HAWTHORN BANCSHARES: Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-Q)

0


Forward-looking statements

This report contains certain forward-looking statements concerning the financial condition, results of operations, plans, objectives, future performance and activities of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the Company), including, without limitation:

? statements that are not of a historical nature, and

statements preceded, followed or comprising the words believes,

? expects, may, will, should, might, anticipates, estimates, intends, plans,

hopes or similar expressions.


Forward-looking statements are not guarantees of future performance or results.
They involve risks, uncertainties and assumptions. Actual results may differ
materially from those contemplated by the forward-looking statements due to,
among others, the following factors:

? competitive pressures among financial services firms may increase

significantly,

? changes in the interest rate environment can reduce interest margins,

general economic conditions, whether at national level or in Missouri, perhaps less

? more favorable than expected and could adversely affect the quality of our loans and

other assets,

increases in non-performing assets in the Company’s loan portfolios and

? economic conditions may require an increase in our loan provisions

losses,

? the costs or difficulties associated with any integration of any activity of the Company

and its acquisition objectives may be greater than expectations,

? legislative, regulatory or tax changes may have a negative impact on the activity in

to which the Company and its subsidiaries are committed,

? changes may occur in the securities markets and,

? effects of the COVID-19 pandemic, or any resurgence thereof, or other

outdoor events.


We have described under the caption Risk Factors in the Company's Annual Report
on Form 10-K for the year ended December 31, 2020, and in other reports filed
with the SEC from time to time, additional factors that could cause actual
results to be materially different from those described in the forward-looking
statements. Other factors that have not been identified in this report could
also have this effect. You are cautioned not to put undue reliance on any
forward-looking statement, which speak only as of the date they were made.
Except as required by law, the Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events, or changes in its business, results of operations or
financial condition over time.

Overview

Crucial to the Company's community banking strategy is growth in its commercial
banking services, retail mortgage lending and retail banking services. Through
the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the
Company, with $1.7 billion in assets at June 30, 2021, provides a broad range of
commercial and personal banking services. The Bank's specialties include
commercial banking for small and mid-sized businesses, including equipment,
operating, commercial real estate, Small Business Administration (SBA) loans,
and personal banking services including real estate mortgage lending,
installment and consumer loans, certificates of deposit, individual retirement
and other time deposit accounts, checking accounts, savings accounts, and money
market accounts. Other financial services that the Company provides include
trust services that include estate planning, investment and asset management
services and a comprehensive suite of cash management services. The geographic
areas in which the Company provides products and services include the Missouri
communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw,
Springfield, St. Louis, and the greater Kansas City metropolitan area.

                                       38



The Company's primary source of revenue is net interest income derived primarily
from lending and deposit taking activities. Much of the Company's business is
commercial, commercial real estate development, and residential mortgage
lending. The Company's income from mortgage brokerage activities is directly
dependent on mortgage rates and the level of home purchases and refinancing
activity.

The success of the Company's growth strategy depends primarily on the ability of
the Bank to generate an increasing level of loans and deposits at acceptable
risk levels and on acceptable terms without significant increases in
non-interest expenses relative to revenues generated. The Company's financial
performance also depends, in part, on its ability to manage various portfolios
and to successfully introduce additional financial products and services by
expanding new and existing customer relationships, utilizing improved
technology, and enhancing customer satisfaction. Furthermore, the success of the
Company's growth strategy depends on its ability to maintain sufficient
regulatory capital levels during periods in which general economic conditions
are unfavorable and despite economic conditions being beyond its control.

The Bank is a full-service bank conducting a general banking business, offering
its customers checking and savings accounts, debit cards, certificates of
deposit, safety deposit boxes and a wide range of lending services, including
commercial and industrial loans, residential real estate loans, single payment
personal loans, installment loans and credit card accounts. In addition, the
Bank provides trust services.

The deposit accounts of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) to the extent provided by law. The operations of the Bank are
supervised and regulated by the FDIC and the Missouri Division of Finance.
Periodic examinations of the Bank are conducted by representatives of the FDIC
and the Missouri Division of Finance. Such regulations, supervision and
examinations are principally for the benefit of depositors, rather than for the
benefit of shareholders. The Company is subject to supervision and examination
by the Board of Governors of the Federal Reserve System.

Important developments and transactions

Each item listed below materially affects the comparability of our results of
operations for the three and six months ended June 30, 2021 and 2020,
respectively, and our financial condition as of June 30, 2021 and December 31,
2020, and may affect the comparability of financial information we report in
future fiscal periods.

Impact of COVID-19. The COVID-19 pandemic and related restrictive measures taken
by governments, businesses and individuals caused unprecedented uncertainty,
volatility and disruption in financial markets and in governmental, commercial
and consumer activity in the United States and globally, including the markets
that we serve. Although many of the restrictive measures have been eased during
2020 and into 2021, and the U.S. economy has begun to recover and with the
availability and distribution of a COVID-19 vaccine, the extent of the impact of
the COVID-19 pandemic on the Company's business remains highly uncertain and
difficult to predict.  If the COVID-19 pandemic subsides, we anticipate
continued improvements in commercial and consumer activity and the U.S. economy.
The continuing impact of the COVID-19 pandemic on the Company's business will
depend on a number of factors, including, but not limited to, the scope,
severity and duration of any resurgence of the pandemic (including COVID-19
variants), the actions taken to contain the outbreak or any resurgence or
mitigate their impacts, the distribution of vaccines and the efficacy of those
vaccines, the ability of communities to achieve herd immunity, the public's
confidence in the health and safety measures implemented by the Company's
customers, the continuing direct and indirect economic effects of the outbreak
and containment measures, and the ability of the Company's customers to recover
from the negative economic impacts of the pandemic as it subsides, all of which
are uncertain and cannot be predicted.

Effects on Our Market Areas. Our commercial and consumer banking products and
services are delivered primarily in Missouri, where individual and governmental
responses to the COVID-19 pandemic have led to a broad curtailment of economic
activity While positive tailwinds exist, we recognize that our business and
consumer customers are experiencing varying degrees of financial distress, which
is expected to continue into the third quarter of 2021, especially as new
COVID-19 variant infections increase and new health and safety measures are
implemented. Commercial activity has improved, but has not returned to the
levels existing prior to the outbreak of the pandemic. In addition, the economic
pressures and uncertainties related to the COVID-19 pandemic have resulted in
changes in consumer spending behaviors,

                                       39



which may negatively impact the demand for loans and other services we offer.
Our borrowing base includes customers in industries such as hotel/lodging,
restaurants, entertainment, retail and commercial real estate, all of which have
been significantly impacted by the COVID-19 pandemic. We recognize that these
industries may take longer to recover as consumers may be hesitant to return to
full social interaction or may change their spending habits on a more permanent
basis as a result of the pandemic. We continue to monitor these customers
closely.

Effects on Our Business. The COVID-19 pandemic and the specific developments
referred to above may continue to have a significant impact on our business. In
particular, we anticipate that a significant portion of the Bank's borrowers in
the hotel, restaurant, gaming, long-term healthcare and retail industries will
continue to endure significant economic distress, which has caused, and may
continue to cause them to draw on their existing lines of credit and adversely
affect their ability to repay existing indebtedness. These developments,
together with economic conditions generally, are also expected to impact our
commercial real estate portfolio, particularly with respect to real estate with
exposure to these industries, our consumer loan business and loan portfolio, and
the value of certain collateral securing our loans.

The Company continues to lend to qualified consumer and commercial customers. We
continue to participate in the SBA's Small Business Paycheck Protection Program
(PPP). As of June 30, 2021, the net balance of the PPP loans totaled $49.6
million.

Beginning in 2020, as provided for by the CARES Act, the Company offered payment
modifications to borrowers. At December 31, 2020, these modifications totaled
$86.7 million, or 6.7% of total loans. At June 30, 2021, $42.8 million, or 3.3%
of total loans, remained in some form of a modification. These loan
modifications include $11.4 million on interest only, $26.4 million on full
deferral and $5.0 million with extended amortization. As permitted by the CARES
Act and other regulatory guidance, the Company has elected to suspend accounting
principles generally accepted in the United States of America (U.S. GAAP) and
regulatory determinations for loan modifications relating to the COVID-19
pandemic that would otherwise require evaluation as troubled debt restructurings
(TDRs). The Company expects most of these modified loans to recover from the
pandemic, but uncertainty regarding the short-term and long-term effects of the
COVID-19 pandemic remain that may require the Company to downgrade modified
loans which may increase our allowance for loan losses, reverse interest income
previously recognized but not received, or charge-off modified loans.

CRITICAL ACCOUNTING POLICIES

The following accounting policies are considered most critical to the
understanding of the Company's financial condition and results of operations.
These critical accounting policies require management's most difficult,
subjective and complex judgments about matters that are inherently uncertain.
Because these estimates and judgments are based on current circumstances, they
may change over time or prove to be inaccurate based on actual experiences. In
the event that different assumptions or conditions were to prevail, and
depending upon the severity of such changes, the possibility of a materially
different financial condition and/or results of operations could reasonably be
expected. The impact and any associated risks related to the critical accounting
policies on the business operations are discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations, where
such policies affect the reported and expected financial results.

Allowance for loan losses

Management has identified the accounting policy related to the allowance for
loan losses as critical to the understanding of the Company's results of
operations, since the application of this policy requires significant management
assumptions and estimates that could result in materially different amounts to
be reported if conditions or underlying circumstances were to change. Further
discussion of the methodology used in establishing the allowance and the impact
of any associated risks related to these policies on the Company's business
operations is provided in note 1 to the Company's unaudited consolidated
financial statements and is also discussed in the Lending and Credit Management
section below. Many of the loans are deemed collateral dependent for purposes of
the measurement of the impairment loss, thus the fair value of the underlying
collateral and sensitivity of such fair values due to changing market
conditions, supply and demand, condition of the collateral and other factors can
be volatile over periods of time. Such volatility can have an impact on the
financial performance of the Company.

