UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

OR

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

For the transition period from _________ to __________

Commission File Number: 001-36808

COUNTY BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

Wisconsin	39-1850431
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2400 South 44th Street Manitowoc, WI	54221
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (920) 686-9998

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	ICBK	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 6, 2021, the registrant had 6,026,748 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	53
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59
Signatures		61

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2021 and December 31, 2020

	June 30, 2021			December 31, 2020
	(unaudited)
	(dollars in thousands except per share data)
ASSETS
Cash and cash equivalents	$	72,329		$	19,084
Interest earning cash at other financial institutions		416			416
Securities available-for-sale, at fair value		349,334			352,854
FHLB Stock		5,485			5,758
Loans held for sale		15,805			35,976
Loans, net of allowance for loan losses of $11,466  as of June 30, 2021;    $14,808 as of December 31, 2020		990,424			981,477
Premises and equipment, net		18,923			14,898
Loan servicing rights		19,478			18,396
Other real estate owned, net		914			1,077
Cash surrender value of bank owned life insurance		31,678			31,275
Core deposit intangible, net of accumulated amortization of $1,789 as    of June 30, 2021; $1,747 as of December 31, 2020		12			54
Accrued interest receivable and other assets		12,274			11,093
Total assets	$	1,517,072		$	1,472,358
LIABILITIES
Deposits:
Noninterest-bearing	$	158,880		$	163,202
Interest-bearing		976,846			877,624
Total deposits		1,135,726			1,040,826
Other borrowings		35,557			49,006
Advances from FHLB		88,000			129,000
Subordinated debentures		67,519			67,111
Deferred tax liability, net		2,951			2,302
Accrued interest payable and other liabilities		12,507			12,337
Total liabilities		1,342,260			1,300,582
SHAREHOLDERS' EQUITY
Preferred stock- $1,000 stated value; 15,000 shares authorized; 8,000 shares issued		8,000			8,000
Common stock - $0.01 par value; 50,000,000 authorized; 7,250,476 shares issued    and 6,026,748 shares outstanding as of June 30, 2021; 7,212,727 shares issued    and 6,197,965 shares outstanding as of December 31, 2020		29			29
Surplus		56,272			55,346
Retained earnings		127,992			118,712
Treasury stock, at cost; 1,223,728 shares at June 30, 2021; 1,014,762 shares at    December 31, 2020		(22,346	)		(17,606	)
Accumulated other comprehensive income		4,865			7,295
Total shareholders' equity		174,812			171,776
Total liabilities and shareholders' equity	$	1,517,072		$	1,472,358

See accompanying notes to unaudited consolidated financial statements.

3

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2021 and 2020

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020*			2021			2020*
	(dollars in thousands except per share data)
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	12,000		$	12,009		$	23,523		$	24,574
Taxable securities		2,205			1,283			4,092			2,565
Tax-exempt securities		261			162			508			168
Federal funds sold and other		71			111			129			336
Total interest and dividend income		14,537			13,565			28,252			27,643
INTEREST EXPENSE
Deposits		1,716			3,721			3,786			8,068
FHLB advances and other borrowed funds		277			343			598			587
Subordinated debentures		1,106			736			2,212			1,442
Total interest expense		3,099			4,800			6,596			10,097
Net interest income		11,438			8,765			21,656			17,546
Provision for (recovery of) loan losses		(4,278	)		1,142			(4,036	)		3,360
Net interest income after provision for loan losses		15,716			7,623			25,692			14,186
NON-INTEREST INCOME
Services charges		165			139			284			252
Crop insurance commission		291			229			593			458
Gain on sale of loans		1,873			1,045			3,552			1,588
Loan servicing fees, net		1,116			1,156			2,156			2,771
Gain (loss) on sale of securities		(1,453	)		570			(1,453	)		570
Other		259			362			832			582
Total non-interest income		2,251			3,501			5,964			6,221
NON-INTEREST EXPENSE
Employee compensation and benefits		6,426			4,594			12,008			9,854
Occupancy		293			305			572			659
Information processing		664			663			1,325			1,333
Professional fees		450			480			1,252			881
Writedown of other real estate owned		—			—			—			1,360
Goodwill impairment		—			—			—			5,038
Loss (gain) on sale of fixed assets		(1,075	)		(1	)		(1,081	)		349
Merger-related professional fees		385			—			385			—
Other		1,622			1,424			3,069			3,008
Total non-interest expense		8,765			7,465			17,530			22,482
Income (loss) before income taxes		9,202			3,659			14,126			(2,075	)
Income tax expense		2,459			926			3,455			379
NET INCOME (LOSS)	$	6,743		$	2,733		$	10,671		$	(2,454	)
Less: Cash dividends declared on preferred stock		(79	)		(99	)		(160	)		(207	)
NET INCOME (LOSS) ATTRIBUTABLE TO    COMMON SHAREHOLDERS	$	6,664		$	2,634		$	10,511		$	(2,661	)
NET INCOME (LOSS) PER SHARE:
Basic	$	1.08		$	0.40		$	1.70		$	(0.40	)
Diluted	$	1.07		$	0.40		$	1.69		$	(0.40	)
Dividends paid per share	$	0.10		$	0.07		$	0.20		$	0.14

*Amounts reclassed to current classifications from original presentation

See accompanying notes to unaudited consolidated financial statements.

4

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Months Ended June 30, 2021 and 2020

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
	(dollars in thousands)
Net income (loss)	$	6,743		$	2,733		$	10,671		$	(2,454	)
Other comprehensive income:
Unrealized gain (loss) on securities available-for-sale		4,322			5,685			(5,346	)		9,132
Income tax benefit (expense)		(1,176	)		(1,548	)		1,457			(2,487	)
Reclassification for realized losses (gains) on securities		1,453			(570	)		1,453			(570	)
Income tax expense (benefit)		(396	)		154			(396	)		154
Total other comprehensive income (loss) on securities     available-for-sale		4,203			3,721			(2,832	)		6,229
Unrealized gain (loss) on derivatives arising during the period		(186	)		(60	)		553			(1,254	)
Income tax benefit (expense)		51			17			(151	)		342
Total other comprehensive income (loss) on derivatives		(135	)		(43	)		402			(912	)
Total other comprehensive income (loss)		4,068			3,678			(2,430	)		5,317
Comprehensive income	$	10,811		$	6,411		$	8,241		$	2,863

See accompanying notes to unaudited consolidated financial statements.

5

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2021 and 2020

(Unaudited)

	Preferred Stock		Common Stock		Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total Shareholders' Equity
	(dollars in thousands except share data)
Balance at January 1, 2020	$	8,000	$	28	$	54,122	$	115,595		$	(5,030	)	$	1,798		$	174,513
Net loss		—		—		—		(5,188	)		—			—			(5,188	)
Other comprehensive income		—		—		—		—			—			1,639			1,639
Stock compensation expense		—		—		314		—			—			—			314
Cash dividends declared on common stock		—		—		—		(466	)		—			—			(466	)
Cash dividends declared on preferred stock		—		—		—		(108	)		—			—			(108	)
Treasury stock purchases (255,650 shares)		—		—		—		—			(5,853	)		—			(5,853	)
Proceeds from exercise of common stock       options (14,590 shares)		—		—		195		—			—			—			195
Balance at March 31, 2020	$	8,000	$	28	$	54,631	$	109,833		$	(10,883	)	$	3,437		$	165,046
Net income		—		—		—		2,733			—			—			2,733
Other comprehensive income		—		—		—		—			—			3,678			3,678
Stock compensation expense		—		—		182		—			—			—			182
Cash dividends declared on common stock		—		—		—		(455	)		—			—			(455	)
Cash dividends declared on preferred stock		—		—		—		(99	)		—			—			(99	)
Treasury stock purchases (127,280 shares)		—		—		—		—			(2,560	)		—			(2,560	)
Balance at June 30, 2020	$	8,000	$	28	$	54,813	$	112,012		$	(13,443	)	$	7,115		$	168,525
Balance at December 31, 2020	$	8,000	$	29	$	55,346	$	118,712		$	(17,606	)	$	7,295		$	171,776
Net Income		—		—		—		3,928			—			—			3,928
Other comprehensive loss		—		—		—		—			—			(6,498	)		(6,498	)
Stock compensation expense		—		—		273		—			—			—			273
Cash dividends declared on common stock		—		—		—		(620	)		—			—			(620	)
Cash dividends declared on preferred stock		—		—		—		(81	)		—			—			(81	)
Treasury stock purchases (117,020 shares)		—		—		—		—			(2,513	)		—			(2,513	)
Proceeds from exercise of common stock       options (6,206 shares)		—		—		72		—			—			—			72
Balance at March 31, 2021	$	8,000	$	29	$	55,691	$	121,939		$	(20,119	)	$	797		$	166,337
Net income		—		—		—		6,743			—			—			6,743
Other comprehensive income		—		—		—		—			—			4,068			4,068
Stock compensation expense		—		—		224		—			—			—			224
Cash dividends declared on common stock		—		—		—		(611	)		—			—			(611	)
Cash dividends declared on preferred stock		—		—		—		(79	)		—			—			(79	)
Treasury stock purchases (91,946 shares)		—		—		—		—			(2,227	)		—			(2,227	)
Proceeds from exercise of common stock       options (18,274 shares)		—		—		357		—			—			—			357
Balance at June 30, 2021	$	8,000	$	29	$	56,272	$	127,992		$	(22,346	)	$	4,865		$	174,812

See accompanying notes to unaudited consolidated financial statements

6

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2021 and 2020

(Unaudited)

	For the Six Months Ended
	June 30, 2021			June 30, 2020
	(dollars in thousands)
Cash flows from operating activities
Net income (loss)	$	10,671		$	(2,454	)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of premises and equipment		598			676
Amortization of core deposit intangible		42			100
Amortization of subordinated debentures discount		408			76
Impairment of goodwill		—			5,038
Provision for (recovery of) loan losses		(4,036	)		3,360
Realized loss (gain) on sales of securities available-for-sale		1,453			(570	)
Realized loss (gain) on sales of premises and equipment		(1,082	)		236
Realized loss on sales of other real estate owned		17			4
Writedown of other real estate owned		—			1,360
Increase in cash surrender value of bank owned life insurance		(403	)		(344	)
Deferred income tax expense (benefit)		1,710			(240	)
Stock compensation expense		497			496
Net amortization of securities		1,074			443
Net change in:
Accrued interest receivable and other assets		(1,181	)		(655	)
Loans held for sale		20,171			(9,696	)
Loan servicing rights		(1,082	)		(1,493	)
Accrued interest payable and other liabilities		573			(1,628	)
Net cash provided by (used in) operating activities		29,430			(5,291	)
Cash flows from investing activities
Proceeds from maturities, principal repayments, and call of securities available-for-sale		17,001			13,000
Purchases of securities available-for-sale		(53,754	)		(100,339	)
Proceeds from sales of securities available-for-sale		33,852			27,790
Purchase (redemption) of FHLB stock		273			(4,130	)
Purchase of bank owned life insurance		—			(10,000	)
Loan originations and principal collections, net		(5,271	)		(51,809	)
Proceeds from sales of premises and equipment		1,750			2,199
Purchases of premises and equipment		(5,291	)		(3,822	)
Proceeds from sales of other real estate owned		506			1,528
Net cash used in investing activities		(10,934	)		(125,583	)
Cash flows from financing activities
Net increase in demand and savings deposits		140,095			86,554
Net decrease in certificates of deposits		(45,195	)		(114,943	)
Net change in other borrowings		(13,449	)		101,054
Proceeds from FHLB advances		376,000			516,000
Repayment of FHLB advances		(417,000	)		(467,000	)
Payments to acquire treasury stock		(4,740	)		(8,413	)
Proceeds from issuance of subordinated debt		—			16,976
Proceeds from issuance of common stock		429			195
Dividends paid on common stock		(1,231	)		(921	)
Dividends paid on preferred stock		(160	)		(207	)
Net cash provided by financing activities		34,749			129,295
Net change in cash and cash equivalents		53,245			(1,579	)
Cash and cash equivalents, beginning of period		19,500			129,011
Cash and cash equivalents, end of period	$	72,745		$	127,432
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7,685		$	12,729
Income taxes	$	490		$	350
Noncash operating activities:
Change in accounting principle	$	—		$	2,484
Noncash investing activities:
Transfer from loans to other real estate owned	$	360		$	—
Loans charged off	$	—		$	144

See accompanying notes to unaudited consolidated financial statements.

7

County Bancorp, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – BASIS OF PRESENTATION

The unaudited consolidated financial statements of County Bancorp, Inc. (“we,” “us,” ”our,” or the “Company”) and its subsidiaries, including Investors Community Bank (the “Bank”), have been prepared, in the opinion of management, to reflect all adjustments necessary for a fair presentation of the financial position and results of operations as of and for the three and six months ended June 30, 2021.  The results of operations for the three and six months ended June 30, 2021 may not necessarily be indicative of the results to be expected for the year ending December 31, 2021, or for any other period.

Management of the Company is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.  Actual results could differ significantly from those estimates.

These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).  Certain information in footnote disclosure normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 12, 2021.

Merger Transaction

On June 22, 2021, we entered into an agreement and plan of merger (the “Merger Agreement”) with Nicolet Bankshares, Inc. (“Nicolet”), a Wisconsin corporation, pursuant to which the Company will merge with and into Nicolet (the “Merger”). Following the Merger, the Bank will merge with and into Nicolet National Bank, Nicolet’s wholly-owned bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand.  The Merger is contingent upon the approval of the Company’s and Nicolet’s shareholders, our regulators, and certain customary closing conditions.  Subject to our receipt of the required approvals, the Merger is expected to be completed in the fourth quarter of 2021.  For additional information on this proposed Merger, see Note 2 “Acquisition” to our consolidated financial statements.

New Accounting Pronouncements

On December 27, 2020, the Consolidated Appropriations Act (“CAA”), 2021, was signed into law which extended the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which expired on December 31, 2020.  The CAA included a $900.0 billion COVID-19 relief package that included an additional $284.5 billion in PPP funding.  In March 2021, President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion economic stimulus package that included cash payments to individuals, supplemental unemployment insurance, and modifications and expansion of the PPP.  In March 2021, President Biden also signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021. Section 4013 of the CARES Act was extended in the CAA and allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the Coronavirus Disease 2019 (COVID-19) pandemic.  The Company has elected to implement Section 4013, and at June 30, 2021, loan balances totaling $2.9 million were still participating in the payment deferral program and were not classified as troubled debt restructurings.

In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848).  The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.  The ASU was effective upon issuance on March 12, 2020 and can be applied through December 31, 2022. The Company is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  Entities should apply this amendment by a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company has engaged a third-party software consultant and is currently testing the model’s methodology in parallel to

8

current loss model calculations.  At this time, the effect this ASU will have on its consolidated financial statements is still being quantified as the Company ensures data, assumptions, and methods all comply with the requirements of ASU 2016-13.  In October 2019, the FASB voted to delay the effective date for the credit losses standard to January 2023 for certain entities, including SEC filers that qualify as smaller reporting companies and private companies.  As a smaller reporting company, the Company is eligible for the delay and will be deferring adoption.  Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.   

NOTE 2 – ACQUISITION

On June 22, 2021, the Company entered into the Merger Agreement with Nicolet Bankshares, Inc.  Inc.  Following the Merger, the Bank will merge with and into Nicolet National Bank, Nicolet’s wholly-owned bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand.  

Under the terms of the Merger Agreement, at the effective time of the Merger, the Company’s shareholders will have the right to receive for each share of the Company’s common stock, at the election of each holder and subject to proration, either $37.18 in cash or 0.48 shares of Nicolet common stock. County shareholder elections will be prorated to ensure the total consideration will consist of approximately 20% cash and approximately 80% common stock.

The Merger is contingent upon the approval of the Company’s and Nicolet’s shareholders, our and Nicolet’s regulators and certain customary closing conditions.  Subject to our receipt of the required approvals, the Merger is expected to be completed in the fourth quarter of 2021.  

 NOTE 3 – EARNINGS PER SHARE

Earnings per common share is computed using the two-class method.  Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period.  Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the dilutive effect of share-based compensation using the treasury stock method.

