What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-04 · 284 added, 341 removed, 354 unchanged (64% of the section changed)

14 unchanged sentences

• changes may occur in the securities markets, and

● effects of the COVID-19 pandemic, or any resurgence thereof, or other adverse external events.

• the COVID-19 pandemic, or other external events may adversely affect the Company.

We have described under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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.

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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 September 30, 2021, provides a broad range of commercial and personal banking services.

Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.7 billion in assets at March 31, 2022, 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.

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Significant Developments and Transactions

Each item listed below materially affects the comparability of our results of operations for the three and nine months ended September 30, 2021 and 2020, respectively, and our financial condition as of September 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 2021, and the U.S.

economy has begun to recover and with the availability and distribution of COVID-19 vaccines, the extent of the ultimate impact of the COVID-19 pandemic on the Company’s business remains uncertain and difficult to predict.

If the COVID-19 pandemic continues to subside, we anticipate continued improvements in commercial and consumer activity and the U.S.

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 continued supply and 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 led to a broad curtailment of economic activity.

While positive tailwinds exist, we recognize that our business and consumer customers are continuing to experience varying degrees of financial distress, which is expected to continue into the fourth quarter of 2021.

Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic.

In addition, the economic pressures, materials supply chain disruptions and continuing uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which has negatively impacted 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 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 is an active participant in the SBA’s Small Business Paycheck Protection Programs (PPP), and has been since their inception.

As of September 30, 2021, the net balance of the PPP loans totaled $26.0 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 September 30, 2021, $11.3 million, or 0.9% of total loans, remained in some form of a modification.

These loan modifications include two remaining loans on interest only.

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.

The item listed below materially affects the comparability of our results of operations for the three months ended March 31, 2022 and 2021, and our financial condition as of March 31, 2022 and December 31, 2021, and may affect the comparability of financial information we report in future fiscal periods.

COVID-19 Pandemic

The Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic) has impacted the Company and may continue to do so, as uncertainty remains about the duration of the pandemic and the timing and strength of the global and national economic recovery.

In conjunction with our efforts to support clients affected by the pandemic, the Company has cumulatively originated $136.0 million in loans under the Paycheck Protection Program (PPP) with amounts outstanding of $2.3 million and $8.4 million at March 31, 2022 and December 31, 2021, respectively.

For more information on PPP loans, see Note 2 – Loans and Allowance for Loan Losses in the Notes to Consolidated Financial Statements (unaudited) .

The future direct and indirect impact of the pandemic on our businesses, results of operations and financial condition remains uncertain.

Should current economic conditions deteriorate or if the pandemic worsens due to various factors, including through the spread of more easily communicable variants of COVID-19, such conditions could have an adverse effect on our businesses and results of operations and could adversely affect our financial condition.

CRITICAL ACCOUNTING POLICIES

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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.

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 - Summary of Significant Accounting Policies 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.

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the three and nine months ended September 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

Nine Months Ended

September 30,

(In thousands, except per share data)

Per Share Data

Executive Summary

The Company has prepared all of the consolidated financial information in this report in accordance with U.S.

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 date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

There can be no assurances that actual results will not differ from those estimates.

As of and for the three months ended

(Dollars in thousands, except per share data) March 31, 2022 December 31, 2021 March 31, 2021

Net interest income $ 14,145 $ 15,103 $ 14,390

(Release of) provision for loan losses (2,500) (2,400) —

Non-interest income 3,726 3,675 4,572

Investment securities (losses) gains, net (4) 9 14

Non-interest expense 12,227 13,474 11,780

Income before income taxes 8,140 7,713 7,196

Income tax expense 1,531 1,723 1,357

Net income $ 6,609 $ 5,990 $ 5,839

Basic earnings per share $ 1.00 $ 0.90 $ 0.88

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Market price per share $ 25.28 $ 25.94 $ 20.47

Selected Ratios

(Based on average balance sheet data)

Return on total assets

Return on stockholders' equity

Stockholders' equity to total assets

Return on average total assets 1.51% 1.35% 1.38%

Return on average stockholders' equity 18.41% 16.70% 18.03%

Average stockholders' equity to total assets 8.22% 8.10% 7.64%

Efficiency ratio (1) 68.42% 71.75% 62.12%

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Net interest margin 3.50% 3.67% 3.61%