                                       40



SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the
Company as of and for each of the three and six months ended June 30, 2021 and
2020, respectively. The selected consolidated financial data should be read in
conjunction with the unaudited consolidated financial statements of the Company,
including the related notes, presented elsewhere herein.


Selected Financial Data
                                          Three Months Ended       Six Months Ended
                                              June 30,                June 30,

(In thousands, except per share data) 2021 2020 2021

    2020
Per Share Data
Basic earnings per share                $     0.74    $   0.49   $     1.62   $  0.61
Diluted earnings per share                    0.74        0.49         1.62      0.61
Cash dividends paid on common stock            828         750        1,670
    1,503
Book value per share                                                  20.63     17.78
Market price per share                                                22.93     18.93
Selected Ratios
(Based on average balance sheet data)
Return on total assets                        1.14 %      0.81 %       1.26 %    0.53 %
Return on stockholders' equity               14.64 %     11.12 %      16.31 %    7.06 %
Stockholders' equity to total assets          7.76 %      7.24 %       7.70
%    7.51 %
Efficiency ratio (1)                         64.45 %     69.59 %      63.14 %   70.17 %
Net interest spread                           3.24 %      3.25 %       3.34 %    3.26 %
Net interest margin                           3.40 %      3.46 %       3.51 %    3.51 %

(Based on end-of-period data)
Stockholders' equity to assets                                         7.99 %    7.13 %
Total risk-based capital ratio                                        14.66 %   14.64 %
Tier 1 risk-based capital ratio                                       13.20
%   12.76 %
Common equity Tier 1 capital                                           9.91 %    9.58 %
Tier 1 leverage ratio (2)                                             10.49 %    9.82 %

(1) The efficiency ratio is calculated as non-interest expense as a percentage of

income. Total income includes net interest income and non-interest income.

(2) The Tier 1 leverage ratio is calculated by dividing the Tier 1 capital by the average

total consolidated assets.

ANALYSIS OF OPERATIONAL RESULTS

The Company has prepared all of the consolidated financial information in this
report in accordance with U.S. GAAP. In preparing the consolidated financial
statements in accordance with U.S. GAAP, the Company makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the

                                       41



date of financial statements and reported income and expense amounts during the reporting period. There can be no assurance that actual results will not differ from these estimates.


                                         Three Months Ended June 30,                         Six Months Ended June 30,
(In thousands)                  2021        2020       $ Change     % 

Change 2021 2020 Change in $ Change in% Net interest income

           $ 13,671    $ 13,339    $      332          2.5 %    $ 28,062    $ 25,865    $   2,197          8.5 %
Provision for loan losses          400         900         (500)       (55.6)           400       4,200      (3,800)       (90.5)
Non-interest income              4,589       2,856         1,733         60.7         9,031       5,147        3,884         75.5
Investment securities
gains, net                           -           7           (7)      (100.0)            15           6            9        150.0
Non-interest expense            11,769      11,270           499          4.4        23,420      21,761        1,659          7.6
Income before income taxes       6,091       4,032         2,059         51.1        13,288       5,057        8,231        162.8
Income tax expense               1,199         750           449         59.9         2,557         907        1,650        181.9
Net income                    $  4,892    $  3,282    $    1,610         49.1 %    $ 10,731    $  4,150    $   6,581        158.6 %


Consolidated net income of $4.9 million, or $0.74 per diluted share, for the
three months ended June 30, 2021 increased $1.6 million compared to $3.3
million, or $0.49 per diluted share, for the three months ended June 30, 2020.
For the three months ended June 30, 2021, the return on average assets was
1.14%, the return on average stockholders' equity was 14.64%, and the efficiency
ratio was 64.5%.

Consolidated net income of $10.7 million, or $1.62 per diluted share, for the
six months ended June 30, 2021 increased $6.6 million compared to $4.1 million,
or $0.61 per diluted share, for the six months ended June 30, 2020. For the
six months ended June 30, 2021, the return on average assets was 1.26%, the
return on average stockholders' equity was 16.31%, and the efficiency ratio was
63.1%.

Net interest income was $13.7 million and $28.1 million for the three and six
months ended June 30, 2021, respectively, compared to $13.3 million and $25.9
million for the three and six months ended June 30, 2020, respectively. The net
interest margin (expressed on a fully taxable equivalent basis) decreased to
3.40% for the three months ended June 30, 2021 compared to 3.46% for the three
months ended June 30, 2020, and was consistent at 3.51% for both the six months
ended June 30, 2021 and 2020. These changes are discussed in greater detail
under the Average Balance Sheet Data and Rate and Volume Analysis section below.

A $0.4 million provision for loan losses was required for both the three and six
months ended June 30, 2021 compared to a $0.9 million and $4.2 million provision
for the three and six months ended June 30, 2020, respectively. The decreased
provision in the three and six months ended June 30, 2021 compared to the three
and six months ended June 30, 2020 resulted primarily from the impact of net
recoveries and improvement in the economic outlook as the economy begins to
recover from the impacts of the COVID-19 pandemic. Criticized loan levels remain
elevated when compared to pre-pandemic levels due to the downgrade of loans to
borrowers that have been impacted by the COVID-19 pandemic.

The Company's net loan charge-offs (recoveries) were $26,000 and $(222,000) for
the three and six months ended June 30, 2021, respectively, compared to net loan
(recoveries) charge-offs of $(29,000) and $55,000 for the three and six months
ended June 30, 2020, respectively.

Non-performing loans totaled $33.8 million, or 2.61% of total loans, at June 30,
2021 compared to $34.6 million, or 2.69% of total loans, at December 31, 2020,
and $8.9 million, or 0.70% of total loans, at June 30, 2020. These changes are
discussed in greater detail under the Lending and Credit Management section
below.

Non-interest income increased $1.7 million, or 60.7%, for the three months ended
June 30, 2021 compared to the three months ended June 30, 2020, and increased
$3.9 million, or 75.5%, for the six months ended June 30, 2021 compared to the
six months ended June 30, 2020. These changes are discussed in greater detail
under the Non-interest Income and Expense section below.

Non-interest expense increased $0.5 million, or 4.4%, for the three months ended
June 30, 2021 compared to the three months ended June 30, 2020, and increased
$1.7 million, or 7.6%, for the six months ended June 30, 2021 compared

                                       42



at the end of the six months June 30, 2020. These changes are discussed in more detail in the Non-interest income and expenses section below.

Average balance sheet data

Net interest income is the largest source of revenue resulting from the
Company's lending, investing, borrowing, and deposit gathering activities. It is
affected by both changes in the level of interest rates and changes in the
amounts and mix of interest earning assets and interest bearing liabilities. The
following table presents average balance sheet data, net interest income,
average yields of earning assets, average costs of interest bearing liabilities,
net interest spread and net

                                       43


interest margin on an equivalent fully taxable basis for each of the three and six month periods ended June 30, 2021 and 2020, respectively.

                                                                  Three Months Ended June 30,
                                                         2021                                      2020
                                                         Interest       Rate                       Interest       Rate
                                          Average        Income/       Earned/      Average        Income/       Earned/
(In thousands)                            Balance       Expense(1)     Paid(1)      Balance       Expense(1)     Paid(1)
ASSETS
Loans: (2) (3)
Commercial                              $   256,557    $      2,999       4.69 %  $   280,867    $      3,121       4.47 %
Real estate construction -
residential                                  35,005             427       4.89         25,993             331       5.12
Real estate construction -
commercial                                   77,726             913       4.71         84,824             962       4.56
Real estate mortgage - residential          263,477           2,843       4.33        248,852           2,922       4.72
Real estate mortgage - commercial           618,126           6,620       4.30        586,043           6,992       4.80
Installment and other consumer               24,794             242       3.91         30,071             307       4.11
Total loans                             $ 1,275,685    $     14,044       4.42 %  $ 1,256,650    $     14,635       4.68 %
Loans held for sale                     $     4,222    $         29       2.76 %  $    11,513    $         50       1.75 %
Investment securities:
U.S. Treasury                           $     3,039    $          8       1.06 %  $       776    $          4       2.07 %
U.S. government and federal agency
obligations                                  22,730              99       1.75         46,981             245       2.10
Obligations of states and political
subdivisions                                 88,153             670       3.05         43,833             318       2.92
Mortgage-backed securities                  131,134             416       1.27        100,558             413       1.65
Other debt securities                        12,886             158       4.92          6,111              81       5.33
Total investment securities             $   257,942    $      1,351       2.10 %  $   198,259    $      1,061       2.15 %
Other investment securities                   6,069              81       5.35          7,421              72       3.90
Federal funds sold and interest
bearing deposits in other financial
institutions                                116,655              88       0.30         99,629             117       0.47
Total interest earning assets           $ 1,660,573    $     15,593       3.77 %  $ 1,573,472    $     15,935       4.07 %
All other assets                             85,077                                    82,098
Allowance for loan losses                  (18,467)                                  (15,854)
Total assets                            $ 1,727,183                               $ 1,639,716
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts                            $   227,179    $        134       0.24 %  $   187,559    $        120       0.26 %
Savings                                     156,944              14       0.04        114,369              10       0.04
Interest checking                            41,336              47       0.46         45,996              75       0.66
Money market                                281,831              81       0.12        282,722              85       0.12
Time deposits                               246,862             504       0.82        304,986           1,040       1.37
Total interest bearing deposits         $   954,152    $        780       0.33 %  $   935,632    $      1,330       0.57 %
Federal funds purchased and
securities sold under agreements to
repurchase                                   45,261              26       0.23         39,355              59       0.60
Federal Home Loan Bank advances and
other borrowings                             94,823             385       1.63        136,983             612       1.80
Subordinated notes                           49,486             307       2.49         49,486             381       3.10
Total borrowings                        $   189,570    $        718       1.52 %  $   225,824    $      1,052       1.87 %
Total interest bearing liabilities      $ 1,143,722    $      1,498       0.53 %  $ 1,161,456    $      2,382       0.82 %
Demand deposits                             433,879                                   343,000
Other liabilities                            15,582                                    16,563
Total liabilities                         1,593,183                                 1,521,019
Stockholders' equity                        134,000                                   118,697
Total liabilities and stockholders'
equity                                  $ 1,727,183                               $ 1,639,716
Net interest income (FTE)                              $     14,095                              $     13,553
Net interest spread                                                       3.24 %                                    3.25 %
Net interest margin                                                       3.40 %                                    3.46 %

Interest income and returns are presented on an equivalent fully taxable basis

using the federal statutory tax rate of 21%, net of non-deductible interest charges (1), for the three months ended June 30, 2021 and 2020. Such

totalized adjustments $ 424,000 and $ 214,000 for the three months ended June 30th,

2021 and 2020 respectively.