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(dollars in thousands)
Net income (loss) from continuing operations	$	6,743	$	2,733	$	10,671	$	(2,454	)
Less:  preferred stock dividends		79		99		160		207
Income (loss) available to common shareholders for basic earnings    per common share	$	6,664	$	2,634	$	10,511	$	(2,661	)
Weighted average number of common shares issued		7,242,997		7,198,901		7,230,746		7,190,923
Less: weighted average treasury shares		1,179,271		759,294		1,129,954		639,017
Plus: weighted average of participating restricted stock units		97,915		65,291		81,047		52,281
Weighted average number of common shares and participating    securities outstanding		6,161,641		6,504,898		6,181,839		6,604,187
Effect of dilutive options		46,438		28,511		41,952		39,548
Weighted average number of common shares outstanding    used to calculate diluted earnings per common share		6,208,079		6,533,409		6,223,791		6,643,735
Weighted average of anti-dilutive options		39,495		62,313		47,163		55,764

9

NOTE 4 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and fair value of securities available-for-sale as of June 30, 2021 and December 31, 2020 were as follows:

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(dollars in thousands)
June 30, 2021
U.S. government and agency securities	$	12,948	$	—	$	(107	)	$	12,841
Municipal securities		127,089		3,741		(826	)		130,004
Mortgage-backed securities		140,037		5,822		(805	)		145,054
Corporate bonds		45,000		242		(193	)		45,049
Asset-backed securities		16,215		172		(1	)		16,386
	$	341,289	$	9,977	$	(1,932	)	$	349,334
December 31, 2020
U.S. government and agency securities	$	14,745	$	—	$	(152	)	$	14,593
Municipal securities		149,203		4,736		(285	)		153,654
Mortgage-backed securities		127,804		7,872		(298	)		135,378
Corporate bonds		32,500		21		(10	)		32,511
Asset-backed securities		16,664		55		(1	)		16,718
	$	340,916	$	12,684	$	(746	)	$	352,854

The amortized cost and fair value of securities at June 30, 2021 and December 31, 2020, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(dollars in thousands)
June 30, 2021
Due in one year or less	$	—	$	—
Due from one to five years		—		—
Due from five to ten years		67,685		67,716
Due after ten years		117,352		120,178
Asset-backed securities		16,215		16,386
Mortgage-backed securities		140,037		145,054
	$	341,289	$	349,334
December 31, 2020
Due in one year or less	$	—	$	—
Due from one to five years		—		—
Due from five to ten years		55,024		55,120
Due after ten years		141,424		145,638
Asset-backed securities		16,664		16,718
Mortgage-backed securities		127,804		135,378
	$	340,916	$	352,854

Proceeds from the sale of available-for-sale securities were $33.9 million for the three and six months ended June 30, 2021, which resulted in a loss of $1.5 million.  For the three and six months ended June 30, 2020, proceeds from the sale of available-for-sale securities were $27.8 million which resulted in a gain of $0.6 million.

At June 30, 2021 and December 31, 2020, there were $32.5 million and $23.0 million, respectively, of securities pledged at the Federal Reserve Bank to secure municipal customer deposits.

Federal Home Loan Bank (FHLB) advances were secured by $5.5 million and $5.8 million FHLB stock at June 30, 2021 and December 31, 2020, respectively.

10

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temorarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2021 and December 31, 2020:

	Less Than 12 Months					12 Months or Greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)
June 30, 2021
U.S. government and agency securities	$	—	$	—		$	12,841	$	(107	)	$	12,841	$	(107	)
Municipal securities		58,747		(826	)		—		—			58,747		(826	)
Mortgage-backed securities		34,778		(805	)		—		—			34,778		(805	)
Corporate bonds		15,307		(193	)		—		—			15,307		(193	)
Asset-backed securities		1,496		(1	)		—		—			1,496		(1	)
	$	110,328	$	(1,825	)	$	12,841	$	(107	)	$	123,169	$	(1,932	)
December 31, 2020
U.S. government and agency securities	$	12,217	$	(134	)	$	2,376	$	(18	)	$	14,593	$	(152	)
Municipal securities		30,849		(285	)		—		—			30,849		(285	)
Mortgage-backed securities		7,781		(298	)		—		—			7,781		(298	)
Corporate bonds		7,990		(10	)		—		—			7,990		(10	)
Asset-backed securities		3,817		(1	)		—		—			3,817		(1	)
	$	62,654	$	(728	)	$	2,376	$	(18	)	$	65,030	$	(746	)

The unrealized losses on the investments at June 30, 2021 and December 31, 2020 were due to market conditions as well as normal fluctuations and pricing inefficiencies.  The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investment.  Because the Company does not intend to sell the investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2021 and December 31, 2020.

NOTE 5 – LOANS

The components of loans were as follows:  

	June 30,			December 31,
	2021			2020
	(dollars in thousands)
Agricultural loans	$	613,513		$	606,881
Commercial real estate loans		245,810			235,969
Commercial loans		107,469			115,087
Residential real estate loans		34,873			38,084
Installment and consumer other		225			264
Total gross loans		1,001,890			996,285
Allowance for loan losses		(11,466	)		(14,808	)
Net loans	$	990,424		$	981,477

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Net unamortized deferred fees totalling $0.3 million and deferred costs of $0.3 million as of June 30, 2021 and December 31, 2020, respectivley, are included in the total gross loans above.

Changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 and 2020 were as follows: 

	For the Three Months Ended June 30, 2021
	Beginning Balance		Provision for Loan Losses			Loans Charged Off			Loan Recoveries		Ending Balance
	(dollars in thousands)
Agricultural loans	$	11,527	$	(2,653	)	$	—		$	—	$	8,874
Commercial real estate loans		2,858		(1,651	)		—			612		1,819
Commercial loans		691		(176	)		—			50		565
Residential real estate loans		5		203			—			—		208
Installment and consumer other		1		(1	)		—			—		—
Total	$	15,082	$	(4,278	)	$	—		$	662	$	11,466
	For the Six Months Ended June 30, 2021
	Beginning Balance		Provision for Loan Losses			Loans Charged Off			Loan Recoveries		Ending Balance
	(dollars in thousands)
Agricultural loans	$	10,859	$	(1,985	)	$	—		$	—	$	8,874
Commercial real estate loans		3,139		(1,933	)		—			613		1,819
Commercial loans		805		(321	)		—			81		565
Residential real estate loans		5		203			—			—		208
Installment and consumer other		—		—			—			—		—
Total	$	14,808	$	(4,036	)	$	—		$	694	$	11,466
	For the Three Months Ended June 30, 2020
	Beginning Balance		Provision for Loan Losses			Loans Charged Off			Loan Recoveries		Ending Balance
	(dollars in thousands)
Agricultural loans	$	12,685	$	(38	)	$	—		$	23.00	$	12,670
Commercial real estate loans		2,577		1,281			—			1		3,859
Commercial loans		2,173		(75	)		(144	)		—		1,954
Residential real estate loans		112		(27	)		—			—		85
Installment and consumer other		—		1			—			—		1
Total	$	17,547	$	1,142		$	(144	)	$	24	$	18,569
	For the Six Months Ended June 30, 2020
	Beginning Balance		Provision for Loan Losses			Loans Charged Off			Loan Recoveries		Ending Balance
	(dollars in thousands)
Agricultural loans	$	11,737	$	910		$	—		$	23.00	$	12,670
Commercial real estate loans		1,913		1,884			—			62		3,859
Commercial loans		1,599		498			(144	)		1		1,954
Residential real estate loans		15		70			—			—		85
Installment and consumer other		3		(2	)		—			—		1
Total	$	15,267	$	3,360		$	(144	)	$	86	$	18,569

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The following tables present the balances in the allowance for loan losses and the recorded balance in loans by portfolio segment and based on impairment method as of  June 30, 2021 and December 31, 2020: 

	June 30, 2021
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(dollars in thousands)
Allowance for loan losses:
Agricultural loans	$	1,892	$	6,982	$	8,874
Commercial real estate loans		217		1,602		1,819
Commercial loans		74		491		565
Residential real estate loans		—		208		208
Installment and consumer other		—		—		—
Total ending allowance for loan losses		2,183		9,283		11,466
Loans:
Agricultural loans		37,377		576,136		613,513
Commercial real estate loans		2,722		243,088		245,810
Commercial loans		2,503		104,966		107,469
Residential real estate loans		—		34,873		34,873
Installment and consumer other		—		225		225
Total loans		42,602		959,288		1,001,890
Net loans	$	40,419	$	950,005	$	990,424
	December 31, 2020
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(dollars in thousands)
Allowance for loan losses:
Agricultural loans	$	3,504	$	7,355	$	10,859
Commercial real estate loans		672		2,467		3,139
Commercial loans		86		719		805
Residential real estate loans		—		5		5
Installment and consumer other		—		—		—
Total ending allowance for loan losses		4,262		10,546		14,808
Loans:
Agricultural loans		63,777		543,104		606,881
Commercial real estate loans		7,077		228,892		235,969
Commercial loans		2,818		112,269		115,087
Residential real estate loans		59		38,025		38,084
Installment and consumer other		—		264		264
Total loans		73,731		922,554		996,285
Net loans	$	69,469	$	912,008	$	981,477

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The following tables present loans individually evaluated for impairment by class of loans at June 30, 2021 and December 31, 2020:

	June 30, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(dollars in thousands)
With no related allowance:
Agricultural loans	$	7,300	$	6,904	$	—
Commercial real estate loans		—		—		—
Commercial loans		2,035		2,029		—
Residential real estate loans		—		—		—
	$	9,335	$	8,933	$	—
With an allowance recorded:
Agricultural loans	$	32,305	$	30,473	$	1,892
Commercial real estate loans		2,958		2,722		217
Commercial loans		503		474		74
Residential real estate loans		—		—		—
	$	35,766	$	33,669	$	2,183
Total	$	45,101	$	42,602	$	2,183
	December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(dollars in thousands)
With no related allowance:
Agricultural loans	$	20,245	$	20,120	$	—
Commercial real estate loans		288		288		—
Commercial loans		2,504		2,481		—
Residential real estate loans		61		59		—
	$	23,098	$	22,948	$	—
With an allowance recorded:
Agricultural loans	$	47,971	$	43,657	$	3,504
Commercial real estate loans		8,245		6,790		672
Commercial loans		357		336		86
Residential real estate loans		—		—		—
	$	56,573	$	50,783	$	4,262
Total	$	79,671	$	73,731	$	4,262

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The following table presents the aging of the recorded investment in past due loans at June 30, 2021 and December 31, 2020:

	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Loans Not Past Due		Total Loans
	(dollars in thousands)
June 30, 2021
Agricultural loans	$	384	$	348	$	4,840	$	5,572	$	607,941	$	613,513
Commercial real estate loans		—		—		—		—		245,810		245,810
Commercial loans		—		—		27		27		107,442		107,469
Residential real estate loans		—		—		—		—		34,873		34,873
Installment and consumer other		—		—		—		—		225		225
Total	$	384	$	348	$	4,867	$	5,599	$	996,291	$	1,001,890
December 31, 2020
Agricultural loans	$	47	$	—	$	5,041	$	5,088	$	601,793	$	606,881
Commercial real estate loans		82		—		4,283		4,365		231,604		235,969
Commercial loans		—		—		96		96		114,991		115,087
Residential real estate loans		4		—		—		4		38,080		38,084
Installment and consumer other		—		—		—		—		264		264
Total	$	133	$	—	$	9,420	$	9,553	$	986,732	$	996,285

The following table presents the recorded investment in nonaccrual loans by class of loan:

	June 30,		December 31,
	2021		2020
	(dollars in thousands)
Agricultural loans	$	27,986	$	35,067
Commercial real estate loans		1,756		6,093
Commercial loans		329		405
Residential real estate loans		—		59
Total	$	30,071	$	41,624

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The following tables present the average recorded investment and interest income recognized on impaired loans by portfolio segment for the three and six months ended June 30, 2021 and 2020:

	As of and for the Three Months Ended June 30, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Agricultural loans	$	39,605	$	37,377	$	1,892	$	45,936	$	103
Commercial real estate loans		2,958		2,722		217		4,898		36
Commercial loans		2,538		2,503		74		2,645		13
Residential real estate loans		—		—		—		29		—
Total	$	45,101	$	42,602	$	2,183	$	53,508	$	152
	As of and for the Six Months Ended June 30, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Agricultural loans	$	39,605	$	37,377	$	1,892	$	50,577	$	1,029
Commercial real estate loans		2,958		2,722		217		4,900		73
Commercial loans		2,538		2,503		74		2,661		53
Residential real estate loans		—		—		—		30		—
Total	$	45,101	$	42,602	$	2,183	$	58,168	$	1,155
	As of and for the Three Months Ended June 30, 2020
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Agricultural loans	$	62,268	$	58,895	$	3,826	$	59,565	$	1,060
Commercial real estate loans		9,420		9,351		2,471		6,496		115
Commercial loans		2,962		2,882		1,226		2,360		21
Residential real estate loans		—		60		—		60		—
Total	$	74,650	$	71,188	$	7,523	$	68,480	$	1,196
	As of and for the Six Months Ended June 30, 2020
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Agricultural loans	$	62,268	$	58,895	$	3,826	$	58,864	$	2,320
Commercial real estate loans		9,420		9,351		2,471		6,517		140
Commercial loans		2,962		2,882		1,226		2,372		69
Residential real estate loans		—		60		—		61		1
Total	$	74,650	$	71,188	$	7,523	$	67,814	$	2,530

Impaired loans include nonaccrual loans, troubled debt restructured loans, and loans that are 90 days or more past due and still accruing.  For nonaccrual loans included in impaired loans, the interest income that would have been recognized had those loans been performing in accordance with their original terms would have been approximately $0.2 million and $2.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $2.8 million for the six months ended June 30, 2021 and 2020, respectively.  

Troubled Debt Restructurings

The Company allocated approximately $1.8 million and $3.8 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at June 30, 2021 and December 31, 2020, respectively.  The Company had no

16

additional lending commitments at June 30, 2021 or December 31, 2020 to customers with outstanding loans that were classified as TDRs.

A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports reasonable assurance of repayment and there has been a satisfactory period of performance according to the modified terms of the loan.  Once this assurance is reached, the TDR is returned to accrual status.  The following table presents the TDRs and related allowance for loan losses by loan class at June 30, 2021 and December 31, 2020:

	Non-Accrual		Restructured and Accruing		Total		Allowance for Loan Losses Allocated
	(dollars in thousands)
June 30, 2021
Agricultural loans	$	21,379	$	4,784	$	26,163	$	1,595
Commercial real estate loans		1,756		966		2,722		217
Commercial loans		27		1,891		1,918		4
Total	$	23,162	$	7,641	$	30,803	$	1,816
December 31, 2020
Agricultural loans	$	27,223	$	15,690	$	42,913	$	3,494
Commercial real estate loans		1,810		984		2,794		315
Commercial loans		68		1,918		1,986		4
Total	$	29,101	$	18,592	$	47,693	$	3,813

 The following table provides the number of loans modified in a troubled debt restructuring investment by class for the three and six months ended June 30, 2021 and 2020:

	For the Three Months Ended
	June 30, 2021				June 30, 2020
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Agricultural loans		—	$	—		6	$	2,640
Total		—	$	—		6	$	2,640
	For the Six Months Ended
	June 30, 2021				June 30, 2020
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Agricultural loans		5	$	1,586		8	$	2,872
Total		5	$	1,586		8	$	2,872

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The following table provides the troubled debt restructurings for the three and six months ended June 30, 2021 and 2020 grouped by type of concession:

	For the Three Months Ended
	June 30, 2021				June 30, 2020
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
Agricultural loans
Payment concessions		—	$	—		1	$	231
Term concessions		—		—		—		435
Extension of interest-only payments		—		—		2		75
Capitalized interest		—		—		1		153
Combination of payment concessions and interest rate       concessions		—		—		2		1,746
Total		—	$	—		6	$	2,640
	For the Six Months Ended
	June 30, 2021				June 30, 2020
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
Agricultural loans
Payment concessions		—	$	—		1	$	231
Term concessions		—		—		1		484
Extension of interest-only payments		5		1,586		2		75
Capitalized interest		—		—		1		153
Combination of extension of term and interest rate      concessions		—		—		3		1,929
Total		5	$	1,586		8	$	2,872

No troubled debt restructurings defaulted within twelve months of the restructure date during the three and six months ended June 30, 2021 and June 30, 2020.

The CAA extended Section 4013 of the CARES Act which allows financial institutions to elect to suspend troubled debt restructuring accounting under certain circumstances when the temporary restructuring is related to the COVID-19 pandemic. The Company has elected to implement Section 4013, and the balance of those loans modified under Section 4103 was $2.9 million and $16.8 million at June 30, 2021 and December 31, 2020, respectively.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes agricultural, commercial, and commercial real estate loans individually by classifying the credits as to credit risk. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits with total exposure in excess of $300,000. The Company uses the following definitions for credit risk ratings:

Sound. Credits classified as sound show very good probability of ongoing ability to meet and/or exceed obligations.