(Based on end-of-period data)

Stockholders' equity to assets 7.74% 8.13% 7.55%

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Tier 1 leverage ratio (2) 10.99% 11.01% 10.22%

Asset Quality

Net-charge-offs (recoveries) $ 124 $ (375) $ (248)

Non-performing loans $ 17,099 $ 25,473 $ 34,233

Classified assets $ 104,073 $ 108,322 $ 145,794

Non-performing loans to total loans 1.28% 1.96% 2.68%

Non-performing assets to total assets 1.55% 1.97% 2.68%

Allowance for loan losses to total loans 1.07% 1.30% 1.44%

(1) Efficiency ratio is calculated as non-interest expense as a percentage of revenue.

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

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

(2) Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets

RESULTS OF OPERATIONS ANALYSIS

The Company has prepared all of the consolidated financial information in this report in accordance with U.S.

In preparing the consolidated financial statements in accordance with U.S.

There can be no assurances that actual results will not differ from those estimates.

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Net interest income

Provision for loan losses

Non-interest income

Investment securities gains, net

Non-interest expense

Income before income taxes

Income tax expense

Consolidated net income of $5.8 million, or $0.88 per diluted share, for the three months ended September 30, 2021 increased $0.8 million compared to $5.0 million, or $0.74 per diluted share, for the three months ended September 30, 2020.

For the three months ended September 30, 2021, the return on average assets was 1.33%, the return on average stockholders’ equity was 16.49%, and the efficiency ratio was 61.2%.

Consolidated net income of $16.5 million, or $2.50 per diluted share, for the nine months ended September 30, 2021 increased $7.4 million compared to $9.1 million, or $1.35 per diluted share, for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, the return on average assets was 1.28%, the return on average stockholders’ equity was 16.37%, and the efficiency ratio was 62.5%.

Net interest income was $15.4 million and $43.4 million for the three and nine months ended September 30, 2021, respectively, compared to $13.8 million and $39.7 million for the three and nine months ended September 30, 2020, respectively.

The net interest margin (expressed on a fully taxable equivalent basis) increased to 3.78% for the three months ended September 30, 2021 compared to 3.50% for the three months ended September 30, 2020 and increased to 3.60% for the nine months ended September 30, 2021 compared to 3.50% for the nine months ended September 30, 2020.

Results of Operations Highlights:

Consolidated net income of $6.6 million for the first quarter 2022, an increase of $0.6 million compared to the fourth quarter 2021 ("linked quarter") and an increase of $0.8 million from the first quarter 2021 (the "prior year quarter").

Earnings per diluted share (“EPS”) was $1.00 for the first quarter 2022 compared to $0.90 and $0.88 for the linked quarter and prior year quarter, respectively.

For the first quarter 2022, the return on average assets was 1.51%, the return on average stockholders’ equity was 18.41%, and the efficiency ratio was 68.4%.

Net interest income of $14.1 million for the first quarter 2022, decreased $1.0 million from the linked quarter, and decreased $0.2 million from the prior year quarter.

Net interest margin, on a fully taxable equivalent basis ("FTE") basis, was 3.50% for the first quarter, a decrease from 3.67% for the linked quarter, and a decrease from 3.61% for the prior year quarter.

These changes are discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis section below.

A $0.3 million and $0.7 million provision for loan losses was required for the three and nine months ended September 30, 2021 compared to a $1.2 million and $5.4 million provision for the three and nine months ended September 30, 2020, respectively.

The decreased provision in the three and nine months ended September 30, 2021 compared to the three and nine months ended September 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 $106,000 and $(116,000) for the three and nine months ended September 30, 2021, respectively, compared to net loan charge-offs of $58,000 and $113,000 for the three and nine months ended September 30, 2020, respectively.

Non-performing loans totaled $32.8 million, or 2.56% of total loans, at September 30, 2021 compared to $34.6 million, or 2.69% of total loans, at December 31, 2020, and $5.8 million, or 0.45% of total loans, at September 30, 2020.

These changes are discussed in greater detail under the Lending and Credit Management section below.