(2) Non-performing loans are included in average outstandings.

Commissions and charges on loans are included in interest income ($ 0.5 million and (3) $ 0.4 million PPP fees were included in commercial loan income for the

    three months ended June 30, 2021 and 2020, respectively).




                                       44




                                                                   Six Months Ended June 30,
                                                         2021                                      2020
                                                         Interest       Rate                       Interest       Rate
                                          Average        Income/       Earned/      Average        Income/       Earned/
(In thousands)                            Balance       Expense(1)     Paid(1)      Balance       Expense(1)     Paid(1)
ASSETS
Loans: (2) (3)
Commercial                              $   257,087    $      7,156       5.61 %  $   239,975    $      5,692       4.77 %
Real estate construction -
residential                                  34,252             822       4.84         24,730             654       5.32
Real estate construction -
commercial                                   78,150           1,791       4.62         85,199           2,070       4.89
Real estate mortgage - residential          261,768           5,684       4.38        249,804           6,064       4.88
Real estate mortgage - commercial           619,991          13,219       4.30        579,588          13,997       4.86
Installment and other consumer               25,390             508       4.03         30,756             652       4.26
Total loans                             $ 1,276,638    $     29,180       4.61 %  $ 1,210,052    $     29,129       4.84 %
Loans held for sale                     $     4,858    $         54       2.24 %  $     6,702    $         55       1.65 %
Investment securities:
U.S. Treasury                           $     3,023    $         16       1.07 %  $       768    $          7       1.83 %
U.S. government and federal agency
obligations                                  23,473             201       1.73         42,074             440       2.10
Obligations of states and political
subdivisions                                 74,878           1,122       3.02         40,309             589       2.94
Mortgage-backed securities                  123,351             798       1.30        102,293             938       1.84
Other debt securities                        12,216             301       4.97          5,256             141       5.39
Total investment securities             $   236,941    $      2,438       2.08 %  $   190,700    $      2,115       2.23 %
Other investment securities                   6,026             165       5.52          6,837             173       5.09
Federal funds sold and interest
bearing deposits in other financial
institutions                                132,899             190       0.29         90,922             442       0.98
Total interest earning assets           $ 1,657,362    $     32,027       3.90 %  $ 1,505,213    $     31,914       4.26 %
All other assets                             84,905                                    82,617
Allowance for loan losses                  (18,466)                                  (14,219)
Total assets                            $ 1,723,801                               $ 1,573,611
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts                            $   229,234    $        272       0.24 %  $   186,601    $        409       0.44 %
Savings                                     149,879              26       0.04        107,615              32       0.06
Interest checking                            51,373             122       0.48         46,646             248       1.07
Money market                                280,539             164       0.12        276,621             548       0.40
Time deposits                               256,899           1,176       0.92        314,045           2,205       1.41
Total interest bearing deposits         $   967,924    $      1,760       0.37 %  $   931,528    $      3,442       0.74 %
Federal funds purchased and
securities sold under agreements to
repurchase                                   43,394              52       0.24         32,822              96       0.59
Federal Home Loan Bank advances and
other borrowings                             96,479             781       1.63        122,507           1,244       2.04
Subordinated notes                           49,486             617       2.51         49,486             882       3.58
Total borrowings                        $   189,359    $      1,450       1.54 %  $   204,815    $      2,222       2.18 %
Total interest bearing liabilities      $ 1,157,283    $      3,210       0.56 %  $ 1,136,343    $      5,664       1.00 %
Demand deposits                             416,749                                   302,122
Other liabilities                            17,083                                    16,998
Total liabilities                       $ 1,591,115                               $ 1,455,463
Stockholders' equity                        132,686                                   118,148
Total liabilities and stockholders'
equity                                  $ 1,723,801                               $ 1,573,611
Net interest income (FTE)                              $     28,817                              $     26,250
Net interest spread                                                       3.34 %                                    3.26 %
Net interest margin                                                       3.51 %                                    3.51 %

Interest income and returns are presented on an equivalent fully taxable basis

using the federal statutory tax rate of 21%, net of non-deductible interest charges (1), for the six months ended June 30, 2021 and 2020. Such

totalized adjustments $ 755,000 and $ 385,000 for the six months ended June 30th,

2021 and 2020 respectively.

(2) Non-performing loans are included in average outstandings.

Commissions and charges on loans are included in interest income ($ 2.0 million and (3) $ 0.4 million PPP fees were included in commercial loan income for the six

months ended June 30, 2021 and 2020, respectively).

Rate and volume analysis

The following table summarizes the changes in net interest income on a fully
taxable equivalent basis, by major category of interest earning assets and
interest bearing liabilities, identifying changes related to volumes and rates
for the three and six months ended June 30, 2021 compared to the three and six
months ended June 30, 2020, respectively. The change in

                                       45



interest due to the combined rate/volume variance has been allocated to rate and
volume changes in proportion to the absolute dollar amounts of change in each.


                                                 Three Months Ended June 30,              Six Months Ended June 30,
                                                         2021 vs. 2020                          2021 vs. 2020
                                                                Change due to                          Change due to
                                               Total         Average      Average       Total      Average      Average
(In thousands)                                 Change         Volume        Rate       Change       Volume       Rate
Interest income on a fully taxable
equivalent basis: (1)
Loans: (2) (3)
Commercial                                   $    (122)     $    (279)    $    157    $   1,464    $    427    $   1,037
Real estate construction - residential               96            111        (15)          168         233         (65)
Real estate construction - commercial              (49)           (82)          33        (279)       (165)        (114)
Real estate mortgage - residential                 (79)            166       (245)        (380)         280        (660)
Real estate mortgage - commercial                 (372)            369       (741)        (778)         933      (1,711)
Installment and other consumer                     (65)           (52)     
  (13)        (144)       (109)         (35)
Loans held for sale                                (21)           (42)          21          (1)        (17)           16
Investment securities:
U.S. Treasury                                         4              7         (3)            9          13          (4)
U.S. government and federal agency
obligations                                       (146)          (110)        (36)        (239)       (170)         (69)
Obligations of states and political
subdivisions                                        352            337          15          533         517           16
Mortgage-backed securities                            3            110       (107)        (140)         170        (310)
Other debt securities                                77             84         (7)          160         173         (13)
Other investment securities                           9           (15)          24          (8)        (22)           14
Federal funds sold and interest bearing
deposits in other financial institutions           (29)             18     
  (47)        (252)         147        (399)
Total interest income                        $    (342)     $      622    $  (964)    $     113    $  2,410    $ (2,297)
Interest expense:
NOW accounts                                         14             24        (10)        (137)          79        (216)
Savings                                               4              4           -          (6)          10         (16)
Interest checking                                  (28)            (7)        (21)        (126)          23        (149)
Money market                                        (4)              -         (4)        (384)           8        (392)
Time deposits                                     (536)          (172)       (364)      (1,029)       (353)        (676)
Federal funds purchased and securities
sold under agreements to repurchase                (33)              8        (41)         (44)          25         (69)
Federal Home Loan Bank advances and other
borrowings                                        (227)          (175)        (52)        (463)       (237)        (226)
Subordinated notes                                 (74)              -        (74)        (265)           -        (265)
Total interest expense                       $    (884)     $    (318)    $  (566)    $ (2,454)    $  (445)    $ (2,009)
Net interest income on a fully taxable
equivalent basis                             $      542     $      940    $

(398) $ 2,567 $ 2,855 $ (288)

Interest income and returns are presented on an equivalent fully taxable basis

using the federal statutory tax rate of 21%, net of non-deductible interest charges (1), for the three and six months ended June 30, 2021 and 2020.

These adjustments totaled $ 424,000 and $ 755,000 for three and six months

ended June 30, 2021, respectively, with respect to $ 214,000 and $ 385,000 for the

three and six months completed June 30, 2020, respectively.

(2) Non-performing loans are included in average outstandings.

Commissions and charges on loans are included in interest income ($ 0.5 million and (3) $ 2.0 million PPP fees for the three and six months ended June 30, 2021,

respectively, with respect to $ 0.4 million for three and six months

ended June 30, 2020 were included in income from commercial loans).


Financial results for the quarter ended June 30, 2021 compared to the quarter
ended June 30, 2020 reflected an increase in net interest income, on a tax
equivalent basis, of $0.5 million, or 4.0%, and the financial results for the
six months ended June 30, 2021 compared to the six months ended June 30, 2020
reflected an increase of $2.6 million, or 9.8%. Measured as a percentage of
average earning assets, the net interest margin (expressed on a fully taxable
equivalent basis) decreased to 3.40% for the quarter ended June 30, 2021
compared to 3.46% for the quarter ended June 30, 2020, and remained consistent
at 3.51% for both the six months ended June 30, 2021 and 2020, respectively. Net
interest income increased primarily due to an increase in average earning assets
and a decrease in rates paid on average interest bearing liabilities in both the
three and six month comparative periods. Although average earning assets
increased for both the three and six

                                       46



month comparative periods, net interest margin decreased quarter-over-quarter
primarily due to a decrease in rates earned, while net interest margin remained
consistent for the six months ended June 30, 2021 compared to the six months
ended June 30, 2020 primarily due to $2.0 million in PPP income earned in 2021
compared to $0.4 million in 2020.