Acceptable. Credits classified as acceptable show a good probability of ongoing ability to meet and/or exceed obligations.

Satisfactory. Credits classified as satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.

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Low Satisfactory.  Credits classified as low satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.  Low satisfactory credits may be newer or have a less established track record of financial performance, inconsistent earnings, or may be going through an expansion.

Watch. Credits classified as watch show some questionable probability of ongoing ability to meet and/or exceed obligations.

Special Mention. Credits classified as special mention show potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard – Performing.  Credits classified as substandard – performing generally have well-defined weaknesses. Collateral coverage is adequate, and the loans are not considered impaired.  Payments are being made and the loans are on accrual status. 

Substandard - Impaired. Credits classified as substandard-impaired generally have well-defined weaknesses that jeopardize the repayment of the debt. They have a distinct possibility that a loss will be sustained if the deficiencies are not corrected.  Loans are considered impaired.  Loans are either exhibiting signs of delinquency, are on non-accrual or are identified as a TDR. 

Doubtful. Credits classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable.

The Company categorizes residential real estate, installment and consumer other loans as satisfactory at the time of origination based on information obtained as to the ability of the borrower(s) to service their debt, such as current financial information, employment status and history, historical payment experience, credit scores and type and amount of collateral among other factors. The Company updates relevant information on these types of loans at the time of refinance, troubled debt restructuring or other indications of financial difficulty, downgrading as needed using the same category descriptions as for agricultural, commercial, and commercial real estate loans. In addition, the Company further considers current payment status as an indicator of which risk category to assign the borrower.

The greater the level of deteriorated risk as indicated by a loan’s assigned risk category, the greater the likelihood a loss will occur in the future. If the loan is substandard - impaired, then the loan loss reserves for the loan are recorded at the loss level of impairment. If the loan is not impaired, then its loan loss reserves are determined by the application of a loss rate that increases with risk in accordance with the allowance for loan loss analysis.

The Bank will not accrue interest on any loan past due 90-days or more.  Furthermore, the Bank will place any loan on non-accrual status for which payment in full of principal and interest is not expected.  A loan shall be placed on non-accrual as soon as it is determined that payment in full of interest and/or principal is unlikely.  The Bank’s chief credit officer may approve the placement of a loan on non-accrual prior to 90-days past due.

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Based on the most recent analysis performed by management, the risk category of loans by class of loans was as follows as of June 30, 2021 and December 31, 2020: 

	As of  June 30, 2021
	Sound/ Acceptable/ Satisfactory/ Low Satisfactory		Watch		Special Mention		Substandard Performing		Substandard Impaired		Total Loans
	(dollars in thousands)
Agricultural loans	$	467,743	$	94,254	$	—	$	23,232	$	28,284	$	613,513
Commercial real estate loans		220,925		20,864		—		2,265		1,756		245,810
Commercial loans		98,408		5,920		566		2,246		329		107,469
Residential real estate loans		34,669		204		—		—		—		34,873
Installment and consumer other		225		—		—		—		—		225
Total	$	821,970	$	121,242	$	566	$	27,743	$	30,369	$	1,001,890
	As of December 31, 2020
	Sound/ Acceptable/ Satisfactory/ Low Satisfactory		Watch		Special Mention		Substandard Performing		Substandard Impaired		Total Loans
	(dollars in thousands)
Agricultural loans	$	374,595	$	155,546	$	1,854	$	34,452	$	40,434	$	606,881
Commercial real estate loans		200,208		26,266		—		3,402		6,093		235,969
Commercial loans		103,488		8,022		647		2,566		364		115,087
Residential real estate loans		37,758		267		—		—		59		38,084
Installment and consumer other		264		—		—		—		—		264
Total	$	716,313	$	190,101	$	2,501	$	40,420	$	46,950	$	996,285

NOTE 6 – LOAN SERVICING RIGHTS

Loans serviced for others are not included in the accompanying consolidated balance sheets.  The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.  The unpaid principal balances of loans serviced for others were approximately $853.2 million and $812.6 million at June 30, 2021 and December 31, 2020, respectively.  The fair value of these rights were approximately $19.5 million and $18.4 million at June 30, 2021 and December 31, 2020.  

The fair value of servicing rights is highly sensitive to changes in underlying assumptions.  The Company’s portfolio of loans serviced for others is mostly comprised of fixed rate loans. Generally, as market interest rates rise, prepayments on fixed rate loans decrease due to a decline in refinancing activity, which results in an increase in the fair value of servicing rights. However, due to the cross-collateralization of loans in the portfolio and the government guarantee programs under which many of the loans were originated, prepayments on the portfolio tend to be muted in comparison to other types of loans, such as mortgage loans. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they were applied at a different time.

The fair value of servicing rights at June 30, 2021 was determined using an assumed discount rate of 15.0% percent and a weighted average run-off rate of 16.78%, ranging from 16.25% to 24.32%, depending upon loan type, the stratification of the specific right, and nominal credit losses.  The fair value of servicing rights at December 31, 2020 was determined using an assumed discount rate of 14.3% and weighted average run-off rate of 16.59%, ranging from 16.02% to 24.72%, depending upon the stratification of the specific right, and nominal credit losses.

Changes to the fair value are reported in loan servicing fees within the consolidated statements of operations.  

The following tables summarize servicing rights capitalized, along with the aggregate activity in related valuation allowances for periods indicated.

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	For the Three Months Ended June 30,
	2021			2020
	(dollars in thousands)
Balance, beginning of period	$	18,864		$	16,211
Additions, net		1,775			1,041
Fair value changes:
Decay due to increases in principal paydowns or runoff		(859	)		(727	)
Due to changes in valuation inputs or assumptions		(302	)		(39	)
Balance, end of period	$	19,478		$	16,486
	For the Six Months Ended June 30,
	2021			2020
	(dollars in thousands)
Balance, beginning of period	$	18,396		$	15,921
Additions, net		3,362			1,546
Fair value changes:
Decay due to increases in principal paydowns or runoff		(1,130	)		(992	)
Due to changes in valuation inputs or assumptions		(1,150	)		11
Balance, end of period	$	19,478		$	16,486

NOTE 7 – DEPOSITS

Deposits are summarized as follows at June 30, 2021 and December 31, 2020:

	June 30,		December 31,
	2021		2020
	(dollars in thousands)
Demand deposits	$	158,880	$	163,202
NOW and interest checking		136,180		96,624
Savings		9,059		7,367
Money market accounts		394,486		344,250
Certificates of deposit		259,386		304,580
National time deposits		18,648		44,347
Brokered deposits		159,087		80,456
Total deposits	$	1,135,726	$	1,040,826

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NOTE 8—ADVANCES FROM FHLB AND OTHER BORROWINGS

The Bank had advances outstanding from the FHLB in the amount of $88.0 million and $129.0 million on June 30, 2021 and December 31, 2020, respectively. These advances, rates, and maturities were as follows:

					June 30,		December 31,
	Maturity	Rate			2021		2020
					(dollars in thousands)
Fixed rate, fixed term	01/04/2021		0.23	%	$	—	$	29,000
Fixed rate, fixed term	04/12/2021		1.92	%		—		8,000
Fixed rate, fixed term	05/03/2021		0.00	%		—		4,000
Fixed rate, fixed term	06/15/2021		1.39	%		—		5,000
Fixed rate, fixed term	08/16/2021		2.29	%		3,000		3,000
Fixed rate, fixed term	12/30/2021		2.29	%		2,000		2,000
Fixed rate, fixed term	03/18/2022		1.03	%		15,000		15,000
Fixed rate, fixed term	03/25/2022		0.75	%		10,000		10,000
Fixed rate, fixed term	05/16/2022		0.00	%		5,000		—
Fixed rate, fixed term	11/16/2022		0.38	%		20,000		20,000
Fixed rate, putable, 2 years no call	01/12/2023		2.03	%		8,000		8,000
Fixed rate, fixed term	03/23/2023		1.26	%		10,000		10,000
Fixed rate, fixed term	03/27/2023		0.82	%		15,000		15,000
					$	88,000	$	129,000

The terms of security agreements with the FHLB require the Bank to pledge collateral for its borrowings. The collateral consists of qualifying first mortgage loans and stock of the FHLB.  At June 30, 2021 and December 31, 2020, the Bank had pledged qualifying mortgage loans of $453.8 million and $367.6 million, respectively.

As of June 30, 2021 and December 31, 2020, the Bank also had a line-of-credit available with the Federal Reserve Bank of Chicago.  Borrowings under this line of credit are limited by the amount of collateral pledged by the Bank, which totaled $53.6 million and $111.5 million in loans at June 30, 2021 and December 31, 2020, respectively.  The borrowings available to the Company were $46.2 million and $83.3 million, as of June 30, 2021 and December 31, 2020, respectively.  There were no outstanding advances included in other borrowings at June 30, 2021 and December 31, 2020.

Other borrowings are borrowings as a result of sold loans that do not qualify for sale accounting. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred loans. The dollar amount of the loans underlying the sale agreements continues to be carried in the Bank’s loan portfolio, and the transfer is reported as a secured borrowing with pledge of collateral.  At June 30, 2021 and December 31, 2020, the amounts of these borrowings were $0.1 million and $0.2 million, respectively.

Also included in other borrowings is the financing lease for our full-service banking location in Manitowoc, Wisconsin.  This branch location was owned by the Bank and was sold to a third party in March 2020.  The Bank is leasing back a portion of the building for its full-service branch.  Under the terms of the current lease which began on March 2, 2020, the Company is obligated to pay monthly rent of $16 thousand with an initial lease term of ten years with two renewal options of five years each.  As of June 30, 2021 and December 31, 2020, the liability remaining under the financing lease was $1.2 million and $1.3 million, respectively.  

The Company largely funded the Small Business Administration’s Paycheck Protection Program (“PPP”) loans through the Federal Reserve’s PPP Liquidity Facility, which allowed for 12-month advances collateralized by PPP loans at an interest rate of 0.35%.  The balance of these advances was $34.2 million and $47.5 million at June 30, 2021 and December 31, 2020, respectively, and were secured by PPP loans of the same amount.  

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The following table sets forth information concerning balances and interest rates on other borrowings as of and for the periods indicated:

	June 30,			December 31,
	2021			2020
	(dollars in thousands)
Balance outstanding at end of period	$	35,557		$	49,006
Average amount outstanding during the period		43,803			61,483
Maximum amount outstanding at any month-end		49,917			93,709
Weighted average interest rate during the period		0.39	%		0.42	%
Weighted average interest rate at end of period		0.41	%		0.39	%

NOTE 9 — SUBORDINATED DEBENTURES

The following is a summary of the carrying values, including unamortized issuance costs, of the Company’s subordinated debt as of the dates indicated:

	As of June 30, 2021								As of December 31, 2020
	Balance Outstanding		Interest Rate			Interest Reset Date	Call Date	Maturity Date	Balance Outstanding
	(dollars in thousands)
Junior subordinated notes issued    to County Bancorp Statutory    Trust II (1)(2)	$	6,186		1.65	%	09/15/2021	N/A	09/15/2035	$	6,186
Junior subordinated notes issued    to County Bancorp Statutory    Trust III (1)(3)		6,186		1.81	%	09/15/2021	N/A	06/15/2036		6,186
Junior subordinated notes issued to    Fox River Valley Capital Trust I (4)		3,610		6.40	%	11/30/2023	N/A	05/30/2033		3,336
5.875% Fixed-to-Floating rate    subordinated notes (5)		29,639		5.875	%	06/01/2023	06/01/2023	06/01/2028		29,545
7.00% Fixed-to-Floating rate    subordinated notes (6)		21,898		7.00	%	06/30/2025	06/30/2025	06/30/2030		21,858
Total subordinated debentures	$	67,519							$	67,111

(1) The company formed wholly owned subsidiary business trusts County Bancorp Statutory Trust II (“Trust II”) and County Bancorp Statutory Trust III (“Trust III”) (together, the “Trusts”), which are both Delaware statutory trusts.  The Company owns all of the outstanding common securities of Trust II and Trust III, which qualify as Tier 1 capital for regulatory purposes. The Trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“debentures”) issued by the Company. These debentures are the Trusts’ only assets, and interest payments from these debentures finance the distributions paid on the capital securities. These debentures are unsecured, rank junior, and are subordinate in the right of payment to all senior debt of the Company.  

(2) The debentures issued to Trust II bear an interest rate of three-month LIBOR plus 1.53% through maturity.

(3) The debentures issued to Trust III bear an interest rate of three-month LIBOR plus 1.69% through maturity.

(4) In connection with the merger with Fox River Valley, the Company acquired all of the common securities of Fox River Valley’s wholly-owned subsidiary, Fox River Valley Capital Trust I, a Delaware statutory trust (the “FRV Trust I”), which qualify as Tier 1 capital for regulatory purposes.  The debentures of the Company owned by FRV Trust I carry an interest rate equal to 5-year LIBOR plus 3.40%, which resets every five years.  

(5) The notes bear interest at a fixed rate of 5.875% per year, from and including May 30, 2018 to, but excluding, June 1, 2023. From and including June 1, 2023 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current 3-month LIBOR plus 2.88%.  The notes qualify as Tier 2 capital of the Company.  Debt issuance costs of $0.9 million are being amortized over the life of the notes.

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(6) The notes bear interest at a fixed rate of 7.00% per year, from and including June 30, 2020 to, but excluding, June 30, 2025. From and including June 30, 2025 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (SOFR) plus 687.5 basis points.  The notes qualify as Tier 2 capital of the Company.  The Company incurred $0.6 million of costs related to the issuance of the notes.  These costs have been capitalized and are being amortized over the life of the notes.  

NOTE 10 – EQUITY INCENTIVE PLAN

Under the Company’s 2021 Long Term Incentive Plan (the “Plan”), the Company may grant options to purchase shares of common stock and issue restricted stock to its directors, officers, and employees.  Both qualified and non-qualified stock options and restricted stock may be granted and issued, respectively, under the Plan.  As of June 30, 2021, 270,455 options or shares of restricted stock remained available under the Plan.

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. Vesting periods range from one to five years from the date of grant. The restricted stock vesting periods range from one to five years from the date of issuance.

Activity in outstanding stock options for the six months ended June 30, 2021 were as follows:

	June 30, 2021
	Number of Options			Weighted-Average Exercise Price		Aggregate Intrinsic Value (1)
	(dollars in thousands except option and per share data)
Outstanding, beginning of year		249,667		$	19.75
Granted		6,070			24.73
Exercised		(24,480	)		17.91
Forfeited/expired		(9,177	)		20.38
Outstanding, end of period		222,080		$	20.06	$	3,087
Options exercisable at period-end		156,703				$	2,198
Weighted-average fair value of options granted during    the period (2)				$	8.03

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2021. This amount changes based on changes in the market value of the Company’s stock.

(2) The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

Activity in restricted stock awards and restricted stock units for the six months ended June 30, 2021 was as follows:

	June 30, 2021
	Restricted Stock Awards			Weighted Average Grant Price
Outstanding, beginning of year		6,299		$	24.80
Granted		—			—
Vested		(3,500	)		22.90
Forfeited/expired		(493	)		27.15
Outstanding, end of period		2,306		$	27.19

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	June 30, 2021
	Restricted Stock Units			Weighted Average Grant Price
Outstanding, beginning of year		66,856		$	19.38
Granted		42,437			22.87
Vested		(17,849	)		20.27
Forfeited/expired		(3,332	)		18.25
Outstanding, end of period		88,112		$	20.92
Restricted shares vested not yet issued, end of period		9,779

For the three months ended June 30, 2021 and 2020, share-based compensation expenses, including options and restricted stock awards and units, applicable to the plan was $0.2 million and $0.3 million, respectively.  For the six months ended June 30, 2021 and 2020, share-based compensation expense, including options and restricted stock awards and units, applicable to the Plan was $0.5 million.

As of June 30, 2021, unrecognized share-based compensation expense related to nonvested share-based compensation instruments amounted to $1.3 million and is expected to be recognized over a weighted average period of 2.09 years.