Non-interest income decreased $1.4 million, or 28.2%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, and increased $2.4 million, or 23.8%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Non-interest income for the first quarter 2022 was $3.7 million, an increase of $0.1 million, or 1.4%, from the linked quarter, and a decrease of $0.8 million, or 18.5%, from the prior year quarter.

The change in the current quarter compared to the prior year quarter is primarily due to the decrease in the gain on sale of real estate mortgages of $1.6 million, or 64.0%.

These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Non-interest expense increased $0.08 million, or 0.1%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, and increased $1.7 million, or 5.0%, for the nine months ended September 30,

2021 compared to the nine months ended September 30, 2020.

Non-interest expense for the first quarter 2022 was $12.2 million, a decrease of $1.2 million, or 9.3%, from the linked quarter, and an increase of $0.4 million, or 3.8%, from the prior year quarter.

The change in the current quarter compared to the linked quarter is primarily due to the decrease in legal fees expenses resulting from the recognition of final settlement of a legal matter in the fourth quarter of 2021.

These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Balance Sheet Highlights:

Loans – Loans held for investment increased by $31.8 million, or 2.4%, equal to $1.3 billion as of March 31, 2022 as compared to the end of the linked quarter.

Year-over-year, loans held for investment grew $57.7 million, or 4.5%, from $1.3 billion as of March 31, 2021.

Asset quality – Non-performing loans totaled $17.1 million at March 31, 2022, a decrease of $8.4 million from $25.5 million at the end of the linked quarter, and a decrease of $17.1 million from $34.2 million at the end of the prior year quarter.

The reduction in non-performing loans in the current quarter, as compared to the linked quarter and prior year quarter is primarily due to several large non-accrual loans returning to accrual status described in more detail below.

The allowance for loan losses to total loans was 1.07% at March 31, 2022, compared to 1.30% at December 31, 2021 and 1.44% at March 31, 2021.

These changes are discussed in greater detail under the Lending and Credit Management section below.

Deposit s – Total deposits decreased by $60.7 million, or 4.0%, equal to $1.5 billion as of March 31, 2022 as compared to the end of the linked quarter.

Year-over-year deposits grew $62.2 million, or 4.5%, from $1.4 billion as of March 31, 2021.

Capital – Total shareholder’s equity was $134.4 million and the common equity to assets ratio was 7.74% at March 31, 2022 as compared to 8.13% and 7.55% at the end of the linked quarter and the prior year quarter, respectively.

Regulatory capital ratios remain “well-capitalized”, with tier 1 leverage ratio of 10.99% and a total risk-based capital ratio of 14.66% at March 31, 2022.

Average Balance Sheet Data

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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 interest margin on a fully taxable equivalent basis for each of the three and nine month periods ended September 30, 2021 and 2020, respectively.

Three Months Ended September 30,

(In thousands)

Real estate construction - residential

Real estate construction - commercial

Real estate mortgage - residential

Real estate mortgage - commercial

Installment and other consumer

Loans held for sale

Investment securities:

government and federal agency obligations

Obligations of states and political subdivisions

Mortgage-backed securities

Other debt securities

Total investment securities

Other investment securities

Federal funds sold and interest bearing deposits in other financial institutions

Total interest earning assets

All other assets

Allowance for loan losses

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest checking

Time deposits

Total interest bearing deposits

Federal funds purchased and securities sold under agreements to repurchase

Federal Home Loan Bank advances and other borrowings

Subordinated notes

Total borrowings

Total interest bearing liabilities

Demand deposits

Other liabilities

Total liabilities

Stockholders' equity

Total liabilities and stockholders' equity

Net interest income (FTE)

Net interest spread

Net interest margin

Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months ended September 30, 2021 and 2020.

Such adjustments totaled $0.5 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively.

Non-accruing loans are included in the average amounts outstanding.

Fees and costs on loans are included in interest income ($2.1 million and $0.7 million of PPP fees were included in commercial loan income for the three months ended September 30, 2021 and 2020, respectively).

Nine Months Ended September 30,

(In thousands)

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 interest margin on a fully taxable equivalent basis for each of the three month periods ended March 31, 2022 and 2021, respectively.