Average interest-earning assets increased $87.1 million, or 5.5%, to $1.66
billion for the quarter ended June 30, 2021 compared to $1.57 billion for the
quarter ended June 30, 2020, and average interest bearing liabilities decreased
$17.7 million, or 1.5%, to $1.14 billion for the quarter ended June 30, 2021
compared to $1.16 billion for the quarter ended June 30, 2020.

Average interest-earning assets increased $152.1 million, or 10.1%, to $1.66
billion for the six months ended June 30, 2021 compared to $1.50 billion for the
six months ended June 30, 2020, average interest bearing liabilities increased
$20.9 million, or 1.8%, to $1.16 billion for the six months ended June 30, 2021
compared to $1.14 billion for the six months ended June 30, 2020.

Total interest income (expressed on a fully taxable equivalent basis) was $15.6
million and $32.0 million for the three and six months ended June 30, 2021,
respectively, compared to $15.9 million and $31.9 million for the three and six
months ended June 30, 2020, respectively. The Company's rates earned on interest
earning assets were 3.77% and 3.90% for the three and six months ended June 30,
2021, respectively, compared to 4.07% and 4.26% for the three and six months
ended June 30, 2020, respectively.

Interest income on loans held for investment purposes has been $ 14.0 million and $ 29.2 million
for the three and six months ended June 30, 2021, respectively, with respect to
$ 14.6 million and $ 29.1 million for the three and six months ended June 30, 2020, respectively.

Average loans outstanding increased $19.0 million, or 1.5%, to $1.28 billion for
the quarter ended June 30, 2021 compared to $1.26 billion for the quarter ended
June 30, 2020. The average yield on loans decreased to 4.42% for the quarter
ended June 30, 2021 compared to 4.68% for the quarter ended June 30, 2020.

Average loans outstanding increased $66.6 million, or 5.5%, to $1.28 billion for
the six months ended June 30, 2021 compared to $1.21 billion for the six months
ended June 30, 2020. The average yield on loans decreased to 4.61% for the
six months ended June 30, 2021 compared to 4.84% for the six months ended June
30, 2020. See the Lending and Credit Management section for further discussion
of changes in the composition of the lending portfolio.

Interest income on available-for-sale securities was $1.4 million and $2.4
million for the three and six months ended June 30, 2021, respectively, compared
to $1.1 million and $2.1 million for the three and six months ended June 30,
2020, respectively.

Average securities increased $59.7 million, or 30.1%, to $257.9 million for the
quarter ended June 30, 2021 compared to $198.3 million for the quarter ended
June 30, 2020. The average yield on securities decreased to 2.10% for the
quarter ended June 30, 2021 compared to 2.15% for the quarter ended June 30,
2020.

Average securities increased $46.2 million, or 24.3%, to $236.9 million for the
six months ended June 30, 2021 compared to $190.7 million for the six months
ended June 30, 2020. The average yield on securities decreased to 2.08% for the
six months ended June 30, 2021 compared to 2.23% for the six months ended June
30, 2020. Management plans to continue to grow the investment portfolio based on
available liquidity. See the Liquidity Management section for further
discussion.

Total interest expense decreased to $1.5 million and $3.2 million for the three
and six months ended June 30, 2021, respectively, compared to $2.4 million and
$5.7 million for the three and six months ended June 30, 2020, respectively. The
Company's rates paid on interest bearing liabilities were 0.53% and 0.56% for
the three and six months ended June 30, 2021, respectively, compared to 0.82%
and 1.0% for the three and six months ended June 30, 2020, respectively. See the
Liquidity Management section for further discussion.

                                       47



Interest expense on deposits decreased to $0.8 million and $1.8 million for the
three and six months ended June 30, 2021, respectively, compared to $1.3 million
and $3.4 million for the three and six months ended June 30, 2020, respectively.

Average interest bearing deposits increased $18.5 million, or 2.0%, to $954.1
million for the quarter ended June 30, 2021 compared to $935.6 million for the
quarter ended June 30, 2020. The average cost of deposits decreased to 0.33% for
the quarter ended June 30, 2021 compared to 0.57% for the quarter ended June 30,
2020.

Average interest bearing deposits increased $36.4 million, or 3.9%, to $967.9
million for the six months ended June 30, 2021 compared to $931.5 million for
the six months ended June 30, 2020. The average cost of deposits decreased to
0.37% for the six months ended June 30, 2021 compared to 0.74% for the
six months ended June 30, 2020. Although offering rates remain low in response
to lower market interest rates, growth in deposits was positively impacted in
part by customers who deposited both economic stimulus payments and PPP loan
proceeds.

Interest expense on borrowings was $0.7 million and $1.5 million for the three
and six months ended June 30, 2021, respectively, compared to $1.1 million and
$2.2 million for the three and six months ended June 30, 2020, respectively.

Average borrowings decreased to $189.6 million for the quarter ended June 30,
2021 compared to $225.8 million for the quarter ended June 30, 2020. The average
cost of borrowings decreased to 1.52% for the quarter ended June 30, 2021
compared to 1.87% for the quarter ended June 30, 2020.

Average borrowings decreased to $189.4 million for the six months ended June 30,
2021 compared to $204.8 million for the six months ended June 30, 2020. The
average cost of borrowings decreased to 1.54% for the six months ended June 30,
2021 compared to 2.18% for the six months ended June 30, 2020. The decrease in
cost of funds primarily resulted from lower market interest rates.

The decrease in average borrowings during 2021 compared to 2020 was primarily
due to a decrease in FHLB advances. The Company used FHLB advances to fund
liquidity needs as refinancing activity increased when rates dropped during the
first quarter of 2020. This in turn was offset beginning in April of 2020 when
the Company had an increase in liquidity due to participation in the CARES Act
economic stimulus programs. The Company experienced significant deposit growth
primarily due to stimulus checks, proceeds from PPP loan funding, deferral of
income tax payments, and customers holding on to savings due to economic
uncertainty, and the Company has been repaying these FHLB advances as they come
due since May of 2020. See the Liquidity Management section for further
discussion.

Non-interest income and expenses

Non-interest income for the periods indicated is as follows:


                                Three Months Ended June 30,                       Six Months Ended June 30,
(In thousands)           2021       2020       $ Change     % Change      2021       2020       $ Change     % Change
Non-interest income
Service charges and                                              35.2                                             10.2
other fees              $   765    $   566    $      199              %  $ 1,503    $ 1,364    $      139              %
Bank card income and                                             25.9      
                                      25.0
fees                      1,022        812           210                   1,882      1,505           377
Trust department                                                 10.4                                            (8.5)
income                      308        279            29                     602        658          (56)
Real estate                                                        NM                                          (511.7)
servicing fees, net         351       (16)           367                     424      (103)           527
Gain on sales of
mortgage loans, net       2,042        924         1,118        121.0      4,511      1,344         3,167        235.6
Other                       101        291         (190)       (65.3)        109        379         (270)       (71.2)
Total non-interest                                               60.7                                             75.5
income                  $ 4,589    $ 2,856    $    1,733              %  $ 9,031    $ 5,147    $    3,884              %
Non-interest income
as a % of total
revenue *                  25.1 %     17.6 %                                24.3 %     16.6 %

* Total income is calculated as net interest income plus non-interest income.


NM = Not meaningful

                                       48



Total non-interest income increased $1.7 million, or 60.7%, to $4.6 million for
the quarter ended June 30, 2021 compared to $2.9 million for the quarter ended
June 30, 2020, and increased $3.9 million, or 75.5%, to $9.0 million for the six
months ended June 30, 2021 compared to $5.1 million for the six months ended
June 30, 2020.

Service charges and fees increased $0.2 million, or 35.2%, to $0.8 million for
the quarter ended June 30, 2021 compared to $0.6 million for the quarter ended
June 30, 2020, and increased $0.1 million, or 10.2%, to $1.5 million for the six
months ended June 30, 2021, compared to $1.4 million for the six months ended
June 30, 2020. The Company experienced lower service charge income during 2020
primarily due to a decrease in nonsufficient fund service charges (NSF)
collected resulting from both a decrease in volume, in addition to temporary fee
waivers for customers related to the COVID-19 pandemic.

Bank Card and Credit card transaction fees increased $0.2 million, or 25.9%, to
$1.0 million for the quarter ended June 30, 2021 compared to $0.8 million for
the quarter ended June 30, 2020, and increased $0.4 million, or 25.0%, to $1.9
million for the six months ended June 30, 2021, compared to $1.5 million for the
six months ended June 30, 2020. The increases were primarily related to
increases in debit card usage and interchange fees. As the economy began to
recover from the COVID 19 pandemic, the Company began to see an increase in
spending due to both stimulus income and a reduction of conservative savings due
to the uncertainty of the pandemic.

Real estate servicing fees, net of the change in valuation of mortgage servicing
rights (MSRs) increased $0.4 million to $0.4 million for the quarter ended June
30, 2021 compared to $(16,000) for the quarter ended June 30, 2020, and
increased $0.5 million to $0.4 million for the six months ended June 30, 2021
compared to $(0.1) million for the six months ended June 30, 2020.

Mortgage loan servicing fees earned on loans sold were $0.2 million and $0.4
million for the three and six months ended June 30, 2021, respectively, compared
to $0.2 million and $0.4 million for the three and six months ended June 30,
2020, respectively. The current quarter's MSR valuation increased $0.3 million
from the prior linked quarter primarily due to decreased prepayment assumptions.
The dramatic drop in market interest rates created an economic incentive for
borrowers to refinance their existing home mortgage loans during 2020 that has
slowed down in 2021.