NOTE 11 – REGULATORY MATTERS

The Company (on a consolidated basis) and Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies.  The Basel III rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy.  The Basel III rules designed the capital conservation buffer to absorb losses during periods of economic stress and effectively increase the minimum required risk-weighted capital ratios.  The Basel III rules require the Company and the Bank to maintain:

(i) Tier 1 Common Equity ratio to risk weighted assets minimum of 4.50% plus a 2.50% “capital conservation buffer” (effectively resulting in minimum Tier 1 Common Equity ratio of 7.00%);

(ii) Tier 1 Capital ratio to risk weighted assets minimum of 6.00% plus the capital conservation buffer (effectively resulting in a minimum Tier 1 Capital to risk-based capital ratio of 8.50%);

(iii) Total Capital ratio to risk weighted assets minimum of 8.00% plus the capital conservation buffer (effectively resulting in a minimum Total Capital to risk weighted assets ratio of 10.50%); and

(iv) Tier 1 Leverage Capital ratio minimum of 4.00%.   

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (applicable only to the Bank), the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.  Management believed, as of June 30, 2021 and December 31, 2020, that the Company and Bank met all capital adequacy requirements to which they were subject.

As of June 30, 2021, the most recent notification from the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There were no conditions or events since the notification that management believes have changed the Bank’s category

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The Company and Bank’s actual capital amounts and ratios are presented in the following table:

	Actual					Minimum For Capital Adequacy Purposes (including the capital conservation buffer):					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions:
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
June 30, 2021
Total Capital (to risk weighted assets):
Consolidated	$	248,921		19.14	%	$	136,589		10.50	%	Not applicable
Bank		215,028		16.58	%		136,182		10.50	%	$	129,697		10.00	%
Tier 1 Capital (to risk weighted assets):
Consolidated		185,917		14.29	%	$	110,572		8.50	%	Not applicable
Bank		203,562		15.70	%		110,243		8.50	%		103,758		8.00	%
Tier 1 Capital (to average assets):
Consolidated		185,917		12.78	%		58,177		4.00	%	Not applicable
Bank		203,562		13.94	%		58,399		4.00	%		72,998		5.00	%
Tier 1 Common Equity Ratio (to risk    weighted assets):
Consolidated		161,935		12.45	%	$	91,060		7.00	%	Not applicable
Bank		203,562		15.70	%		90,788		7.00	%		84,303		6.50	%
December 31, 2020
Total Capital (to risk weighted assets):
Consolidated	$	246,275		19.50	%	$	132,603		10.50	%	Not applicable
Bank		211,864		16.83	%		132,174		10.50	%	$	125,880		10.00	%
Tier 1 Capital (to risk weighted assets):
Consolidated		180,135		14.26	%		107,345		8.50	%	Not applicable
Bank		197,056		15.65	%		106,998		8.50	%		100,704		8.00	%
Tier 1 Capital (to average assets):
Consolidated		180,135		13.01	%		55,403		4.00	%	Not applicable
Bank		197,056		14.06	%		56,047		4.00	%		70,059		5.00	%
Tier 1 Common Equity Ratio (to risk    weighted assets):
Consolidated		156,427		12.39	%		88,402		7.00	%	Not applicable
Bank		197,056		15.65	%		88,116		7.00	%		81,822		6.50	%

NOTE 12 – FAIR VALUE MEASUREMENTS

ASC 820-10 defines fair value 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 independent, knowledgeable, and both able and willing to transact.

ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own

26

assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments recorded at fair value on a recurring basis:

Securities Available-for-Sale

Where quoted prices are available in an active market, the Company classifies the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.

If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads.

Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. government and agency securities, corporate bonds and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in Level 3.

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Loan Servicing Rights

The Company’s loan servicing rights do not trade in an active, open market with readily observable prices.  Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, and default rate.    Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the valuation hierarchy.

Derivative Instruments

The Company's derivative instruments consist of interest rate swaps, which are accounted for as cash flow hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(dollars in thousands)
June 30, 2021
Securities available for sale:
U.S. government and agency securities	$	—	$	12,841	$	—	$	12,841
Municipal securities		—		130,004		—		130,004
Mortgage-backed securities		—		145,054		—		145,054
Corporate bonds		—		45,049		—		45,049
Asset-backed securities		—		16,386		—		16,386
Loan servicing rights (1)		—		—		19,478		19,478
Total assets at fair value	$	—	$	349,334	$	19,478	$	368,812
Derivative instruments, interest rate swaps		—		1,360		—		1,360
Total liabilities at fair value	$	—	$	1,360	$	—	$	1,360
December 31, 2020
Securities available for sale:
U.S. government and agency securities	$	—	$	14,593	$	—	$	14,593
Municipal securities		—		153,654		—		153,654
Mortgage-backed securities		—		135,378		—		135,378
Corporate bonds		—		32,511		—		32,511
Asset-backed securities		—		16,718		—		16,718
Loan servicing rights (1)		—		—		18,396		18,396
Total assets at fair value	$	—	$	352,854	$	18,396	$	371,250
Derivative instruments, interest rate swaps		—		1,914		—		1,914
Total liabilities at fair value	$	—	$	1,914	$	—	$	1,914

(1) See Note 6 for quantitative information on the significant inputs and a rollforward of activity related to the loan servicing rights.

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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). The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	(dollars in thousands)
June 30, 2021
Impaired loans	$	—	$	—	$	31,486
Other real estate owned		—		—		914
Total assets at fair value	$	—	$	—	$	32,400
December 31, 2020
Impaired loans	$	—	$	—	$	46,521
Other real estate owned		—		—		1,077
Total assets at fair value	$	—	$	—	$	47,598

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis were as follows:

June 30, 2021
	Valuation Techniques	Unobservable Inputs	Range (Average)
Impaired loans	Evaluation of collateral	Estimation of value	NM*
Other real estate owned	Appraisal	Appraisal adjustment	6%-7% (7%)
December 31, 2020
	Valuation Techniques	Unobservable Inputs	Range (Average)
Impaired loans	Evaluation of collateral	Estimation of value	NM*
Other real estate owned	Appraisal	Appraisal adjustment	6%-9% (7%)

 * Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivable, 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 include 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.

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The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments were as follows:

	June 30,				December 31,
	2021				2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Input Level
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	72,329	$	72,329	$	19,084	$	19,084	1
Interest earning cash at other financial institutions		416		416		416		416	1
FHLB Stock		5,485		5,485		5,758		5,758	2
Securities available for sale		349,334		349,334		352,854		352,854	2
Loans, net of allowance for loan losses		990,424		1,002,823		981,477		991,342	3
Loans held for sale		15,805		15,805		35,976		35,976	3
Accrued interest receivable		4,511		4,511		3,240		3,240	2
Loan servicing rights		19,478		19,478		18,396		18,396	3
Financial liabilities:
Deposits:
Time		437,121		429,991		419,542		426,092	2
Other deposits		698,605		698,605		621,284		621,284	1
Other borrowings		35,557		35,557		49,006		49,006	3
Advances from FHLB		88,000		88,907		129,000		130,361	2
Subordinated debentures		67,519		66,435		67,111		67,111	3
Accrued interest payable		1,408		1,408		2,496		2,496	2
Derivative instruments, interest rate swaps		1,360		1,360		1,914		1,914	2

NOTE 13 – OTHER REAL ESTATE OWNED

Changes in other real estate owned were as follows:

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
		2021			2020			2021			2020
	(dollars in thousands)
Balance, beginning of period	$	739		$	3,247		$	1,077		$	5,521
Assets foreclosed		360			—			360			—
Write-down of other real estate owned		—			—			-			(1,360	)
Net loss on sales of other real estate owned		—			—			(17	)		(4	)
Proceeds from sale of other real estate owned		(185	)		(618	)		(506	)		(1,528	)
Balance, end of period	$	914		$	2,629		$	914		$	2,629

Expenses applicable to other real estate owned included in non-interest expense included the following:

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
		2021			2020			2021			2020
	(dollars in thousands)
Net loss on sales of other real estate owned	$	—		$	—		$	(17	)	$	(4	)
Write-down of other real estate owned		—			—			—			(1,360	)
Operating expenses, net of rental income		(52	)		(50	)		(71	)		(166	)
	$	(52	)	$	(50	)	$	(88	)	$	(1,530	)

NOTE 14 – DERIVATIVE FINANCIAL INSTRUMENTS

On June 15, 2018, the Company executed an interest rate swap to manage interest rate risk on two sets of its trust preferred securities.  This derivative contract involves the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.  This instrument is designated as a cash flow hedge as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with three-month LIBOR advances.  The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

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The Company had two outstanding interest rate swaps designated as a cash flow hedge each with an aggregate notional value of $6.0 million at June 30, 2021 and December 31, 2020.  Both interest rate swaps mature on June 15, 2028. A pre-tax unrealized gain of $0.6 million was recognized in accumulated other comprehensive income for the six months ended June 30, 2021, and a pre-tax loss of $1.3 million was recognized in accumulated other comprehensive income for the six months ended June 30, 2020.  There was no ineffective portion of this hedge.   

The Company is exposed to credit risk in the event of nonperformance by the interest rate swaps counterparty.  The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of FASB ASC 815.  In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty.  Collateral must be posted when the market value exceeds certain threshold limits.  Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels.  These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.  The Company was required to pledge $2.4 million of cash as collateral to the counterparty as of June 30, 2021.

NOTE 15 – SUBSEQUENT EVENTS

Management evaluated subsequent events through the date the financial statements were issued.  

There were no other significant events or transactions occurring after June 30, 2021, but prior to August 6, 2021, that provided additional evidence about conditions that existed at June 30, 2021.

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.  This report contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the use of words such as “estimate,” “project,” “predict,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “may,” “might,” “should,” “indicate,” “will,” “would,” “could,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements are not historical facts and include statements of our goals, intentions, expectations, business plans, and operating strategies.

Forward-looking statements are subject to significant risks and uncertainties, and our actual results may differ materially from the results discussed in such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic;

• government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms;

• adverse changes in the economic conditions of our market area and of the agriculture market generally, dairy in particular;

• adverse changes in the financial services industry and national and local real estate markets (including real estate values);

• competition among depository and other financial institutions, as well as financial technology (FinTech) companies and other non-traditional competitors;

• risks related to a high concentration of dairy-related collateral located in our market area;

• credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our     allowance for loan losses and provision for loan losses;

• the failure of assumptions and estimates underlying the establishment of our allowance for loan losses and estimation of values of collateral and various financial assets and liabilities;

• interest rate risks associated with our business;

• fluctuations in the values of the securities held in our securities portfolio;

• changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity, our net interest margin, our funding sources and the value of our assets and liabilities;

• our success in introducing new financial products;

• our ability to attract and maintain deposits;

• fluctuations in the demand for loans, which may be affected by numerous factors, including commercial conditions in our market areas and declines in the value of real estate in our market areas;

• changes in consumer spending, borrowing and saving habits that may affect deposit levels;

• costs or difficulties related to the integration of the business of acquired entities and the risk that the anticipated benefits, cost savings and any other savings from such transactions may not be fully realized or may take longer than expected to realize;

• our ability to enter new markets successfully and capitalize on growth opportunities, execute our strategic plan, and manage our growth;

• any negative perception of our reputation or financial strength;

• our ability to raise additional capital on acceptable terms when needed;

• changes in laws or government regulations or policies affecting financial institutions, including changes in banking, consumer protection, securities, trade, and tax laws and regulations, and any increased costs of compliance with such laws and regulations;

• changes in accounting policies and practices, including the implementation of CECL;

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• our ability to retain key members of our senior management team;

• our ability to successfully manage liquidity risk;

• the effectiveness of our risk management framework;

• the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents and our ability to identify and address such incidents;

• interruptions involving our information technology and telecommunications systems or third-party servicers;

• changes in benchmark interest rates used to price our loans and deposits, including the expected elimination of the London Interbank Offered Rate (“LIBOR”) and the adoption of a substitute;

• the extensive regulatory framework that applies to us and our compliance with governmental and regulatory requirements including the Dodd-Frank Act, the Basel III Rule and others relating to banking, consumer protection, securities and tax matters;

• rapid technological change in the financial services industry;

• the effects of severe weather, natural disasters, acts of war or terrorism, widespread disease or pandemics, including the COVID-19 pandemic, and other external events;

• the impact of any claims, legal actions, litigation, and other legal proceedings and regulatory actions against us, including any effect on our reputation;

• the effect of tariffs, trade agreements, and other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and

• each of the factors and risks identified in the “Risk Factors” section included in this Form 10-Q and under Item 1A of Part I of our most recent Annual Report on Form 10-K.

In addition, this report also contains forward-looking statements regarding the Company’s outlook or expectations with respect to the planned Merger with Nicolet. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of the Company and Nicolet with respect to the planned Merger, the strategic benefits and financial benefits of the Merger, including the expected impact of the Merger on the combined corporation's future financial performance including the timing of the closing of the transaction. Such risks, uncertainties and assumptions, include, among others, the following:

• the possibility that any of the anticipated benefits of the proposed Merger will not be realized or will not be realized within the expected time period;

• the risk that integration of the Company’s operations with those of Nicolet will be materially delayed or will be more costly or difficult than expected;

• the parties’ inability to meet expectations regarding the timing of the proposed Merger;

• changes to tax legislation and their potential effects on the accounting for the Merger;

• the inability to complete the proposed Merger due to the failure of Nicolet’s or the Company’s shareholders to adopt the merger agreement;

• the failure to satisfy other conditions to completion of the proposed Merger, including receipt of required regulatory and other approvals;

• the failure of the proposed Merger to close for any other reason;

• diversion of management’s attention from ongoing business operations and opportunities due to the proposed Merger;

• the challenges of integrating and retaining key employees;

• the effect of the announcement of the proposed Merger on Nicolet’s, the Company’s or the combined company’s respective customer and employee relationships and operating results;

• the possibility that the proposed Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

• dilution caused by Nicolet’s issuance of additional shares of Nicolet common stock in connection with the Merger; and

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• risks and uncertainties relating to Nicolet’s proposed acquisition of Mackinac Financial Corporation (“Mackinac”), including but not limited to the failure of the proposed acquisition to close for any reason and risks and uncertainties relating to the Mackinac’s business, the combined business of Mackinac and Nicolet, and the combined businesses of Nicolet, the Company and Mackinac.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are made only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.

Overview

County Bancorp, Inc. is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary activities consist of operating through our wholly owned subsidiary bank, Investors Community Bank, headquartered in Manitowoc, Wisconsin, and providing a wide range of banking and related business services through the Bank and our other subsidiaries.

In addition to the Bank, we have three wholly owned subsidiaries, County Bancorp Statutory Trust II, County Bancorp Statutory Trust III, and Fox River Valley Capital Trust I, which are Delaware statutory trusts.  The Bank is the sole member of Investors Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies.  

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial, and residential real estate loans.  Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, net overhead ratio, return on average assets, earnings per share, and ratio of non-performing assets to total assets.  We also utilize non-GAAP metrics, such as adjusted diluted earnings per share, efficiency ratio, return on average common shareholders’ equity, tangible book value per share, ratio of tangible common equity to tangible assets, and adverse classified asset ratio, to evaluate the Company’s performance.  We are required to maintain appropriate regulatory leverage and risk-based capital ratios.

There have been no material changes to the critical accounting policies included in the Form 10-K for the year ended December 31, 2020, by the Company with the SEC filed on March 12, 2021.

Merger Agreement

On June 22, 2021, the Company entered into an Agreement and Plan of Merger with Nicolet, pursuant to which the Company will merge with and into Nicolet. Following the Merger, the Bank will merge with and into Nicolet National Bank, Nicolet’s wholly-owned bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand.

The Company and Nicolet have agreed to prepare and file with the SEC a registration statement on Form S-4, which will include a proxy statement/prospectus.  As soon as practicable following effectiveness of the registration statement on Form S-4, the Company and Nicolet will each call a special shareholder meeting to approve the Merger Agreement. 

Merger Consideration. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, County shareholders shall receive for each share of County common stock, at the election of the shareholder, either 0.48 shares of Nicolet common stock or $37.18 in cash, subject to customary proration procedures so that the total consideration will consist of approximately 80% stock and 20% cash.

Closing Conditions. Consummation of the Merger is subject to certain customary closing conditions, including without limitation, (i) approval of the Merger Agreement by County and Nicolet shareholders, (ii) the receipt of all requisite regulatory approvals, and (iii) receipt of a tax opinion of Nicolet’s counsel that the Merger will qualify as a tax-free reorganization.

In addition to these mutual conditions, each party’s obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of each party’s representations and warranties; and (ii) each party’s compliance with its covenants and agreements contained in the Merger Agreement.

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Representations, Warranties and Covenants. The Merger Agreement includes detailed representations, warranties and covenant provisions that are customary for transactions of this type.  

Significant Developments – Impact of COVID-19

The COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three and six months ended June 30, 2021 and 2020, and has had a complex and adverse impact on the economy and the banking industry and is expected to continue to adversely impact the Company in future fiscal periods.  

