities available-for-sale	$	0	$	3,385	$	622	$	0	$	622	$	5,463
Gross realized gains on securities available-for-sale		0		386		24		0		24		430
Gross realized losses on securities available-for-sale		0		0		0		0		0		0

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
2021:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	36,924	$	(413	)	$	0	$	0		$	36,924	$	(413	)	$	102,182	$	(716	)	$	0	$	0		$	102,182	$	(716	)
U.S. government agencies		20,716		(418	)		875		(6	)		21,591		(424	)		29,722		(436	)		0		0			29,722		(436	)
U.S. government mortgage-backed securities		113,380		(1,841	)		0		0			113,380		(1,841	)		100,746		(1,177	)		0		0			100,746		(1,177	)
State and political subdivisions		73,842		(1,309	)		503		(3	)		74,345		(1,312	)		67,527		(672	)		896		(23	)		68,423		(695	)
Corporate bonds		3,337		(91	)		0		0			3,337		(91	)		9,378		(97	)		0		0			9,378		(97	)
	$	248,199	$	(4,072	)	$	1,378	$	(9	)	$	249,577	$	(4,081	)	$	309,555	$	(3,098	)	$	896	$	(23	)	$	310,451	$	(3,121	)

	Three Months Ended March 31, 2020
			1-4 Family
	Construction		Residential		Commercial			Agricultural						Consumer
	Real Estate		Real Estate		Real Estate			Real Estate		Commercial		Agricultural		and Other			Total
Balance, December 31, 2019	$	672	$	2,122	$	5,362		$	1,326	$	1,458	$	1,478	$	201		$	12,619
Provision for loan losses		80		214		1,220			237		212		337		16			2,316
Recoveries of loans charged-off		1		0		1			0		2		0		3			7
Loans charged-off		0		0		(31	)		0		0		0		(2	)		(33	)
Balance, March 31, 2020	$	753	$	2,336	$	6,552		$	1,563	$	1,672	$	1,815	$	218		$	14,909

	2021		2020		2021		2020

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Interest	$	1,576	$	3,110	$	3,987	$	7,134
Income taxes		70		0		4,327		3,987

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned	$	10	$	0	$	560	$	11