The company served $ 286.6 million mortgage loans to June 30, 2021
compared to $ 292.7 million and $ 273.8 million To December 31, 2020 and June 30, 2020, respectively.

Gain on sales of mortgage loans increased $1.1 million to $2.0 million for the
quarter ended June 30, 2021 compared to $0.9 million for the quarter ended June
30, 2020, and increased $3.2 million to $4.5 million for the six months ended
June 30, 2021 compared to $1.3 million for the six months ended June 30, 2020.
The Company sold $61.9 million and $128.5 million of loans for the three and six
months ended June 30, 2021, respectively, compared to $35.5 million and $47.7
million for the three and six months ended June 30, 2020, respectively. The
increase in loans sales is directly attributed to the formation of the mortgage
loan group in the fourth quarter of 2019, and significant growth in 2020.

Other Income decreased $0.2 million, or 65.3%, to $0.1 million for the quarter
ended June 30, 2021 compared to $0.3 million for the quarter ended June 30,
2020, and decreased $0.3 million, or 71.2%, to $0.1 million for the six months
ended June 30, 2021 compared to $0.4 million for the six months ended June 30,
2020. The decreases resulted from a decrease in net gains on sales of other real
estate owned and net losses on disposal of fixed assets, and a reduction in rent
received on foreclosed properties. In the quarter ended June 30, 2020, the
Company sold an out-of-service branch building being held as other real estate
owned (OREO) to a non-profit organization. This transaction consisted of a
$266,000 donation expense and the Company realized a net gain of $210,000. These
decreases were partially offset by an increase in brokerage income.



                                       49


The following table presents the gross realized gains and losses from sales and
calls of available-for-sale securities, as well as gains and losses on equity
securities from fair value adjustments which have been recognized in earnings:


                                                     Three Months Ended June 30,             Six Months Ended June 30,
(in thousands)                                       2021                    2020            2021                  2020
Investment securities gains, net
Available-for-sale securities:
Gross realized gains                             $          -            $          6    $           2          $         6
Gross realized losses                                       -                       -                -                    -
Other-than-temporary impairment recognized                  -                       -                -                    -
Other investment securities:
Fair value adjustments, net                                 -                       1               13                    -
Investment securities gains, net                 $          -            $ 
        7    $          15          $         6



The non-interest charges for the periods indicated were as follows:


                                   Three Months Ended June 30,                         Six Months Ended June 30,
(In thousands)              2021        2020       $ Change     % Change       2021        2020       $ Change     % Change
Non-interest expense
Salaries                  $  5,151    $  4,992    $      159         3.2 %   $ 10,492    $  9,505    $      987        10.4 %
Employee benefits            1,804       1,519           285        18.8        3,608       3,128           480        15.3
Occupancy expense, net         719         757          (38)       (5.0)        1,490       1,522          (32)       (2.1)
Furniture and
equipment expense              753         763          (10)       (1.3)        1,497       1,514          (17)       (1.1)
Processing, network
and bank card expense        1,225         954           271        28.4        2,233       1,929           304        15.8
Legal, examination,
and professional fees          385         407          (22)       (5.4)          789         774            15         1.9
Advertising and
promotion                      309         222            87        39.2          552         470            82        17.4
Postage, printing, and
supplies                       186         193           (7)       (3.6)          390         434          (44)      (10.1)
Loan expense                   229         303          (74)      (24.4)          403         427          (24)       (5.6)
Other                        1,008       1,160         (152)      (13.1)        1,966       2,058          (92)       (4.5)
Total non-interest
expense                   $ 11,769    $ 11,270    $      499         4.4 %   $ 23,420    $ 21,761    $    1,659         7.6 %
Efficiency ratio*             64.5 %      69.6 %                                 63.1 %      70.2 %
Number of full-time
equivalent employees           306         305                                    306         305

* The efficiency ratio is calculated as non-interest expense as a percentage of revenue.

Total income includes net interest income and non-interest income.


Total non-interest expense increased $0.5 million, or 4.4%, to $11.8 million for
the quarter ended June 30, 2021 compared to $11.3 million for the quarter ended
June 30, 2020, and increased $1.7 million, or 7.6%, to $23.4 million for the six
months ended June 30, 2021 compared to $21.8 million for the six months ended
June 30, 2020.

Salaries increased $0.2 million, or 3.2%, to $5.2 million for the quarter ended
June 30, 2021 compared to $5.0 million for the quarter ended June 30, 2020, and
increased $1.0 million, or 10.4%, to $10.5 million for the six months ended June
30, 2021 compared to $9.5 million for the six months ended June 30, 2020. The
increases were primarily due to adding additional personnel to the new mortgage
loan department. In addition, annual merit increases average approximately 4.0%
each year and were awarded in the first quarter of each year.

Employee benefits increased $0.3 million, or 18.8%, to $1.8 million for the
quarter ended June 30, 2021 compared to $1.5 million for the quarter ended June
30, 2020, and increased $0.5 million, or 15.3%, to $3.6 million for the six
months ended June 30, 2021 compared to $3.1 million for the six months ended
June 30, 2020. The increases were primarily due to an

                                       50



increase in 401 (k) plan contributions, payroll taxes, medical premiums and pension costs due to annual discount rate assumptions lower than the previous year’s annual assumptions.

Processing, network, and bank card expense increased $0.3 million, or 28.4%, to
$1.2 million for the quarter ended June 30, 2021 compared to $1.0 million for
the quarter ended June 30, 2020, and increased $0.3 million, or 15.8%, to $2.2
million for the six months ended June 30, 2021 compared to $1.9 million for the
six months ended June 30, 2020. These increases were primarily related to
increases in network, processing, and debit card processing expenses, partially
offset by decreases in credit card and ATM interchange expenses.

Loan expense decreased $74,000, or 24.4%, to $0.2 million for the quarter ended
June 30, 2021 compared to $0.3 million for the quarter ended June 30, 2020, and
decreased $24,000, or 5.6%, to $0.4 million for the six months ended June 30,
2021 compared to $0.4 million for the six months ended June 30, 2020. The
decreases in loan expense primarily resulted from decreases in commercial and
real estate third-party loan expenses. The Company experienced a decrease in
commercial loan growth during the three and six months ended June 30, 2021
compared to the three and six months ended June 30, 2020. Also during 2020, the
Company experienced significant real estate mortgage refinancing activity and
growth in loan volume sold to the secondary market.

Other non-interest expense decreased $0.2 million, or 13.1%, to $1.0 million for
the quarter ended June 30, 2021 compared to $1.2 million for the quarter ended
June 30, 2020, and decreased $92,000, or 4.5%, to $2.0 million for the six
months ended June 30, 2021 compared to $2.1 million for the six months ended
June 30, 2020. The decreases were primarily related to a decrease in donations,
pension net interest cost, and insurance reserves. In the quarter ended June 30,
2020, the Company sold an out-of-service branch building being held as other
real estate owned (OREO) to a non-profit organization. This transaction
consisted of a $266,000 donation expense and the Company realized a net gain of
$210,000. These decreases were partially offset by an increase in the FDIC
assessment expense and software expense due to new mortgage loan software. The
increase in the FDIC assessment was due to the Company having received the
remaining FDIC assessment credit during the first quarter of 2020 that reduced
the overall assessment due in addition to an increase in deposits.

Income taxes

Income taxes as a percentage of earnings before income taxes as reported in the
consolidated financial statements were 19.7% and 19.2% for the three and six
months ended June 30, 2021, respectively, compared to 18.6% and 17.9% for the
three and six months ended June 30, 2020, respectively. The increase in the
effective tax rate for each of the three and six months ended June 30, 2021
compared to the three and six months ended June 30, 2020 was primarily
attributable to the increase in earnings and an increase in state taxes
attributed to elevated earnings. The effective tax rate for each of the three
and six months ended June 30, 2021 and 2020, respectively, is lower than the
U.S. federal statutory rate of 21% primarily due to tax-free revenues.

Loan and credit management

Interest earned on the loan portfolio is a primary source of interest income for
the Company. Net loans represented 74.6% of total assets as of June 30, 2021
compared to 73.2% as of December 31, 2020.

Lending activities are conducted pursuant to an established loan policy approved
by the Bank's Board of Directors. The Bank's credit review process is overseen
by regional loan committees with established loan approval limits. In addition,
a senior loan committee reviews all credit relationships in aggregate over an
established dollar amount. The senior loan committee meets weekly and is
comprised of senior managers of the Bank.

                                       51



The main classifications within the portfolio of investment loans held by the Company on the dates indicated are as follows:

                                                      June 30, 2021              December 31, 2020
(In thousands)                                   Amount      % of Loans         2020     % of Loans
Commercial, financial, and agricultural (a)    $   263,511         20.4 %    $   272,918       21.2 %
Real estate construction - residential              35,760          2.8           29,692        2.3
Real estate construction - commercial               74,788          5.8           78,144        6.1
Real estate mortgage - residential                 267,264         20.7          262,339       20.4
Real estate mortgage - commercial                  628,075         48.5          617,133       48.0
Installment and other consumer                      24,496          1.9           26,741        2.1
Total loans held for investment                $ 1,293,894        100.0 %  

$ 1,286,967 100.0%

(a) Includes $ 49.6 million and $ 63.3 million PPP SBA loans, net at June 30th,

2021 and December 31, 2020, respectively.


The Company extends credit to its local community markets through traditional
real estate mortgage products. The Company does not participate in extending
credit to sub-prime residential real estate markets. The Company does not lend
funds for transactions defined as "highly leveraged" by bank regulatory
authorities or for foreign loans. Additionally, the Company does not have any
concentrations of loans exceeding 10% of total loans that are not otherwise
disclosed in the loan portfolio composition table. The Company does not have any
interest-earning assets that would have been included in non-accrual, past due,
or restructured loans if such assets were loans.