Effects on Our Business.  The COVID-19 pandemic, federal, state, and local government responses to the pandemic, and the effects of existing and future variants of the disease, such as the Delta variant. have had and are expected to continue to have an impact on our business.  In particular, we anticipate that a significant portion of the Bank’s borrowers in retail shopping centers, limited-service restaurants, hotels, assisted living and nursing homes and residential rental industries may continue to endure significant economic distress, which may cause them to draw on their existing lines of credit and adversely affect their ability and willingness to repay existing indebtedness, and may adversely impact the value of collateral.  These developments, together with economic conditions generally, may impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans.  As a result, we anticipate that our financial condition, capital levels and results of operations may be adversely affected.  

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

• In response to the interagency statement encouraging financial institutions to work with borrowers impacted by COVID-19, between March 31, 2020 and June 30, 2021, we processed 184 customer payment modification requests for customers who had loan balances of $200.4 million, and at June 30, 2021, four customers remained on payment relief with loan balances totaling $2.9 million.

• The Bank processed 904 PPP loan applications in round one in 2020, totaling $106.2 million, and 497 applications in round two totaling $36.1 million during the first two quarters of 2021.  These loans are being funded through borrowings from the Federal Reserve’s PPP Liquidity Facility so as not to reduce the Bank’s available liquidity.  As of June 30, 2021, there were $33.4 million of PPP loans (rounds one and two) outstanding.  We are currently working with PPP borrowers to help them through the process of forgiveness of their PPP loans.

• Approximately 80% of the Bank’s employees are working remotely as of June 30, 2021.  In our branch network, the drive thrus are open, and the lobbies reopened to the public on March 1, 2021.

• We suspended our common stock buyback plan on June 17, 2021 in connection with entering the Merger Agreement described above.  There are no current plans to suspend dividends paid on our common stock.  The Board and management will continue to evaluate our capital plans as our credit metrics and capital levels change.  In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if we do not maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.

Operational Overview

• Net income for the three months ended June 30, 2021 was $6.7 million, compared to $3.9 million and $2.7 million for the three months ended March 31, 2021 and June 30, 2020, respectively.  Net income for the six months ended June 30, 2021 was $10.7 million compared to a net loss of $2.5 million for the six months ended June 30, 2020.  This increase was primarily the result of $5.0 million of goodwill impairment during the first quarter of 2020 and a $7.4 million decrease in provision for loan losses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 as a result of improved credit quality within the loan portfolio.

• Total securities available-for-sale decreased $3.5/ million, or 1.0% from December 31, 2020 to $349.3 million at June 30, 2021, and increased $122.4 million, or 53.9%, since June 30, 2020.

• Total loans increased $5.6 million, or 5.6%, from December 31, 2020 to $1.0 billion at June 30, 2021, and decreased $85.6 million, or 7.9%, from June 30, 2020.  

• Participated and sold loans that we continue to service totaled $853.2 million at June 30, 2021, an increase of $40.6 million, or 5.0%, since December 31, 2020, and an increase of $91.1 million, or 12.0%, since June 30, 2020.

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• Client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit) increased $42.0 million, or 4.6%, since December 31, 2020, to $958.0 million at June 30, 2021, and increased $64.4 million, or 7.2%, since June 30, 2020.

• Cost of funds on interest bearing deposits decreased 19 basis points since the quarter ended March 31, 2021 to 0.72% for the three months ended June 30, 2021, and decreased 88 basis points since the quarter ended June 30, 2021.  For the six months ended, June 30, 2021, cost of funds on interest bearing deposits decreased 90 basis points to 0.81% compared to the six months ended June 30, 2020.

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Selected Financial Data

	As of and for the						As of and for the						As of and for the
	Three Months Ended						Six Months Ended						Year Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			December 31, 2020
	(unaudited)						(unaudited)
	(Dollars in thousands, except per share data)
Selected Income Statement Data:
Interest income	$	14,537		$	13,565		$	28,252		$	27,643		$	55,475
Interest expense		3,099			4,800			6,596			10,097			18,499
Net interest income		11,438			8,765			21,656			17,546			36,976
Provision for (recovery of) loan losses		(4,278	)		1,142			(4,036	)		3,360			2,984
Net interest income after provision for loan losses		15,716			7,623			25,692			14,186			33,992
Non-interest income		2,251			3,501			5,964			6,221			14,250
Non-interest expense		8,765			7,465			17,530			22,482			39,645
Income tax expense		2,459			926			3,455			379			3,118
Net income	$	6,743		$	2,733		$	10,671		$	(2,454	)	$	5,479
Per Common Share Data:
Basic earnings (loss) per common share	$	1.08		$	0.40		$	1.70		$	(0.40	)	$	0.79
Diluted earnings (loss) per common share	$	1.07		$	0.40		$	1.69		$	(0.40	)	$	0.79
Adjusted diluted earnings per common share (1)	$	1.07		$	0.40		$	1.69		$	0.36		$	1.56
Cash dividends per common share	$	0.10		$	0.07		$	0.20		$	0.14		$	0.31
Book value per share, end of period	$	27.68		$	25.18		$	27.68		$	25.18		$	26.42
Tangible book value per share, end of period (1)	$	27.68		$	25.16		$	27.68		$	25.16		$	26.42
Weighted average common shares - basic		6,161,641			6,504,898			6,181,839			6,604,187			6,477,173
Weighted average common shares - diluted		6,208,079			6,533,409			6,223,791			6,643,735			6,505,198
Common shares outstanding, end of period		6,026,748			6,375,150			6,026,748			6,375,150			6,197,965
Selected Balance Sheet Data:
Total assets	$	1,517,072		$	1,513,917		$	1,517,072		$	1,513,917		$	1,472,358
Securities available-for-sale		349,334			226,971			349,334			226,971			352,854
Total loans		1,001,890			1,087,524			1,001,890			1,087,524			996,285
Allowance for loan losses		(11,466	)		(18,569	)		(11,466	)		(18,569	)		(14,808	)
Total deposits		1,135,726			1,073,053			1,135,726			1,073,053			1,040,826
Other borrowings and FHLB advances		123,557			195,247			123,557			195,247			178,006
Subordinated debentures		67,519			61,910			67,519			61,910			67,111
Total shareholders' equity		174,812			168,525			174,812			168,525			171,776
Performance Ratios:
Return on average assets (annualized)		1.80	%		0.74	%		1.43	%		(0.23	)%		0.38	%
Return on average shareholders' equity (annualized)		15.82	%		6.55	%		12.45	%		(2.88	)%		3.22	%
Return on average common shareholders' equity (1)		16.40	%		6.63	%		12.86	%		(3.28	)%		3.15	%
Equity to assets ratio		11.52	%		11.13	%		11.52	%		11.13	%		11.67	%
Net interest margin		3.22	%		2.54	%		3.08	%		2.63	%		2.68	%
Interest rate spread		3.03	%		2.24	%		2.88	%		2.30	%		2.37	%
Non-interest income to average assets (annualized)		0.60	%		0.92	%		0.80	%		0.86	%		1.19	%
Non-interest expense to average assets (annualized)		2.34	%		2.03	%		2.35	%		3.19	%		2.58	%
Net overhead ratio (annualized) (2)		1.74	%		1.11	%		1.55	%		2.32	%		1.40	%
Efficiency ratio (1)		64.98	%		63.83	%		67.32	%		69.32	%		65.63	%
Dividend payout ratio		9.35	%		17.50	%		11.83	%		(35.00	)%		39.24	%
Asset Quality Ratios:
Adverse classified asset ratio (1)		24.72	%		41.73	%		24.72	%		41.73	%		39.43	%
Non-performing loans to total loans (3)		4.39	%		3.26	%		4.39	%		3.26	%		4.18	%
Allowance for loan losses to:
Total loans		1.14	%		1.71	%		1.14	%		1.71	%		1.49	%
Non-performing loans		26.08	%		52.37	%		26.08	%		52.37	%		35.58	%
Net charge-offs (recoveries) to average loans		(0.07	)%		0.01	%		(0.07	)%		0.01	%		0.32	%
Non-performing assets to total assets (3)		2.95	%		2.52	%		2.95	%		2.52	%		2.90	%

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(1) Adjusted diluted earnings per common share, tangible book value per share, return on average common shareholders’ equity, efficiency ratio, and adverse classified asset ratio are not recognized under GAAP and are therefore considered to be non-GAAP financial measures.  See below for reconciliations of these financial measures to their most comparable GAAP measures.

(2) Net overhead ratio represents the difference between noninterest expense and noninterest income, divided by average assets.

(3) Non-performing loans consist of nonaccrual loans.  Non-performing assets consist of nonaccrual loans and other real estate owned.  

	As of
	June 30, 2021			June 30, 2020			December 31, 2020
	(unaudited)
Capital Ratios:
Shareholders' common equity to assets		11.00	%		10.60	%		11.12	%
Total capital to risk-weighted assets (Bank)		16.58	%		20.42	%		16.83	%
Tangible common equity to tangible assets (1)		10.99	%		10.60	%		11.12	%

(1) Tangible common equity to tangible assets is not recognized under GAAP and is therefore considered to be a non-GAAP financial measure.  See below for reconciliations of this financial measure to its most comparable GAAP measure.

Non-GAAP Financial Measures

“Efficiency ratio” is defined as non-interest expense, excluding goodwill impairment, historical tax credit investment impairment, and gains and losses on sales and write-downs of other real estate owned, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities.  In our judgment, the adjustments made to non-interest expense and non-interest income allow investors to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

	Three Months Ended						Six Months Ended						Year Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			December 31, 2020
	(dollars in thousands)
Efficiency Ratio GAAP to Non-GAAP reconciliation:
Non-interest expense	$	8,765		$	7,465		$	17,530		$	22,482		$	39,645
Less: goodwill impairment		—			—			—			(5,038	)		(5,038	)
Net loss on sales and write-downs of    OREO		—			—			(17	)		(1,364	)		(1,195	)
Net gain (loss) on sale of fixed assets		1,075			1			1,081			(236	)		(234	)
Adjusted non-interest expense (non-GAAP)	$	9,840		$	7,466		$	18,594		$	15,844		$	33,178
Net interest income	$	11,438		$	8,886		$	21,656		$	17,684		$	36,976
Non-interest income		2,251			3,380			5,964			6,083			14,250
Less: net loss (gain) on sales of securities		1,453			(570	)		—			(570	)		(671	)
Operating revenue	$	15,142		$	11,696		$	27,620		$	23,197		$	50,555
Efficiency ratio		64.98	%		63.83	%		67.32	%		68.30	%		65.63	%

Return on average common shareholders’ equity is a non-GAAP based financial measure calculated using non-GAAP based amounts.  The most directly comparable GAAP based measure is return on average shareholders’ equity.  We calculate return on average common shareholders’ equity by excluding the average preferred shareholders’ equity and the related dividends.  Management uses the return on average common shareholders’ equity in order to review our core operating results and our performance.  

	Three Months Ended						Six Months Ended						Year Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			December 31, 2020
Return on Average Common Shareholders' Equity    GAAP to Non-GAAP reconciliation:
Return on average shareholders' equity		15.82	%		6.55	%		0.00	%		(2.88	)%		3.22	%
Effect of excluding average preferred     shareholders' equity		0.58	%		0.08	%		(0.00	)%		(0.40	)%		(0.07	)%
Return on average common shareholders'     equity		16.40	%		6.63	%		0.00	%		(3.28	)%		3.15	%

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Tangible book value per share and ratio of tangible common equity to tangible assets are non-GAAP financial measures based on GAAP amounts.  In our judgment, the adjustments made to book value, equity and assets allow investors to better assess our capital adequacy and net worth by removing the effect of goodwill and intangible assets that are unrelated to our core business.

	June 30, 2021			June 30, 2020			December 31, 2020
	(dollars in thousands, except per share data)
Tangible book value per share and tangible common    equity to tangible assets reconciliation:
Common equity	$	166,812		$	160,525		$	163,776
Less: Core deposit intangible, net of amortization		12			125			54
Tangible common equity	$	166,800		$	160,400		$	163,722
Common shares outstanding		6,026,748			6,375,150			6,197,965
Tangible book value per share	$	27.68		$	25.16		$	26.42
Total assets	$	1,517,072		$	1,513,917		$	1,472,358
Less: Core deposit intangible, net of amortization		12			125			54
Tangible assets	$	1,517,060		$	1,513,792		$	1,472,304
Tangible common equity to tangible assets		10.99	%		10.60	%		11.12	%

Adjusted diluted earnings per share is a non-GAAP measure based on GAAP amounts.  In our judgment, the adjustments made to diluted earnings per share allow investors to better assess our income related to core operations by removing the volatility associated with the goodwill impairment, which was a one-time, non-cash expense.

	Three Months Ended						Six Months Ended						Year Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			December 31, 2020
	(dollars in thousands, except per share data)
Adjusted diluted earnings per share:
Net income from continuing operations	$	6,743		$	2,733		$	10,671		$	(2,454	)	$	5,479
Less:  preferred stock dividends		(79	)		(99	)		(160	)		(207	)		(367	)
Plus: goodwill impairment		—			—			—			5,038			5,038
Adjusted income available to common shareholders         for basic earnings per common share	$	6,664		$	2,634		$	10,511		$	2,377		$	10,150
Weighted average number of common shares         outstanding		6,161,641			6,504,898			6,181,839			6,604,187			6,477,173
Effect of dilutive options		46,438			28,511			41,952			39,548			28,025
Weighted average number of common shares         outstanding used to calculate diluted earnings         per common share		6,208,079			6,533,409			6,223,791			6,643,735			6,505,198
Adjusted diluted earnings per share	$	1.07		$	0.40		$	1.69		$	0.36		$	1.56

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Adverse classified asset ratio is a non-GAAP financial measure based on GAAP amounts.  In our judgment, the adjustments made to non-performing assets allow management to better assess asset quality and monitor the amount of capital coverage necessary for non-performing assets.  

	June 30, 2021			June 30, 2020			December 31, 2020
	(dollars in thousands)
Adverse classified asset ratio:
Substandard loans		58,112			88,679			87,370
Other real estate owned		914			2,629			1,077
Substandard unused commitments		2,130			3,230			4,049
Less: Substandard government guarantees		(8,007	)		(6,336	)		(8,960	)
Total adverse classified assets (non-GAAP)	$	53,149		$	88,202		$	83,536
Total equity (Bank)	$	209,416		$	201,507		$	205,743
Accumulated other comprehensive gain on available-for-sale         securities		(5,854	)		(8,734	)		(8,686	)
Allowance for loan losses		11,466			18,569			14,808
Adjusted total equity (non-GAAP)	$	215,028		$	211,342		$	211,865
Adverse classified asset ratio		24.72	%		41.73	%		39.43	%

Results of Operations

Our operating revenue is comprised of interest income and non-interest income.  Net interest income increased by 11.9% to $11.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily attributable to a 87 basis point decrease in rates paid on interest bearing deposits that contributed to the decrease in interest expense of $1.7 million.  The decrease in cost of funds was coupled with a $0.9 million increase in interest income on loans which was primarily attributable to a 31 basis point increase in loan yield due to the fee income recognized at the time of PPP loan forgiveness.  For the six months ended June 30, 2021, net interest income was $21.7 million, an increase of $4.1 million, or 23.4%, from the six months ended June 30, 2020.  

Interest income increased $0.9 million to $14.5 million for the second quarter of 2021 compared to $13.6 million for the second quarter of 2020, which resulted mainly from a 31 basis point increase in loan yield from 4.42% for the three months ended June 30, 2020 to 4.73% for the three months ended June 30, 2021.  The increase in loan yield was partially offset by a decrease in average loan balance of $81.4 million from June 30, 2020 which was primarily the result of PPP loan forgiveness.   For the six months ended June 30, 2021, interest income increased $0.6 million, or 2.2%, to $28.3 million, compared to $27.6 million for the six months ended June 30, 2020, primarily due to the $1.5 million of PPP fee income that was recognized in connection with the forgiveness of $69.9 million of PPP loans.  The increase in fee income was partially offset by a decrease of $48.2 million in average loan balance compared to the first six months of 2020.

PPP loans contributed $0.7 million and $1.8 million in interest and related SBA fee income for the three and six months ended June 30, 2021, respectively, compared to $0.2 million for the three and six months ended June 30, 2020.  The following table shows the accretive effect the PPP loans had on net interest margin for the three and six months ended June 30, 2021:

	For the Three Months Ended			For the Six Months Ended
	June 30, 2021			June 30, 2021
Net interest margin excluding PPP loans		3.12	%		2.93	%
Accretion related to PPP loans:
Impact of interest rate on PPP loans		(0.03	)%		(0.15	)%
Impact of PPP fee income recognized		0.14	%		0.32	%
Impact of interest expense on PPP    Liquidity Facility program		(0.01	)%		(0.02	)%
Total accretion related to PPP loans		0.10	%		0.15	%
Total net interest margin		3.22	%		3.08	%

Interest expense decreased from $4.8 million for the second quarter of 2020 to $3.1 million for the second quarter of 2021, which was primarily the result of a 61 basis point decrease in the rate paid on interest-bearing liabilities.  The decline in average rate was primarily the result of the Federal Reserve’s decrease to the target federal funds rate in March 2020 and our focused efforts to increase customer transactional deposits which have a lower rate than time deposits.  Rates paid on savings, NOW, money market, and

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interest checking accounts decreased from 0.55% for the quarter ended June 30, 2020 to 0.29% for the quarter ended June 30, 2021, and the average balance increased by $0.1 million between the two periods.  Rates paid on time deposits decreased from 2.31% for the quarter ended June 30, 2020 to 1.20% for the quarter ended June 30, 2021, and the average balance decreased by $0.1 million between the same periods.  For the six months ended June 30, 2021, interest expense decreased to $6.6 million from $10.1 million for the six months ended June 30, 2020.  The $3.5 million, or 34.7%, decrease is primarily due to a 90 basis point reduction in the rate paid on interest-bearing deposits, and the 46 basis point reduction in the rate of our FHLB borrowings, which was slightly offset by the 20 basis point increase on the rate paid on our subordinated debt.

Analysis of Net Interest Income

Net interest income is the largest component of our income and is dependent on the volumes of and yields earned on interest-earning assets as compared to the volumes of and rates paid on interest-bearing liabilities.  

As a result of the reductions in the target federal funds interest rate, as well as the impact of the COVID-19 pandemic, we expect that our net interest income and net interest margin could decrease in future periods.

The following tables reflect the components of net interest income for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended
	June 30, 2021								June 30, 2020
	Average Balance (1)			Income/ Expense		Yields/ Rates			Average Balance (1)			Income/ Expense		Yields/ Rates
	(dollars in thousands)
Assets
Investment securities	$	386,637		$	2,533		2.63	%	$	237,082		$	1,445		2.44	%
Loans excluding PPP loans(2)		974,525			11,281		4.64	%		995,010			12,033		4.86	%
PPP loans - round 1 (2)		9,344			282		12.11	%		103,317			97		0.38	%
PPP loans - round 2 (2)		33,080			437		5.30	%		—			—		—
Total loans (2)		1,016,949			12,000		4.73	%		1,098,327			12,130		4.42	%
Interest bearing deposits due from other banks		22,085			4		0.07	%		64,142			111		0.69	%
Total interest-earning assets	$	1,425,671		$	14,537		4.09	%	$	1,399,551		$	13,686		3.91	%
Allowance for loan losses		(15,305	)							(17,844	)
Other assets		91,039								85,716
Total assets	$	1,501,405							$	1,467,423
Liabilities
Savings, NOW, money market, interest checking	$	507,089		$	363		0.29	%	$	379,991		$	525		0.55	%
Time deposits		452,443			1,353		1.20	%		553,616			3,196		2.31	%
Total interest-bearing deposits	$	959,532		$	1,716		0.72	%	$	933,607		$	3,721		1.59	%
Other borrowings		43,803			43		0.39	%		66,910			15		0.09	%
FHLB advances		101,352			234		0.93	%		103,916			328		1.26	%
Junior subordinated debentures		67,213			1,106		6.60	%		45,090			736		6.52	%
Total interest-bearing liabilities	$	1,171,900		$	3,099		1.06	%	$	1,149,523		$	4,800		1.67	%
Non-interest-bearing deposits		146,242								134,271
Other liabilities		12,741								16,749
Total liabilities	$	1,330,883							$	1,300,543
Shareholders' equity		170,522								166,880
Total liabilities and equity	$	1,501,405							$	1,467,423
Net interest income				$	11,438							$	8,886
Interest rate spread (3)							3.03	%							2.24	%
Net interest margin (4)							3.22	%							2.54	%
Ratio of interest-earning assets to interest-bearing    liabilities		1.22								1.22

(1) Average balances are calculated on amortized cost.

(2) Includes loan fee income, nonaccruing loan balances, and interest received on such loans.

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(3) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

	Six Months Ended
	June 30, 2021								June 30, 2020
	Average Balance (1)			Income/ Expense		Yields/ Rates			Average Balance (1)			Income/ Expense		Yields/ Rates
	(dollars in thousands)
Assets
Investment securities	$	379,475		$	4,600		2.44	%	$	216,718		$	2,733		2.52	%
Loans (2)		971,992			21,760		4.51	%		1,029,279			24,478		4.76	%
PPP loans - round 1 (2)		18,248			1,243		13.74	%		34,203			234		1.36	%
PPP loans - round 2 (2)		25,013			520		4.19	%		—			—		—
Total loans (2)		1,015,253			23,523		4.67	%		1,063,482			24,712		4.65	%
Interest bearing deposits due from other banks		21,023			129		1.24	%		62,483			336		1.08	%
Total interest-earning assets	$	1,415,751		$	28,252		4.02	%	$	1,342,683		$	27,781		4.14	%
Allowance for loan losses		(15,119	)							(16,593	)
Other assets		90,574								85,092
Total assets	$	1,491,206							$	1,411,182
Liabilities
Savings, NOW, money market, interest checking	$	492,207		$	743		0.30	%	$	357,599		$	1,299		0.73	%
Time deposits		447,562			3,043		1.37	%		583,451			6,769		2.32	%
Total interest-bearing deposits	$	939,769		$	3,786		0.81	%	$	941,050		$	8,068		1.71	%
Other borrowings		47,491			91		0.39	%		34,084			25		0.15	%
FHLB advances		108,790			507		0.94	%		80,312			562		1.40	%
Junior subordinated debentures		67,168			2,212		6.64	%		44,981			1,442		6.44	%
Total interest-bearing liabilities	$	1,163,218		$	6,596		1.14	%	$	1,100,427		$	10,097		1.84	%
Non-interest-bearing deposits		142,548								123,811
Other liabilities		13,957								16,813
Total liabilities	$	1,319,723							$	1,241,051
Shareholders' equity		171,483								170,131
Total liabilities and equity	$	1,491,206							$	1,411,182
Net interest income				$	21,656							$	17,684
Interest rate spread (3)							2.88	%							2.30	%
Net interest margin (4)							3.08	%							2.63	%
Ratio of interest-earning assets to interest -bearing    liabilities		1.22								1.22

(1) Average balances are calculated on amortized cost.

(2) Includes loan fee income, nonaccruing loan balances, and interest received on such loans.

(3) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income between the periods indicated.  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The net column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately between the changes due to rate and the changes due to volume.

	Three Months Ended June 30, 2021 v. 2020
	Increase (Decrease) Due to Change in Average
	Rate			Volume			Net
	(dollars in thousands)
Interest Income:
Investment securities	$	117		$	971		$	1,088
Loans (excluding PPP)		(94	)		(658	)		(752	)
PPP loans - round 1		193			(8	)		185
PPP loans - round 2		437			—			437
Total loans		536			(666	)		(130	)
Federal funds sold and interest-bearing deposits with    banks		(62	)		(45	)		(107	)
Total interest income		591			260			851
Interest Expense:
Savings, NOW, money market and interest checking		(551	)		389			(162	)
Time deposits		(1,336	)		(507	)		(1,843	)
Other borrowings		31			(3	)		28
FHLB advances		(86	)		(8	)		(94	)
Junior subordinated debentures		7			363			370
Total interest expense		(1,935	)		234			(1,701	)
Net interest income	$	2,526		$	26		$	2,552
	Six Months Ended June 30, 2021 v. 2020
	Increase (Decrease) Due to Change in Average
	Rate			Volume			Net
	(dollars in thousands)
Interest Income:
Investment securities	$	(73	)	$	1,940		$	1,867
Loans (excluding PPP)		(1,314	)		(1,404	)		(2,718	)
PPP loans - round 1		1,063			(54	)		1,009
PPP loans - round 2		520			—			520
Total loans		269			(1,458	)		(1,189	)
Federal funds sold and interest-bearing deposits with    banks		58			(265	)		(207	)
Total interest income		254			217			471
Interest Expense:
Savings, NOW, money market and interest checking		(1,568	)		1,012			(556	)
Time deposits		(2,376	)		(1,350	)		(3,726	)
Other borrowings		53			13			66
FHLB advances		662			(717	)		(55	)
Junior subordinated debentures		47			723			770
Total interest expense		(3,182	)		(319	)		(3,501	)
Net interest income	$	3,436		$	536		$	3,972

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Provision for Loan Losses

Based on our analysis of the components of the allowance for loan losses, management recorded a recovery of loan losses of $4.3 million for the three months ended June 30, 2021, compared to a provision for loan losses of $1.1 million for the three months ended June 30, 2020.  The decrease in provision was primarily the result of a $30.0 million decrease in substandard rated loans and corresponding release of specific reserves, and the upgrade of $44.6 million of watch rated loans to a pass rating during the second quarter of 2021.

For the six months ended June 30, 2021, the recovery of loan losses was $4.0 million compared to a provision for loans losses of $3.4 million for the six months ended June 30, 2020.  The $7.4 million decrease in provision expense was primarily the result of the improvement in asset quality. During the first six months of 2021, watch rated loans decreased by $68.9 million, or 36.2%, primarily as the result of 41 dairy customers being upgraded to a low satisfactory rating.  In addition, we eliminated the $2.0 million qualitative factor for industries immediately affected by the COVID-19 pandemic.  

The specific reserve related to impaired loans was $2.2 million at June 30, 2021, which was a decrease of $2.1 million, or 48.8%, from December 31, 2020, as a result of five agricultural customers being upgraded as part of our annual review process.  This improvement in asset quality is expected to continue throughout 2021 as we complete the annual review process.  

As of June 30, 2021, there were four customer relationships with loans in payment deferral associated with COVID-19 customer support programs totaling $2.9 million, or less than 0.1% of total loans, which is a decrease of $20.0 million since December 31, 2020.

Other than the qualitative factor for COVID-19 discussed above, there have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan losses from what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.  Based upon this methodology, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan losses of $11.5 million, or 1.14% of total loans, was appropriate as of June 30, 2021.  This is compared to an allowance for loan losses of $17.5 million, or 1.73% of total loans, at June 30, 2020, and $14.8 million, or 1.49% of total loans, at December 31, 2020.  

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Non-Interest Income

Non-interest income for the three months ended June 30, 2021 decreased by 35.7% to $2.3 million from $3.5 million for the three months ended June 30, 2020.  The $1.2 million decrease was primarily the result of the sale of $35.3 million of securities during the second quarter of 2021 in an effort to reduce duration risk, which resulted in a loss of $1.5 million.  The loss on security sales was partially offset by increases of $0.4 million and $0.3 million in loan servicing fees and net loan servicing right income, respectively, which was the result of $91.1 million additional loans serviced for the three months ended June 30, 2021 compared to the same period in the previous year.  

For the six months ended June 30, 2021, non-interest income decreased $0.2 million, or 4.1%, to $6.0 million from $6.2 million for the six months ended June 30, 2020, primarily as a result of the loss on the sale of securities which was partially offset by an increase of $1.3 million in loan servicing fees from the previously discussed increase in average loans serviced.

The following table reflects the components of non-interest income for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
	(dollars in thousands)
Service charges	$	165		$	139		$	284		$	252
Crop insurance commission		291			229			592			458
Gain on sale of residential loans		89			4			182			42
Gain on sale of service-retained loans		1,784			1,041			3,371			1,546
Total gain on sale of loans		1,873			1,045			3,553			1,588
Loan servicing fees		2,278			1,923			4,436			3,754
Decay due to increases in principal paydowns or runoff		(860	)		(727	)		(1,130	)		(992	)
Changes in valuation inputs or assumptions		(302	)		(39	)		(1,150	)		11
Total loan servicing fees, net		1,116			1,157			2,156			2,773
Gain on sale of securities		(1,453	)		570			(1,453	)		570
Referral fees		—			121			319			138
Other		259			240			513			442
Total non-interest income	$	2,251		$	3,501		$	5,964		$	6,221

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2021 increased $1.3 million, or 17.4%, to $8.8 million compared to the three months ended June 30, 2020, primarily due to a $1.8 million increase to employee compensation and benefits which was the result of eight additional employees and the accrual of benefits that are anticipated to be paid out at the time of the Merger.  The increase to salaries and benefits was partially offset by the $1.1 million gain on sale of fixed assets related to the sale of the excess land that surrounds the area where our new branch is under construction in Appleton, Wisconsin.  During the second quarter of 2021, we also recorded $0.3 million of expenses related to the Merger discussed above.  

For the six months ended June 30, 2021, non-interest expense decreased by $5.0 million, or 22.0%, to $17.5 million from $22.5 million for the six months ended June 30, 2020.  In addition to the items noted above, the year-over-year decrease was primarily the result of a $5.0 million goodwill impairment during the first quarter of 2020.  In addition, in the first quarter of 2020 there was a $1.4 million write-down of a retail shopping center that is in other real estate owned and a $0.3 million loss recognized on the sale-leaseback of our Manitowoc branch.  These decreases in non-interest expense were partially offset by increased professional fees.

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The following table reflects the components of our non-interest expense for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
	(dollars in thousands)
Employee compensation and benefits	$	6,426		$	4,594		$	12,008		$	9,854
Occupancy		293			305			572			659
Information processing		664			663			1,325			1,333
Professional fees		450			480			1,252			881
Business development		289			333			596			699
Other real estate owned expenses		52			44			75			160
Write-down of other real estate owned		—			—			—			1,360
Net loss on other real estate owned		—			—			17			4
Net loss (gain) on sale of fixed assets		(1,075	)		(1	)		(1,081	)		349
Depreciation and amortization		484			303			741			603
Merger expenses		385			—			385			—
Goodwill impairment		—			—			—			5,038
Other		797			743			1,640			1,891
Total non-interest expense	$	8,765		$	7,464		$	17,530		$	22,831

Income taxes

The Company accounts for income taxes in accordance with income tax accounting guidance, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50%; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the “more likely than not” recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company files income tax returns in the U.S. federal jurisdiction and in the state of Wisconsin. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2017.

The Company recognizes interest and penalties on income taxes, if any, as a component of other non-interest expense.

Income tax expense for the three months ended June 30, 2021 and 2020, was $2.5 million and $0.9 million, respectively, which represents an effective tax rate of 26.7% and 25.3%, respectively.  Income tax expense for the six months ended June 30, 2021 and 2020, was $3.5 million and $0.4 million, respectively, which represents an effective tax rate of 24.5% and 18.3%, respectively.  The decrease in the effective tax rate for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily the result of the non-deductible goodwill impairment that took place during the first quarter of 2020.

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Financial Condition

Total assets increased $44.7 million, or 3.0%, from December 31, 2020 to $1.5 billion at June 30, 2021.  Total loans increased by $5.6 million, or 0.6%, from December 31, 2020 to June 30, 2021, primarily as a result of the increase of $16.5 million in agricultural and commercial real estate loans and $36.1 million of second round of PPP loans.  The increase in loan originations was partially offset by the forgiveness from the SBA of $40.5 million of first and second round PPP loans during the same period.  

Total liabilities increased $41.7 million, or 3.2%, from December 31, 2020 to $1.3 billion at June 30, 2021.  This increase was primarily attributable to a $52.9 million increase in wholesale deposits that were used to purchase securities and to paydown FHLB borrowings.  Client deposits increased $42.0 million from December 31, 2020 to June 30, 2021, and were used to fund the second round of PPP loans discussed above.   The balance of the Federal Reserve Bank’s Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings was $34.2 million at June 30, 2021, compared to $47.5 million at December 31, 2020 due to payments made against the PPPLF when forgiveness was received from the SBA for the first round of PPP loans.

Shareholders’ equity increased $3.0 million, or 1.8%, to $174.8 million at June 30, 2021 from $171.8 million at December 31, 2020.  This increase was due primarily to net income for the six months ended June 30, 2021 of $10.7 million which was partially offset by $2.4 million of unrealized losses in our securities portfolio during the first half of 2021.  In addition, the Company repurchased 117,020 shares of its common stock, totaling $4.7 million, during the six months ended June 30, 2021.  Total shareholders’ equity was also reduced by the payment of $1.4 million of dividends on common and preferred stock during the six months ended June 30, 2021.  