The Company generally does not retain long-term fixed rate residential mortgage
loans in its portfolio. Fixed rate loans conforming to standards required by the
secondary market are offered to qualified borrowers but are not funded until the
Company has a non-recourse purchase commitment from the secondary market at a
predetermined price. During the six months ended June 30, 2021, the Company sold
approximately $128.5 million of loans to investors compared to $47.7 million for
the six months ended June 30, 2020. At June 30, 2021, the Company was servicing
approximately $286.6 million of loans sold to the secondary market compared to
$292.7 million at December 31, 2020, and $273.8 million at June 30, 2020.

Risk elements of the loan portfolio

Management, the senior loan committee, and internal loan review, formally review
all loans in excess of certain dollar amounts (periodically established) at
least annually. Loans in excess of $2.0 million in aggregate and all adversely
classified credits identified by management are reviewed by the senior loan
committee. In addition, all other loans are reviewed on a risk weighted
selection process. The senior loan committee reviews and reports to the Board of
Directors, at scheduled meetings: past due, classified, and watch list loans in
order to classify or reclassify loans as loans requiring attention, substandard,
doubtful, or loss. During this review, management also determines which loans
should be considered impaired. Management follows the guidance provided in the
Financial Accounting Standards Board's (FASB) ASC Topic 310-10-35 in identifying
and measuring loan impairment. If management determines that it is probable that
all amounts due on a loan will not be collected under the original terms of the
loan agreement, the loan is considered impaired. These loans are evaluated
individually for impairment, and in conjunction with current economic conditions
and loss experience, specific reserves are estimated as further discussed below.
Loans not individually evaluated are aggregated and reserves are recorded using
a consistent methodology that considers historical loan loss experience by loan
type, delinquencies, current economic conditions, loan risk ratings and industry
concentration. Management believes, but there can be no assurance, that these
procedures keep management informed of potential problem loans. Based upon these
procedures, both the allowance and provision for loan losses are adjusted to
maintain the allowance at a level considered necessary by management to provide
for probable losses inherent in the loan portfolio.

                                       52



Non-performing Assets

The following table summarizes non-performing assets at the dates indicated:


                                                 June 30,       December 31,       June 30,
(In thousands)                                     2021             2020             2020
Non-accrual loans:
Commercial, financial, and agricultural         $     6,564    $         6,717    $     3,022
Real estate construction - residential                    -                192              -
Real estate construction - commercial                   112                200            959
Real estate mortgage - residential                    1,773              2,105          3,310
Real estate mortgage - commercial                    25,313             25,314          1,521
Installment and other consumer                           21                 31             37
Total                                           $    33,783    $        34,559    $     8,849
Loans contractually past - due 90 days or
more and still accruing:
Real estate mortgage - residential              $         -    $             -    $        51
Installment and other consumer                            5                 17              7
Total                                           $         5    $            17    $        58
Total non-performing loans (a)                       33,788             34,576          8,907
Other real estate owned and repossessed
assets                                               11,938             12,291         12,520
Total non-performing assets                     $    45,726    $        46,867    $    21,427

Loans held for investment                       $ 1,293,894    $     1,286,967    $ 1,280,615
Allowance for loan losses to loans                     1.45 %             1.41 %         1.30 %
Non-performing loans to loans (a)                      2.61 %             2.69 %         0.70 %
Non-performing assets to loans (b)                     3.53 %             3.64 %         1.67 %
Non-performing assets to assets (b)                    2.68 %             2.70 %         1.27 %
Allowance for loan losses to non-performing
loans                                                 55.45 %            

52.39% 186.62%

Nonperforming loans include loans 90 days past due and outstanding, unrecorded loans (a) and nonperforming TORs included in unrecorded loans and 90 days past due.

payable.

(b) Non-performing assets include non-performing loans and other real estate

    owned and repossessed assets.



Total non-performing assets were $45.7 million, or 3.53% of total loans, at June
30, 2021 compared to $46.9 million, or 3.64% of total loans, at December 31,
2020, and $21.4 million, or 1.67% of total loans, at June 30, 2020,
respectively.

Total non-accrual loans at June 30, 2021 decreased $0.8 million, or 2.2%, to
$33.8 million compared to $34.6 million at December 31, 2020. Loans past due
90 days and still accruing interest at June 30, 2021 were $5,000 compared to
$17,000 at December 31, 2020. Other real estate and repossessed assets were
$11.9 million and $12.3 million at June 30, 2021 and December 31, 2020,
respectively. During the six months ended June 30, 2021, $30,000 of non-accrual
loans, net of charge-offs taken, moved to other real estate owned and
repossessed assets compared to no such loan movements during the six months
ended June 30, 2020.

As of June 30, 2021, approximately $6.9 million of loans classified as
substandard, which include performing TDRs, and not included in the
non-performing asset table, were identified as potential problem loans having
more than normal risk which raised doubts as to the ability of the borrower to
comply with present loan repayment terms compared to $6.0 million and $5.7
million at December 31, 2020 and June 30, 2020, respectively. Management
believes the allowance for loan losses was sufficient to cover the risks and
probable losses related to such loans at June 30, 2021 and December 31, 2020,
respectively.

                                       53


The following table summarizes the ToRs of the Company on the dates indicated:


                                                        June 30, 2021                          December 31, 2020
                                            Number of     Recorded      Specific     Number of     Recorded      Specific
(In thousands)                              contracts    Investment     Reserves     contracts    Investment     Reserves
Performing TDRs
Commercial, financial and agricultural              7    $       798    $      36            7    $       835    $      90
Real estate mortgage - residential                  5          1,136           46            5          1,521           28
Real estate mortgage - commercial                   2            334            7            2            343            7
Installment and other consumer                      4             40            5            5             77           10
Total performing TDRs                              18    $     2,308    $      94           19    $     2,776    $     135
Non-performing TDRs
Commercial, financial and agricultural *            1    $         -    $       -            1    $         4    $       1
Real estate mortgage - residential                  6            748           60            8            895           78
Total non-performing TDRs                           7    $       748    $  
   60            9    $       899    $      79
Total TDRs                                         25    $     3,056    $     154           28    $     3,675    $     214

* Amounts less than $ 1,000 are not reported



At June 30, 2021, loans classified as TDRs totaled $3.1 million, with $154,000
of specific reserves compared to $3.7 million of loans classified as TDRs, with
$214,000 of specific reserves at December 31, 2020. Non-performing loans,
included $0.8 million of loans classified as TDRs at June 30, 2021 compared to
$0.9 million at December 31, 2020. Both performing and non-performing TDRs are
considered impaired loans. When an individual loan is determined to be a TDR,
the amount of impairment is based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or the fair value of the
underlying collateral less applicable selling costs if the loan is collateral
dependent. The net decrease in total TDRs from December 31, 2020 to June 30,
2021 was primarily due to $620,000 of payments received on TDRs.

Allowance for loan losses and allowance

Allowance for loan losses

The following table is a summary of the allocation of the allowance for loan
losses:


                                                               June 30,       December 31,
(In thousands)                                                   2021             2020

Allocation of the allowance for loan losses at the end of the period: Commercial, financial and agricultural

                       $     5,336    $         5,121
Real estate construction - residential                                251                213
Real estate construction - commercial                                 495                475
Real estate mortgage - residential                                  2,467              2,679
Real estate mortgage - commercial                                   9,915              9,354
Installment and other consumer                                        252  
             264
Unallocated                                                            19                  7
Total                                                         $    18,735    $        18,113




The allowance for loan losses (ALL) was $18.7 million, or 1.45% of loans
outstanding, at June 30, 2021 compared to $18.1 million, or 1.41%, at December
31, 2020, and $16.6 million, or 1.30% at June 30, 2020. The ratio of the ALL to
non-performing loans was 55.45% at June 30, 2021, compared to 52.39% at December
31, 2020, and 186.62% at June 30, 2020.

                                       54



The following table is a summary of the general and specific allocations of the
ALL:


                                                               June 30,       December 31,
(In thousands)                                                   2021             2020
Allocation of allowance for loan losses:
Individually evaluated for impairment - specific reserves     $     5,355    $         5,113
Collectively evaluated for impairment - general reserves           13,380  
          13,000
Total                                                         $    18,735    $        18,113



The specific reserve component applies to loans evaluated individually for
impairment. The net carrying value of impaired loans is generally based on the
fair values of collateral obtained through independent appraisals and/or
internal evaluations, or by discounting the total expected future cash flows.
Once the impairment amount is calculated, a specific reserve allocation is
recorded. At June 30, 2021, $5.4 million of the Company's ALL was allocated to
impaired loans totaling approximately $36.1 million compared to $5.1 million of
the Company's ALL allocated to impaired loans totaling approximately $37.3
million at December 31, 2020. Management determined that $12.4 million, or 34%,
of total impaired loans required no reserve allocation at June 30, 2021 compared
to $11.9 million, or 32%, at December 31, 2020, primarily due to adequate
collateral values, acceptable payment history and adequate cash flow ability.

The incurred loss component of the general reserve, or loans collectively
evaluated for impairment, is determined by applying loss rates to pools of loans
by asset type. Loans not individually evaluated are aggregated by risk
characteristics and reserves are recorded using a consistent methodology that
considers historical loan loss experience by loan type. The look-back period
begins with loss history in the first quarter 2012 as the starting point through
the current quarter and it will continue to include this starting point going
forward. Management determined that the look-back period should be expanded
until a loss producing downturn is recognized. This would be accomplished by
allowing the look-back period to shift forward by eliminating the earliest loss
period and replenishing it with losses from the most recent period. The
look-back period is consistently evaluated for relevance given the current facts
and circumstances.

These historical loss rates for each risk group are used as the starting point
to determine loss rates for measurement purposes. The historical loan loss rates
are multiplied by loss emergence periods (LEP) which represent the estimated
time period between a borrower first experiencing financial difficulty and the
recognition of a loss.