Net Loans

Net loans increased by $8.9 million, or 0.9%, to $1.0 billion at June 30, 2021 from December 31, 2020.  This increase was primarily the result of $36.1 million of second round PPP loans that were funded in the first half of 2021, which were offset by the forgiveness from the SBA of $40.5 million of first and second round PPP loans during the same period.  In addition, agricultural and commercial real estate loans increased $16.5 million as of June 30, 2021 compared to December 31, 2020, which were partially offset by normal pay-downs.

The following table sets forth the composition of our loan portfolio at the dates indicated:

	June 30, 2021						December 31, 2020
	Amount			Percent			Amount			Percent
	(dollars in thousands)
Agriculture loans	$	613,513			61.3	%	$	606,881			60.9	%
Commercial real estate loans		245,810			24.5	%		235,969			23.7	%
Commercial loans		74,069			7.4	%		77,297			7.8	%
PPP loans		33,400			3.3	%		37,790			3.8	%
Residential real estate loans		34,873			3.5	%		38,084			3.8	%
Installment and consumer other		225			0.0	%		264			0.0	%
Total gross loans	$	1,001,890			100.0	%	$	996,285			100.0	%
Allowance for loan losses		(11,466	)					(14,808	)
Loans, net	$	990,424					$	981,477

The following table sets forth the composition of PPP loans in our loan portfolio at the dates indicated:

	June 30, 2021							December 31, 2020
	# of Loans		Balance			Deferred Fee Income		# of Loans		Balance			Deferred Fee Income
	(dollars in thousands)
PPP 1oans - Round 1		69	$	3,285		$	82		456	$	37,790		$	1,191
PPP loans - Round 2		391		30,115			1,576		—		—			—
Total PPP loans		460	$	33,400		$	1,658		456	$	37,790		$	1,191
% of Total loans				3.33	%						3.79	%

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of

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the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, past loan loss experience, the nature of the portfolio, economic conditions, information about specific borrower situations, and estimated collateral values. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators, our auditors, and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result.

We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us. We mitigate this risk by actively using government guarantee programs.  12.1% of our substandard loans are partially guaranteed by the U.S. Farm Services Agency (“FSA”) or the SBA.  The amount of the guarantee can range from 80% to 95% of unpaid principal for FSA guaranteed loans and 50% to 100% for SBA guaranteed loans.  

At June 30, 2021 and December 31, 2020, the allowance for loan losses was $11.5 million and $14.8 million, respectively, which resulted in a ratio of the allowance to total loans of 1.14% and 1.49%, respectively.    

Charge-offs and recoveries by loan category for the three and six months ended June 30, 2021 and 2020 were as follows:

	Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
	(dollars in thousands)
Balance, beginning of period	$	15,082		$	17,547		$	14,808		$	15,267
Loans charged off:					-						-
Agriculture loans		—			—			—			—
Commercial real estate loans		—			—			—			—
Commercial loans		—			144			—			144
Residential real estate loans		—			—			—			—
Installment and consumer other		—			—			—			—
Total loans charged off	$	—		$	144		$	—		$	144
Recoveries:					-						-
Agriculture loans		—			23			—			23
Commercial real estate loans		612			1			613			62
Commercial loans		50			—			81			1
Residential real estate loans		—			—			—			—
Installment and consumer other		—			—			—			—
Total recoveries		662			24			694			86
Net loans charged-off (recovered)	$	(662	)	$	120		$	(694	)	$	58
Provision for loan losses		(4,278	)		1,142			(4,036	)		3,360
Allowance for loan losses, end of period	$	11,466		$	18,569		$	11,466		$	18,569
Selected loan quality ratios:
Net charge offs (recoveries) to average loans		(0.07	)%		0.01	%		(0.07	)%		0.01	%
Allowance for loan losses to total loans (end of period)		1.14	%		1.71	%		1.14	%		1.71	%
Allowance for loan losses to non-performing loans and    performing troubled debt restructurings (end of period)		30.40	%		32.32	%		30.40	%		32.32	%

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As provided in the interagency statement, the Company has been working with its borrowers impacted by COVID-19.  As of June 30, 2021, loans with COVID-19 payment modifications were $2.9 million, or less than 0.1% of total loans.  We will continue to evaluate the impacts of these payment modification requests on our allowance for loan losses.

Loan Servicing Rights

As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers as well as increasing non-interest income through the recognition of loan sale and servicing revenue. Because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we receive a servicing fee that offsets some of the cost of administering the loan, while maintaining the customer relationship.  

Loan servicing rights are recognized as separate assets when rights are acquired through the sale of financial assets. Servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer.  Under the fair value method, the value of the asset is based on a discounted cash flow model. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, and run-off rates.  These variables change from quarter-to-quarter as market conditions and projected interest rates change and may have an adverse impact on the value of the servicing right and may result in a reduction to non-interest income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

Information about the loan servicing portfolio is shown below:

	For the Three Months Ended
	June 30, 2021			December 31, 2020
	(dollars in thousands)
Loan servicing rights, end of period	$	19,478		$	18,396
Loans serviced, end of period		853,176			812,560
Loan servicing rights as a % of loans    serviced		2.28	%		2.26	%
Total loan servicing fees	$	2,278		$	1,974
Average loans serviced		847,535			805,190
Annualized loan servicing fees as a    % of average loans serviced		1.08	%		0.98	%

Securities

Our securities portfolio is predominately composed of municipal securities, investment grade mortgage-backed securities, U.S. government and agency securities, asset-backed securities, and corporate bonds. We classify substantially all of our securities as available for sale. We do not engage in active securities trading in carrying out our investment strategies.

Securities decreased to $349.3 million at June 30, 2021 from $352.9 million at December 31, 2020.  

In an effort to reduce long-term duration risk, we sold $35.3 million of securities during the first half of 2021, which resulted in a pre-tax loss of $1.5 million.  For the six months ended June 30, 20120, $27.8 million of securities were sold resulting in a pre-tax gain of $0.6 million.  During the six months ended June 30, 2021, we recognized unrealized holding losses of $5.3 million before income taxes through other comprehensive income.

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The following table sets forth the amortized cost and fair values of our securities portfolio at June 30, 2021 and December 31, 2020:

	June 30, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Securities available-for-sale:
U.S. government and agency securities	$	12,948	$	12,841	$	14,745	$	14,593
Municipal securities		127,089		130,004		149,203		153,654
Mortgage-backed securities		140,037		145,054		127,804		135,378
Corporate bonds		45,000		45,049		32,500		32,511
Asset-backed securities		16,215		16,386		16,664		16,718
Total securities available-for-sale	$	341,289	$	349,334	$	340,916	$	352,854

Deposits

Deposits are the major source of our funds for lending and other investment purposes.  Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts, noninterest-bearing demand accounts, money market accounts, savings accounts, time deposit accounts (including “jumbo” certificates in denominations of $100,000 or more), and retirement savings plans.  

Total deposits increased $94.9 million, or 9.1%, from December 31, 2020 to $1.1 billion at June 30, 2021, due primarily to a $52.9 million increase in wholesale deposits in order to paydown FHLB borrowings. In addition, client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit) increased by $42.0 million during the same period.

As of June 30, 2021 and December 31, 2020, the distribution by type of deposit account was as follows:

	June 30, 2021					December 31, 2020
	Amount		% of Deposits			Amount		% of Deposits
	(dollars in thousands)
Demand, noninterest-bearing	$	158,880		14.0	%	$	163,202		15.6	%
NOW accounts and interest checking		136,180		12.0	%		96,624		9.3	%
Savings		9,059		0.8	%		7,367		0.7	%
Money market accounts		394,486		34.8	%		344,250		33.1	%
Certificates of deposit		259,386		22.8	%		304,580		29.3	%
Brokered deposits		18,648		1.6	%		44,347		4.3	%
National time deposits		159,087		14.0	%		80,456		7.7	%
Total deposits	$	1,135,726		100.0	%	$	1,040,826		100.0	%

Hedging Activities

As of June 30, 2021, the Company had two outstanding interest rate swaps designated as a cash flow hedge, each with an aggregate notional value of $6.0 million. Both interest rate swaps mature on June 15, 2028.  A pre-tax unrealized loss of $1.4 million and $1.9 million was recognized at June 30, 2021 and December 31, 2020, respectively, with a corresponding increase reported in accrued interest payable and other liabilities on the consolidated balance sheets.  There was no ineffective portion of this hedge.  

Liquidity Management and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature including, but not limited to, funding loans and depositor withdrawals. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

At June 30, 2021, advances from the FHLB were $88.0 million compared to $129.0 million at December 31, 2020.  At June 30, 2021, there were advances from the Federal Reserve Bank’s PPPLF program totaling $34.2 million compared to $47.5 million at December 31, 2020.    

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Management adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) the objectives of our interest-rate risk and investment policies and (5) the risk tolerance of management and our board of directors.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by (used in) operating activities was $29.4 million and ($5.3) million for the six months ended June 30, 2021 and 2020, respectively.  Net cash used in investing activities, which consists primarily of purchases of and proceeds from the sale, maturities, calls, and principal repayments of securities available for sale, as well as loan originations, net of repayments, was $10.9 million and $125.6 million for the six months ended June 30, 2021 and 2020, respectively.  Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $34.7 million and $129.3 million for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021 the Bank had $84.8 million and $46.2 million in borrowing capacity with the FHLB and the Federal Reserve Bank of Chicago, respectively, to mitigate any liquidity needs.  The Bank also had $297.5 million in unpledged securities available for sale available for liquidity needs.

At June 30, 2021, the Bank exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of $203.6 million, or 13.94% of adjusted average total assets, which is above the minimum level to be well-capitalized of $73.0 million, or 5.0% of adjusted average total assets, and total risk-based capital of $215.0 million, or 16.58% of risk-weighted assets, which is above the minimum level to be well-capitalized of $129.7 million, or 10.0% of risk-weighted assets.  In addition, the Company issued $22.4 million of subordinated debt during 2020 that qualifies as Tier 2 capital that is available to support the Bank.

At the holding company level, our primary sources of liquidity are dividends from the Bank, investment income and net proceeds from investment sales, borrowings and capital offerings. The main uses of liquidity are the payment of interest to holders of our junior subordinated debentures and subordinated notes and the payment of interest or dividends to common and preferred shareholders.  The Bank is subject to certain regulatory limitations regarding its ability to pay dividends to the Company; however, we do not believe that the Company will be adversely affected by these dividend limitations.  At June 30, 2021, there were $114.3 million of retained earnings available for the payment of dividends by the Bank to the Company but would be limited to the Bank maintaining minimum regulatory capital ratios.  Management believed liquidity to be sufficient as of June 30, 2021.

At June 30, 2021 the holding company exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of $185.9 million, or 12.78% of adjusted average assets, which is above the minimum level for capital adequacy of $58.1 million, or 4.0% of adjusted average assets, and total risk-based capital of $248.9 million, or 19.14% of risk-weighted assets, which is above the minimum level for capital adequacy of $136.6 million, or 10.5% of risk-weighted assets.  

During the fourth quarter of 2020, the Company began construction on a new branch in Appleton, Wisconsin with an estimated completion in the fourth quarter of 2021.  The remaining contractual obligation related to the construction was $1.7 million at June 30, 2021.

Off-Balance Sheet Arrangements and Contractual Obligations

As of June 30, 2021, there were no significant changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 12, 2021.  We continue to believe that we have adequate capital and liquidity available from various sources to fund projected obligations and commitments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

General. Market risk refers to potential losses arising from changes in interest rates, commodity prices, such as milk prices, and/or other relevant market rates or prices. We are exposed to market risk as a result of our banking activities. Our market risk is comprised primarily of interest rate risk. As a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit our exposure to changes in market interest rates. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.

A major source of interest rate risk is a difference in the repricing of assets and liabilities. First, there are differences in the timing of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a commercial real estate loan may be fixed for 10 years, while the rate paid on a certificate of deposit may be fixed only for a few months. Due to

51

these timing differences, net interest income is sensitive to changes in the level and shape of the yield curve. Second, there are differences in the drivers of rate changes of various assets and liabilities known as basis risk. For example, commercial loans may reprice based on one-month LIBOR or prime, while the rate paid on retail money market demand accounts may be only loosely correlated with LIBOR and depend on competitive demand for funds. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.

Another important source of interest rate risk relates to the potential exercise of explicit or embedded options for prepayment or withdrawal. For example, most residential real estate loans can be prepaid without penalty, and most consumer deposits can be withdrawn without penalty. The exercise of such options by customers can exacerbate the timing differences discussed above.

Deposit accounts typically react more quickly to changes in market interest rates than loans because of the shorter maturities of deposits. However, given the asset sensitive nature of our balance sheet, a decrease in interest rates may adversely affect our earnings while increases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes adjustable-rate loans for retention in our loan portfolio, promoting core deposit products and time deposits, adjusting the maturities of borrowings, and adjusting the investment portfolio mix and duration.

We have an asset/liability committee, which includes members of management, to communicate, coordinate and control all aspects involving asset-liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income and net income and control exposure to interest rate risk within policy limits approved by our board of directors. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons. We analyze our sensitivity to changes in interest rates through our net interest income simulation model. Exposures are reported on a monthly basis to the asset and liability committee and at meetings of our board of directors.

Net Interest Income Simulation Analysis. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings.

Income simulation is the primary tool for measuring the interest rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time horizons, under a range of interest rate shock scenarios. These simulations take into account repricing, maturity and prepayment characteristics of individual products. We estimate what our net interest income would be for a one- and two-year horizon based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions.

These estimates require us to make certain assumptions, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain, and, as a result, we cannot precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

The following table shows the estimated impact on net interest income for the one- and two-year periods beginning June 30, 2021 resulting from potential changes in interest rates. The net interest income simulation analyses assume a static balance sheet and do not include possible future actions that management might undertake to mitigate this risk.

Rate Shift	Net Interest Income Year 1 Forecast		Year 1 Change from Base			Net Interest Income Year 2 Forecast		Year 2 Change from Base
	(dollars in thousands)					(dollars in thousands)
+400 bps	$	49,700		17.77	%	$	47,400		16.18	%
+200 bps		45,900		8.77	%		44,500		9.07	%
+100 bps		43,800		3.79	%		42,700		4.66	%
Base		42,200		0.00	%		40,800		0.00	%
-100 bps		40,000		-5.21	%		38,700		-5.15	%
-200 bps		38,800		-8.06	%		37,600		-7.84	%

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As of June 30, 2021, net interest income simulation indicated that our exposure to changing interest rates was within our internal policy guidelines. As the table illustrates, our balance sheet is asset-sensitive over a one- and two-year time horizon and net interest income would increase as interest rates increase. It should be noted that the magnitude of any possible increase in interest rates is constrained by the low absolute starting levels of rates. While immediate, proportional, and severe shifts in interest rates upward were used as part of this analysis, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact.

Depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that our level of interest rate risk is acceptable using this approach.

Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the present value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates. As with the net interest income simulation model, the estimates of changes in the economic value of our equity require certain assumptions to be made. These assumptions include loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain, and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2021. Based on such evaluation, our President and Chief Financial Officer have concluded that, as of June 30, 2021, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There are inherent limitations in the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of disclosure controls and procedures can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We and our subsidiaries may be involved from time to time in ordinary routine litigation incidental to our respective businesses.  Neither we nor any of our subsidiaries are currently engaged in, nor is any of our property the subject of, any legal proceedings, other than ordinary routine litigation incidental to the business, that are expected to have a material adverse effect on our results of operations or financial position.  

Item 1A. Risk Factors.

In addition to the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 31, 2020, the following risk factor applies to the Company:

Risks Relating to the Merger

The Merger consideration is fixed despite any changes in Nicolet’s or the Company’s stock prices and, because the market price of Nicolet common stock may fluctuate, Company shareholders cannot be certain of the market value of the Merger consideration they will receive.

In the Merger, each share of Company common stock owned by the Company’s shareholders immediately prior to the effective time will be converted into the right to receive 0.48 shares of Nicolet common stock or $37.18 in cash (without interest), at the election of each holder and subject to proration. Shareholder elections will be prorated to ensure the total consideration will consist of approximately 20% cash and approximately 80% common stock. The exchange ratio is fixed and will not be adjusted for changes in the market price of either Nicolet common stock received or Company common stock currently owned. Changes in the price of Nicolet common stock prior to the Merger will affect the value that the Company’s shareholders receiving Nicolet common stock will receive in the Merger. Under limited circumstances, the Company is permitted to terminate the Merger Agreement as a result of a decrease in the market price of Nicolet common stock. In any such instance, Nicolet may elect to negate the Company’s termination by increasing the exchange ratio pursuant to the formula specified in the Merger Agreement.