The Company's methodology includes qualitative risk factors that allow
management to adjust its estimates of losses based on the most recent
information available and to address other limitations in the quantitative
component that is based on historical loss rates. Such risk factors are
generally reviewed and updated quarterly, as appropriate, and are adjusted to
reflect changes in national and local economic conditions and developments, the
nature, volume and terms of loans in the portfolio, including changes in volume
and severity of past due loans, the volume of non-accrual loans, and the volume
and severity of adversely classified or graded loans, loan concentrations,
assessment of trends in collateral values, assessment of changes in the quality
of the Company's internal loan review department, and changes in lending
policies and procedures, including underwriting standards and collections,
charge-off and recovery practices.

The specific and general reserve allocations represent management's best
estimate of probable losses inherent in the loan portfolio at the evaluation
date. Although the ALL is comprised of specific and general allocations, the
entire ALL is available to absorb any credit losses.

The ALL changes from December 31, 2020 to June 30, 2021 primarily resulted from
net recovery activity, in addition to organic loan growth.  The Company
continues to monitor the risks associated with its non-performing loans and the
remaining loans modified under the CARES Act.

Arrangement

A $0.4 million provision for loan losses was required for both the three and six
months ended June 30, 2021 compared to a $0.9 million and $4.2 million provision
for the three and six months ended June 30, 2020, respectively. The decreased
provision in the three and six months ended June 30, 2021 compared to the three
and six months ended June 30, 2020

                                       55



Mainly resulted from the impact of net recoveries and improved economic outlook as the economy begins to recover from the impacts of the COVID-19 pandemic, which significantly affected provisions in 2020. Lending levels criticized remain high from pre-pandemic levels due to downgrading of loans to borrowers who have been affected by the COVID-19 pandemic.

The following table summarizes loan loss experience for the periods indicated:


                                             Three Months Ended        Six Months Ended
                                                 June 30,                 June 30,
(In thousands)                                2021         2020        2021        2020
Analysis of allowance for loan losses:
Balance beginning of period                $   18,361    $ 15,693    $ 18,113    $ 12,477
Charge-offs:
Commercial, financial, and agricultural            28          43          55          84
Real estate mortgage - residential                  4          33           3          52
Real estate mortgage - commercial                   3           2          26          24
Installment and other consumer                     46          39         104          91
Total charge-offs                          $       81    $    117    $    188    $    251
Recoveries:
Commercial, financial, and agricultural    $       33    $     66    $    183    $     91
Real estate construction - residential              -          32          13          32
Real estate mortgage - residential                  7          27         175          36
Real estate mortgage - commercial                   -           1           -           3
Installment and other consumer                     15          20         
39          34
Total recoveries                           $       55    $    146    $    410    $    196
Net charge-offs (recoveries)                       26        (29)       (222)          55
Provision for loan losses                         400         900         400       4,200
Balance end of period                      $   18,735    $ 16,622    $ 18,735    $ 16,622



Net loan write-offs (recoveries)

The Company's net charge-offs were $26,000 for the three months ended June 30,
2021 compared to net recoveries of $29,000 for the three months ended June 30,
2020, and net recoveries were $222,000 for the six months ended June 30, 2021
compared to net charge-offs of $55,000 for the six months ended June 30, 2020.
During the first quarter of 2021 the Company received commercial and a real
estate mortgage recoveries primarily related to two loan relationships

Loans held for sale

The Company designates certain long-term fixed rate personal real estate loans
as held for sale, and the Company carries them at the lower of cost or fair
value. The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and
other various secondary market investors. At June 30, 2021, the carrying amount
of these loans was $2.5 million compared to $5.1 million at December 31, 2020.

In the fourth quarter of 2019 the Company expanded its current home mortgage
loan program to better serve its customers. This expansion began with hiring new
mortgage lending personnel and expanding the Bank's available loan products and
upgrading the Company's operating systems. New home loan programs for its
customers include: VA loans, designed for military families and veterans; USDA
loans for those buying homes in rural communities; and FHA loans, which offer
low down payments and flexible underwriting guidelines. In addition, we have
added several secondary market investors, allowing us to sell loans on the
secondary market versus servicing them at the Company. This provides us with the
ability to offer clients more aggressive pricing and at the same time improve
the Company's financial return.

                                       56



Liquidity and capital resources

Liquidity management

The role of liquidity management is to ensure funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of those funds. Liquidity to meet these
demands is provided by maturing assets, short-term liquid assets that can be
converted to cash and the ability to attract funds from external sources,
principally depositors. Due to the nature of services offered by the Company,
management prefers to focus on transaction accounts and full service
relationships with customers as the primary sources of funding.

The Company's Asset/Liability Committee (ALCO), primarily made up of senior
management, has direct oversight responsibility for the Company's liquidity
position and profile. A combination of daily, weekly, and monthly reports
provided to management detail the following: internal liquidity metrics,
composition and level of the liquid asset portfolio, timing differences in
short-term cash flow obligations, available pricing and market access to the
financial markets for capital, and exposure to contingent draws on the Company's
liquidity.

The Company has a number of sources of funds to meet liquidity needs on a daily
basis. The Company's most liquid assets are comprised of available-for-sale
investment securities, not including other debt securities, federal funds sold,
and excess reserves held at the Federal Reserve.


                                                             June 30,       December 31,
(In thousands)                                                  2021            2020

Federal funds sold and other interest-bearing deposits $ 58,514 $ 161,128
Certificates of deposit in other banks

                            7,165     

9 376

Available-for-sale investment securities                        276,013    
       198,030
Total                                                        $  341,692    $       368,534


Federal funds sold and resale agreements normally have overnight maturities and
are used for general daily liquidity purposes. The fair value of the
available-for-sale investment portfolio was $276.0 million at June 30, 2021 and
included an unrealized net gain of $2.9 million. The portfolio includes
projected maturities and mortgage-backed securities pay-downs of approximately
$4.9 million over the next twelve months, which offer resources to meet either
new loan demand or reductions in the Company's deposit base.

The Company pledges portions of its investment securities portfolio to secure
public fund deposits, federal funds purchase lines, securities sold under
agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and
for other purposes required by law. At June 30, 2021 and December 31, 2020, the
Company's unpledged securities in the available-for-sale portfolio totaled
approximately $66.6 million and $44.1 million, respectively.

The total of the marketable securities pledged for these purposes was as follows:

                                                             June 30,       December 31,
(In thousands)                                                  2021            2020
Investment securities pledged for the purpose of
securing:
Federal Reserve Bank borrowings                              $   10,882    $         9,115
Federal funds purchased and securities sold under
agreements to repurchase                                         53,654             59,695
Other deposits                                                  144,918             85,130
Total pledged, at fair value                                 $  209,454    $       153,940




Liquidity is available from the Company's base of core customer deposits,
defined as demand, interest checking, savings, money market deposit accounts,
and time deposits less than $250,000, less all brokered deposits under $250,000.
At June 30, 2021, such deposits totaled $1.3 billion and represented 92.9% of
the Company's total deposits. These core deposits are normally less volatile and
are often tied to other products of the Company through long lasting
relationships.

                                       57


Basic deposits at June 30, 2021 and December 31, 2020 were as follows:

                                June 30,       December 31,
(In thousands)                    2021             2020
Core deposit base:
Non-interest bearing demand    $   433,288    $       382,492
Interest checking                  252,600            292,375
Savings and money market           421,442            391,248
Other time deposits                175,666            183,072
Total                          $ 1,282,996    $     1,249,187




Time deposits and certificates of deposit of $250,000 and greater at June 30,
2021 and December 31, 2020 were $66.6 million and $91.3 million, respectively.
The Company had brokered deposits totaling $30.2 million and $40.2 million at
June 30, 2021 and December 31, 2020, respectively.

Other components of liquidity are the level of borrowings from third-party
sources and the availability of future credit. The Company's outside borrowings
are comprised of securities sold under agreements to repurchase, Federal Home
Loan Bank advances, and subordinated notes. Federal funds purchased are
overnight borrowings obtained mainly from upstream correspondent banks with
which the Company maintains approved credit lines. As of June 30, 2021,
under agreements with these unaffiliated banks, the Bank may borrow up to $60.0
million in federal funds on an unsecured basis and $10.5 million on a secured
basis. There were no federal funds purchased outstanding at June 30, 2021.
Securities sold under agreements to repurchase are generally borrowed overnight
and are secured by a portion of the Company's investment portfolio. At June 30,
2021, there were $32.0 million in repurchase agreements. The Company may
periodically borrow additional short-term funds from the Federal Reserve Bank
through the discount window, although no such borrowings were outstanding at
June 30, 2021.

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has
access to credit products of the FHLB. As of June 30, 2021, the Bank had $93.5
million in outstanding borrowings with the FHLB. In addition, the Company has
$49.5 million in outstanding subordinated notes issued to wholly-owned grantor
trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at June 30, 2021 and December 31, 2020 were as follows:


                                                              June 30,       December 31,
(In thousands)                                                   2021            2020
Borrowings:
Federal funds purchased and securities sold under
agreements to repurchase                                      $   32,018    $        45,154
Federal Home Loan Bank advances                                   93,540   
        106,660
Subordinated notes                                                49,486             49,486
Other borrowings                                                      14                 14
Total                                                         $  175,058    $       201,314




The Company pledges certain assets, including loans and investment securities to
the Federal Reserve Bank, FHLB, and other correspondent banks as security to
establish lines of credit and borrow from these entities. Based on the type and
value of collateral pledged, the FHLB establishes a collateral value from which
the Company may draw advances against this collateral. This collateral is also
used to enable the FHLB to issue letters of credit in favor of public fund
depositors of the Company. The Federal Reserve Bank also establishes a
collateral value of assets pledged to support borrowings

                                       58



of the discount window. The following table reflects the value of collateral for pledged assets, outstanding borrowings and letters of credit, in addition to the estimated future financing capacity available to the Company, as follows:





                                                June 30,                                                    December 31,
                                                  2021                                                          2020
                                                          Federal                                                       Federal
                                                           Funds                                                         Funds
                                         Federal         Purchased                                     Federal         Purchased
(In thousands)             FHLB        Reserve Bank        Lines        

Total FHLB reserve bank Lines Total Equivalent Advance $ 283,148 $ 10,498 $ 60,000 $ 353,646 $ 300,633 $ 8,898 $ 56,835 $ 366,366
Letters of Credit (1,000)

                 -              -       (1,000)      (123,000)                 -              -      (123,000)
Advances outstanding      (93,540)                 -              -      (93,540)      (106,660)                 -              -      (106,660)

Total available $ 188,608 $ 10,498 $ 60,000 $ 259,106 $ 70,973 $ 8,898 $ 56,835 $ 136,706


At June 30, 2021, loans of $537.1 million were pledged at the FHLB as collateral
for borrowings and letters of credit. At June 30, 2021, investments totaling
$10.9 million were pledged to secure federal funds purchase lines and borrowing
capacity at the Federal Reserve Bank.