Stock price changes prior to the closing of the Merger may result from a variety of factors, including but not limited to general market and economic conditions, impacts and disruptions resulting from the COVID-19 pandemic, changes in Nicolet’s or the Company’s businesses, operations and prospects, and regulatory considerations, many of which are beyond Nicolet’s or the Company’s control.  Therefore, at the time of the Company special meeting, Company shareholders will not know the market value of the stock consideration to be received by holders of Company common stock at the effective time. Shareholders should obtain current market quotations for shares of Nicolet common stock and for shares of the Company’s common stock.

The Company’s shareholders may receive a form of consideration different from what they elect.

While each Company shareholder may elect to receive cash or Nicolet common stock in exchange for each share of Company common stock that it holds, the total number of shares of Company common stock that will be converted into the cash consideration will be equal to 1,237,000, and the remaining shares of Company common stock will be converted into the stock consideration (excluding certain cancelled shares). As a result, if Company shareholders choose an election that is oversubscribed, they may receive a portion of the Merger consideration in the form they did not elect.

The global coronavirus outbreak may delay or adversely affect the completion of the Merger and could harm the business and results of operations for each of Nicolet and the Company and the combined company following the completion of the Merger.

In March 2020, the World Health Organization declared the coronavirus to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on the businesses of Nicolet, the Company and the combined company, and there is no guarantee that efforts by Nicolet, the Company and the combined company to address the adverse impacts of the COVID-19 pandemic will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on Nicolet’s and the Company’s customers and on the companies’ respective businesses, financial condition and results of operations.

In addition, actions by U.S. federal, state and foreign governments to address the pandemic, including travel bans and school, business and entertainment venue closures, may also have a significant adverse effect on the markets in which Nicolet and the Company conduct their businesses. The extent of impacts resulting from the COVID-19 pandemic and other events beyond the control of Nicolet, the Company and the combined company will depend on future developments, which are highly uncertain and cannot be

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predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and actions taken to contain the coronavirus or its impact, among others.

The COVID-19 pandemic has, and could result in further, business disruption to Nicolet and the Company, and if either company is unable to recover from such a business disruption on a timely basis, the Merger and the combined company’s business and financial conditions and results of operations following the completion of the Merger would be adversely affected. Completion of the Merger, including obtaining regulatory approvals, and efforts to integrate the businesses of Nicolet and the Company may also be delayed and adversely affected by the COVID-19 pandemic, and become more costly. Each of Nicolet, the Company and the combined company may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect its financial condition and results of operations.

The opinion of Stephens, Inc. delivered to the board of directors of the Company prior to the signing of the Merger Agreement will not reflect changes in circumstances after the date of the opinion.

Prior to the execution of the Merger Agreement, the Company board of directors received an opinion from its financial advisor to address the fairness of the Merger consideration from a financial point of view and as of the date of the opinion and subject to the limitations and assumptions contained therein. Subsequent changes in the operations or prospects of Nicolet or the Company, general market and economic conditions or other factors that may be beyond the control of Nicolet or the Company, may significantly alter the value of Nicolet or the Company or the prices of the shares of Nicolet common stock or Company common stock by the time the Merger is completed. The opinion does not speak as of the effective time or as of any other date other than the date of each such opinion.

Nicolet’s integration of the Company may be more difficult, costly, or time-consuming than we expect.

Nicolet and the Company have operated, and, until completion of the Merger, will continue to operate, independently.  It is possible that the integration process could result in the loss of key employees, disruption of each company’s ongoing business or inconsistencies in standards, procedures or policies, each of which could adversely affect the ability to maintain relationships with clients and employees or to achieve some of the anticipated benefits of the Merger.  Further, the COVID-19 pandemic may make it more costly or more difficult for Nicolet to effect the integration of the Company into its current operations or may cause Nicolet or the Company to reduce integration efforts in order to focus on internal operations to account for changes in the economic environment.  If Nicolet experiences difficulties with the integration process, Nicolet might not achieve some of the economic benefits expected to result from the Merger in a timely manner or at all.  As with any Merger of banking institutions, there also may be business disruptions that cause the combined entity to lose customers or cause customers to take their deposits out of the Company’s and Nicolet’s banks and move their business to other financial institutions.

The Company and Nicolet will be subject to business uncertainties while the Merger is pending, which could adversely affect their respective businesses.

Uncertainty about the consummation of the Merger or the effect of the Merger on employees and customers may have an adverse effect on the Company and Nicolet and consequently on the business and stock price of Nicolet after the Merger.  Although the parties intend to take steps to reduce any adverse effects, these uncertainties may impair their ability to attract, retain, and motivate key personnel until the Merger is consummated and for a period of time thereafter, and such uncertainties could cause customers and others that deal with the Company or Nicolet to seek to change their existing business relationships.  Employee retention could be particularly challenging during the Merger, as employees may experience uncertainty about their roles in the combined company following the Merger.  If key employees depart because of issues relating to the perceived uncertainty and difficulty of integration or a desire not to remain with the combined company, the combined company’s business following the Merger could be harmed and the market price of its common stock could decrease.

There is no assurance when or even if the Merger will be completed.

Completion of the Merger is subject to satisfaction or waiver of a number of conditions. There can be no assurance that Nicolet and the Company will be able to satisfy the closing conditions or that closing conditions beyond their control will be satisfied or waived.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated.

The Merger must be approved by the Board of Governors or the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”) and the Wisconsin Department of Financial Institutions (the “WDFI”).   The Federal

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Reserve, the OCC and the WDFI will consider, among other factors, the competitive impact of the Merger, Nicolet’s and the Company’s financial and managerial resources and the convenience and needs of the communities to be served.  As part of that consideration, we expect that the Federal Reserve, the OCC and the WDFI will review the capital position, safety and soundness, and legal and regulatory compliance matters and Community Reinvestment Act matters.  There can be no assurance as to whether any necessary approvals will be received, the timing of those approvals, or whether any conditions will be imposed.

The market price of Nicolet common stock after the Merger may be affected by factors different from those currently affecting the market price of the Company.

The businesses of Nicolet and the Company differ in some respects and, accordingly, the results of operations of Nicolet and the market price of Nicolet’s shares of common stock after the Merger may be affected by factors different from those currently affecting the Company’s results of operations and stock price.  

The Merger Agreement limits the Company’s ability to pursue alternatives to the Merger.

The Merger Agreement contains provisions that limit the Company’s ability to discuss any competing third-party proposals to acquire it or all or a significant part of any of its subsidiaries.  In addition, the Company has agreed to pay Nicolet a fee of $10.0 million if Nicolet terminates the Merger Agreement after the Company’s board of directors withdraws or changes its recommendation of the Merger Agreement to its shareholders, if the Company terminates the Merger Agreement to accept an acquisition proposal that the Company’s board deems a superior proposal, as each term is defined in the Merger Agreement, or if (i) an acquisition proposal is made with respect to the Company, (ii) the Merger Agreement is terminated as a result of the failure to obtain the Company’s shareholder approval, and (iii) the Company enters into an agreement for such acquisition proposal within 12 months after the Merger Agreement is terminated.  These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share price than that proposed in the Merger, or might result in a potential competing acquirer proposing to pay a lower per share price to acquire the Company than it might otherwise have proposed to pay.

Company shareholders will have limited ability to exercise influence over management of the combined organization.

Company shareholders currently have the right to vote in the election of the board of directors of the Company and on other matters affecting the Company. Upon the completion of the Merger, each Company shareholder will become a shareholder of Nicolet with a percentage ownership of the combined organization that is much smaller than the shareholder’s percentage ownership of the Company. Company shareholders will not have separate approval rights with respect to any actions or decisions of Nicolet or have separate representation on Nicolet’s board of directors. Because of this, Company shareholders will have significantly less influence on the management and policies of Nicolet than they now have on the management and policies of the Company.

Failure to complete the Merger could negatively impact the stock price and future business and financial results of the Company.

If the Merger is not completed for any reason, including the Company or Nicolet shareholders failing to approve the Merger Agreement and the Merger, the ongoing business of the Company may be adversely affected and, without realizing any of the benefits of having completed the Merger, the Company could be subject to a number of possible consequences, including the following:

• the Company may be required, under certain circumstances, to pay a termination fee to Nicolet;

• the Company is subject to certain restrictions on the conduct of business prior to completing the Merger, which may adversely affect its ability to execute certain business strategies;

• the Company may experience negative reactions from the financial markets, including negative impacts on its stock price;

• the Company’s relationships with customers, regulators and employees may be negatively affected;

• the Company has incurred and will continue to incur certain costs and fees associated with the Merger; and

• matters related to the Merger (including integration planning) may require substantial commitments of time and resources by the management and employees of the Company, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to the Company as an independent company.

Nicolet may fail to realize some or all of the anticipated benefits of the Merger.

The success of the Merger will depend on, among other things, Nicolet’s ability to successfully combine the businesses of Nicolet and the Company. If Nicolet is not able to successfully achieve this objective, the anticipated benefits of the Merger may not be realized fully, or at all, or may take longer to realize than expected.  Nicolet and the Company have operated and, until the consummation of the Merger, will continue to operate independently. It is possible that the integration process or other factors could result in the disruption of the ongoing business of Nicolet or inconsistencies in standards, controls, procedures and policies. It is also

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possible that clients, customers, depositors and counterparties of Nicolet or the Company could choose to discontinue their relationships with the combined company post-Merger because they prefer doing business with an independent company or for any other reason, which would adversely affect the future performance of the combined company. These transition matters could have an adverse effect on each of Nicolet and the Company during the pre-Merger period and for an undetermined period of time after the consummation of the Merger.

The Company is subject to specific market risks due to its focus on agricultural lending, an area of lending where Nicolet has historically only held a small portion of its loan portfolio.

The Company primarily concentrates its lending activities in the state of Wisconsin, which has a significant agricultural economy. Historically, the Company’s senior management’s primary business lending experience has been in agricultural lending, with a specific expertise in and focus on dairy and dairy-related businesses. Nicolet attempts to maintain a diversified customer base and a diversified loan portfolio, but the acquisition of the Company will result in Nicolet’s portfolio becoming more heavily dependent upon the agricultural economy than a typical commercial bank. Nicolet may fail to implement certain lending practices that maintain the health and growth of the agricultural loan portfolio.  A prolonged period of weakness in the agricultural economy could result in a decrease in demand for loans or other products and services offered by the Company or the combined company, an increase in agricultural loan delinquencies and defaults, an increase in impaired assets and foreclosures, a decline in the value of loans secured by real estate, and an inability to sell foreclosed assets. The effects of a prolonged period of a weakened agricultural economy could have a material adverse effect on the business or results of operations of the Company or the combined company.  

The agricultural economy is subject to certain risks that are either inherently volatile or are beyond the Company’s or Nicolet’s ability, or the ability of farmers or other participants in the agricultural economy, to predict or control. Some of these risks include, but are not limited to market prices, governmental policies and regulations, changing consumer preferences, weather-related risks, disease-related risks and real property value.

Litigation related to the Merger may be filed against Nicolet, the Nicolet board of directors, the Company and/or the Company board of directors, which could prevent or delay the completion of the Merger or result in the payment of damages.

It is possible that litigation by shareholders of Nicolet and/or the Company may be filed against Nicolet, the Nicolet board of directors, the Company and/or the Company board of directors. Among other remedies, the lawsuits could seek damages and/or to enjoin the Merger or the other transactions contemplated by the Merger Agreement. The outcome of any litigation is uncertain, and any such lawsuits could prevent or delay the completion of the Merger and result in substantial costs to Nicolet, the Company and the combined company, including following consummation of the Merger. Any such actions may create uncertainty relating to the Merger and may be costly and distracting to management. Further, the defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may adversely affect the combined company’s business, financial condition and results of operations.

There is no assurance that Nicolet will complete the Mackinac merger transaction.

Like the Merger, the Mackinac merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and the approval of Nicolet and Mackinac shareholders. If any conditions to the Mackinac merger are not satisfied or waived, to the extent permitted by law, the Mackinac merger will not be completed. In addition, Nicolet and Mackinac may terminate the Mackinac merger agreement under certain circumstances even though the Mackinac merger agreement has been approved by Nicolet’s shareholders and Mackinac’s shareholders. If Nicolet and Mackinac do not complete the Mackinac merger, Nicolet would not realize any of the expected benefits of having completed the Mackinac merger. There is no assurance that the Mackinac merger will be completed or, if it is completed, the timing of such completion.

If Nicolet’s stock price decreases below specified thresholds, then the Company has the right to terminate the Merger Agreement, and the Merger would not occur unless Nicolet increases the Merger consideration.

If for a specified period prior to completion of the Merger Nicolet’s average stock price decreases below certain specified thresholds, then the Company may terminate the Merger Agreement subject to Nicolet’s right (but not obligation) to increase the Merger consideration by increasing the exchange ratio. If Nicolet elects not to increase the Merger consideration, the Company may then terminate the Merger Agreement.

As a result, even if the Company’s shareholders approve the Merger Agreement, the Merger may ultimately not be completed. Although the Nicolet board of directors has the ability to increase the Merger consideration and the Company’s board of directors has the power to choose not to terminate the Merger Agreement and proceed with the Merger if Nicolet does not increase the Merger consideration, there is no obligation of either board to exercise such power.

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Shares of Nicolet common stock to be received by the Company’s shareholders as a result of the merger will have rights different from the shares of Company common stock.

Upon completion of the merger, the rights of former Company shareholders will be governed by the articles of incorporation and bylaws of Nicolet and by Wisconsin corporate law. Although the rights associated with Nicolet common stock and Company common stock are both governed by the terms of Wisconsin corporate law, the Company governing documents provide for different rights to its shareholders than the Nicolet governing documents.

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

Unregistered Sales of Equity Securities

The Company did not issue any unregistered equity securities during the quarter ended June 30, 2021.

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the second quarter of 2021.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that may yet be Purchased under the Plans or Programs (1)
April 1 - 30, 2021		27,965	$	23.88		27,965		573,321
May 1 - 31, 2021		31,818		24.04		31,818		541,503
June 1 - 30, 2021		31,670		25.07		31,670		509,833

(1) On January 29, 2020, the Company announced that its Board of Directors authorized the Company to repurchase up to 673,000 shares of its common stock through January 23, 2023.  Stock repurchases under the program could be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. From January 29, 2020 through the first quarter of 2021, all the authorized shares in this program had been repurchased for a total of $14.9 million.  On February 16, 2021, the Company announced that its Board of Directors extended the stock repurchase program, authorizing the purchase of up to an aggregate of 609,000 additional shares of the Company’s outstanding common stock through February 16, 2024.  The timing of purchases and the number of shares repurchased under the program are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice.  As of June 30, 2021, $2.4 million, or 99,167 shares, of the Company’s common stock had been repurchased under the program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit Number	Description
2.1	Agreement and Plan of Merger between Nicolet Bankshares, Inc. and County Bancorp, Inc. dated June 22, 2021 (incorporated by reference to Exhibit 2.1 of County Bancorp, Inc.’s current report on Form 8-K filed on June 22, 2021)
3.1	Third Amended and Restated Articles of Incorporation of County Bancorp, Inc.  (Incorporated by reference to Exhibit 3.1 of County Bancorp, Inc.’s annual report on Form 10-K filed on March 15, 2018)
3.2	Third Amended and Restated Bylaws of County Bancorp, Inc. as of November 20, 2018 (Incorporated by reference to Exhibit 3.1 of County Bancorp, Inc.’s current report on Form 8-K filed on November 27, 2018)
10.1	County Bancorp, Inc. 2021 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.4 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.2	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.5 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.3	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.6 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.4	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Director Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.7 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.5	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Deferred Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.8 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.6	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Director Deferred Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.9 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.7	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 4.10 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.8	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 4.11 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
10.9	Form of County Bancorp, Inc. 2021 Long-Term Incentive Plan Stock Appreciation Right Award Agreement (incorporated by reference to Exhibit 4.12 of County Bancorp, Inc.’s registration statement on Form S-8 (File no. 333-256289) filed on May 19, 2021)
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	The iXBRL 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

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101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements

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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.

	County Bancorp, Inc.
Date:  August 6, 2021	By:	/s/ Timothy J. Schneider
		Timothy J. Schneider
		President (principal executive officer)
Date:  August 6, 2021	By:	/s/ Glen L. Stiteley
		Glen L. Stiteley
		Chief Financial Officer (principal financial and accounting officer)

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