Based upon the above, management believes the Company has more than adequate
liquidity, both on balance sheet and through the additional funding capacity
with the FHLB, the Federal Reserve Bank and Federal funds purchased lines to
meet future anticipated needs in both the short and long-term; this includes
accounting for the impact of the COVID-19 pandemic, which is difficult to
currently measure.  Management believes the most significant impact to the
Company's liquidity position in the short-term may be related to the PPP as
loans are expected to be forgiven and depositors may choose to redirect their
funds. The longer-term impact on the Company's liquidity from the pandemic will
be closely monitored and addressed as needs arise.

The Company also has additional liquidity which has pledged the PPP loans to the FHLB as security for the available advances.

Sources and uses of funds

Cash and cash equivalents were $76.4 million at June 30, 2021 compared to $180.4
million at December 31, 2020. The $103.9 million decrease resulted from changes
in the various cash flows produced by operating, investing, and financing
activities of the Company, as shown in the accompanying consolidated statement
of cash flows for the six months ended June 30, 2021. Cash flow provided from
operating activities consists mainly of net income adjusted for certain non-cash
items. Operating activities provided cash flow of $13.0 million for the six
months ended June 30, 2021.

Investing activities consisting mainly of purchases, sales and maturities of
available-for-sale securities, and changes in the level of the loan portfolio
used total cash of $84.2 million during the six months ended June 30, 2021. The
cash outflow primarily consisted of $114.5 million in purchases of investment
securities partially offset by $34.3 million from maturities and calls of
investment securities. Management intends to continue to grow the investment
portfolio based on available liquidity.

Financing activities used total cash of $32.7 million during the six months
ended June 30, 2021, resulting primarily from a $53.4 million decrease in
interest-bearing transaction accounts and time deposits, a $13.1 million
decrease in securities sold under agreements to repurchase, and a $13.1 million
repayment of FHLB advances, partially offset by a $50.8 million increase in
demand deposits. The growth in demand deposits was positively impacted by
customers who deposited both economic stimulus payments and PPP loan proceeds
into demand accounts. Future short-term liquidity needs arising from daily
operations are not expected to vary significantly during 2021.

                                       59



In the normal course of business, the Company enters into certain forms of
off-balance sheet transactions, including unfunded loan commitments and letters
of credit. These transactions are managed through the Company's various risk
management processes. Management considers both on-balance sheet and off-balance
sheet transactions in its evaluation of the Company's liquidity. The Company had
$297.2 million in unused loan commitments and standby letters of credit as of
June 30, 2021. Although the Company's current liquidity resources are adequate
to fund this commitment level the nature of these commitments is such that the
likelihood of such a funding demand is very low.

The Company is a legal entity, separate and distinct from the Bank, which must
provide its own liquidity to meet its operating needs. The Company's ongoing
liquidity needs primarily include funding its operating expenses, paying cash
dividends to its shareholders and, to a lesser extent, repurchasing its shares
of common stock. The Company paid cash dividends to its shareholders totaling
approximately $1.7 million and $1.5 million for the six months ended June 30,
2021 and 2020, respectively. A large portion of the Company's liquidity is
obtained from the Bank in the form of dividends. The Bank declared and paid $4.5
million and $2.5 million in dividends to the Company during the six months ended
June 30, 2021 and 2020, respectively. At June 30, 2021 and December 31, 2020,
the Company had cash and cash equivalents totaling $1.8 million and $2.0
million, respectively. Subject to declaration by the Company's Board of
Directors, the Company expects to continue paying quarterly cash dividends as a
part of its current capital allocation strategy. Future dividends will be
subject to the determination, declaration and discretion of the Company's Board
of Directors and compliance with applicable regulatory capital requirements.

In 2019, the Company's Board of Directors authorized the purchase of up to $5.0
million market value of the Company's common stock. The Company repurchased
117,632 shares at an average cost of $18.26 per share totaling $2.1 million
during the first quarter of 2021. During the second quarter of 2021, the
Company's Board of Directors reauthorized the purchase of up to $5.0 million
market value of the Company's common stock. There were no shares repurchased
during the second quarter of 2021. The repurchases under these authorizations
may be effectuated in the open market, by block purchase, in privately
negotiated transactions, or through other transactions managed by
broker-dealers, or any combination thereof. No time limit was set for the
completion of these authorized share repurchases.  As of June 30, 2021, $5.0
million remained available for the repurchase of shares pursuant to the share
repurchase authorizations. The Company may continue to repurchase shares under
its share repurchase authorizations, but the amount and timing of such
repurchases will be dependent on a number of factors, including the price of its
common stock and other cash flow needs. There is no assurance that the Company
will repurchase up to the full amount remaining under its share repurchase
authorizations.



Capital Management

The Company and the Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. 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 consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification of the Company and the Bank
are subject to qualitative judgments by the regulators about components,
risk-weightings, and other factors.

The Basel III regulatory capital framework (the "Basel III Capital Rules")
adopted by U.S. federal regulatory authorities, among other things, (i)
establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii)
specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital"
instruments meeting stated requirements, (iii) requires that most
deductions/adjustments to regulatory capital measures be made to CET1 and not to
other components of capital and (iv) defines the scope of the
deductions/adjustments to the capital measures.

Additionally, the Basel III Capital Rules require that the Company maintain a
2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total
capital to risk-weighted assets, which provides for capital levels that exceed
the minimum risk-based capital adequacy requirements. A financial institution
with a conservation buffer of less than the required amount is subject to
limitations on capital distributions, including dividend payments and stock
repurchases, and certain discretionary bonus payments to executive officers.

                                       60


Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of CET1,
Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to
average assets, each as defined in the regulations. Management believes, as of
June 30, 2021, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately
capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier
1 leverage ratios. As shown in the table below, the Company's capital ratios
exceeded the regulatory definition of adequately capitalized as of June 30, 2021
and December 31, 2020. Based upon the information in its most recently filed
call report, the Bank met the capital ratios necessary to be well capitalized.
The regulatory authorities can apply changes in classification of assets and
such changes may retroactively subject the Company to changes in capital ratios.
Any such change could reduce one or more capital ratios below well-capitalized
status. In addition, a change may result in imposition of additional assessments
by the FDIC or could result in regulatory actions that could have a material
effect on our condition and results of operations. In addition, bank holding
companies generally are required to maintain a Tier 1 leverage ratio of at least
4%.

Because the Bank had less than $15.0 billion in total consolidated assets as of
December 31, 2009, the Company is allowed to continue to classify our trust
preferred securities, all of which were issued prior to May 19, 2010, as Tier 1
capital.

                                       61



Under the Basel III requirements, at June 30, 2021 and December 31, 2020, the
Company met all capital adequacy requirements and had regulatory capital ratios
in excess of the levels established for well-capitalized institutions, as shown
in the following table as of periods indicated:


                                                                   Minimum Capital            Required to be
                                                                Required - Basel III         Considered Well-
                                            Actual                 Fully Phased-In              Capitalized
(in thousands)                          Amount      Ratio         Amount         Ratio       Amount       Ratio
June 30, 2021
Total Capital (to risk-weighted
assets):
Company                                $ 201,020    14.66 %    $     143,944     10.50 %    $        -      N.A %
Bank                                     199,684    14.60            143,562     10.50         136,725    10.00
Tier 1 Capital (to risk-weighted
assets):
Company                                $ 180,936    13.20 %    $     116,526      8.50 %    $        -      N.A %
Bank                                     182,572    13.35            116,217      8.50         109,380     8.00
Common Equity Tier 1 Capital (to
risk-weighted assets):
Company                                $ 135,862     9.91 %    $      95,963      7.00 %    $        -      N.A %
Bank                                     182,572    13.35             95,708      7.00          88,872     6.50
Tier 1 leverage ratio (to adjusted
average assets):
Company                                $ 180,936    10.49 %    $      68,981      4.00 %    $        -      N.A %
Bank                                     182,572    10.63             68,680      4.00          85,850     5.00

December 31, 2020
Total Capital (to risk-weighted
assets):
Company                                $ 193,220    14.97 %    $     135,518     10.50 %    $        -      N.A %
Bank                                     191,504    14.87            135,186     10.50         128,748    10.00
Tier 1 Capital (to risk-weighted
assets):
Company                                $ 172,591    13.37 %    $     109,705      8.50 %    $        -      N.A %
Bank                                     175,384    13.62            109,436      8.50         102,999     8.00
Common Equity Tier 1 Capital (to
risk-weighted assets)
Company                                $ 129,061    10.00 %    $      90,345      7.00 %    $        -      N.A %
Bank                                     175,384    13.62             90,124      7.00          83,686     6.50
Tier 1 leverage ratio:
Company                                $ 172,591    10.19 %    $      67,724      4.00 %    $        -      N.A %
Bank                                     175,384    10.41             67,394      4.00          84,243     5.00

© Edgar online, source Previews


Share.

About Author

Leave A Reply