The average balances used in this table and other statistical data were calculated using average daily balances.

Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1)

Commercial $ 220,888 $ 2,832 5.20% $ 257,623 $ 4,159 6.55%

Real estate construction - residential 23,455 256 4.43 33,492 394 4.77

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Installment and other consumer 22,342 206 3.74 25,992 265 4.13

Total loans $ 1,315,157 $ 14,060 4.34% $ 1,277,602 $ 15,137 4.81%

Loans held for sale 2,288 20 3.55 5,500 25 1.84

Investment securities:

Treasury 4,010 5 0.51 3,006 8 1.08

government and federal agency obligations 27,371 89 1.32 38,605 146 1.53

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Other investment securities 5,412 75 5.62 5,982 83 5.63

Federal funds sold and interest bearing deposits in other financial institutions

Federal funds sold 6,232 1 0.07 20,276 4 0.08

Interest bearing deposits in other financial institutions 70,824 60 0.34 129,048 98 0.31

Total interest earning assets $ 1,704,249 $ 15,996 3.81% $ 1,654,115 $ 16,434 4.03%

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Allowance for loan losses (16,926) (18,466)

Total assets $ 1,770,617 $ 1,720,056

LIABILITIES AND STOCKHOLDERS' EQUITY

NOW accounts $ 176,648 $ 15 0.03% $ 142,735 $ 12 0.03%

Savings 265,542 187 0.29 231,311 138 0.24

Interest checking 29,398 28 0.39 61,522 76 0.50

Money market 289,140 86 0.12 279,234 83 0.12

Time deposits 260,628 389 0.61 267,047 671 1.02

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Net interest margin 3.50% 3.61%

Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the nine months ended September 30, 2021 and 2020.

Such adjustments totaled $1.3 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively.

(1) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months ended March 31, 2022 and 2021.

Such adjustments totaled $0.6 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.

Fees and costs on loans are included in interest income ($4.4 million and $1.2 million of PPP fees were included in commercial loan income for the nine months ended September 30, 2021 and 2020, respectively).

(3) Fees and costs on loans are included in interest income ($0.3 million and $1.5 million of PPP fees were included in commercial loan income for the three months ended March 31, 2022 and 2021, 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 nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, respectively.

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 months ended March 31, 2022 compared to the three months ended March 31, 2021.

The change in 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 September 30,

Nine Months Ended September 30,

Change due to

Three Months Ended March 31,

Change due to

(In thousands)

(In thousands) Total Change Average Volume Average Rate

Interest income on a fully taxable equivalent basis:

Commercial $ (1,327) $ (543) $ (784)

Real estate construction - residential (138) (111) (27)

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Investment securities:

Treasury (3) 2 (5)

government and federal agency obligations (57) (38) (19)

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Other investment securities (8) (8) —

Federal funds sold and interest bearing deposits in other financial institutions

Federal funds sold (3) (2) (1)

Interest bearing deposits in other financial institutions (38) (48) 10

Total interest income $ (438) $ 778 $ (1,216)

Interest expense:

Savings 3 3 —

NOW accounts 49 22 27

Interest checking (48) (33) (15)

Money market 3 3 —

Time deposits (282) (16) (266)

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Net interest income on a fully taxable equivalent basis $ (17) $ 893 $ (910)

Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three and nine months ended September 30, 2021 and 2020.

Such adjustments totaled $0.5 million and $0.2 million for the three and nine months ended September 30, 2021, respectively, compared to $1.3 million and $0.6 million for the three and nine months ended September 30, 2020, respectively.

Such adjustments totaled $0.6 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.

Fees and costs on loans are included in interest income ($2.1 million and $4.4 million of PPP fees for the three and nine months ended September 30, 2021, respectively, compared to $0.7 million and $1.2 million for the three and nine months ended September 30, 2020 were included in commercial loan income).

Financial results for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 reflected an increase in net interest income, on a tax equivalent basis, of $1.8 million, or 12.8%, and the financial results for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 reflected an increase of $4.4 million, or 10.8%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased to 3.78% for the quarter ended September 30, 2021 compared to 3.50% for the quarter ended September 30, 2020 and increased to 3.60% for the nine months ended September 30, 2021 compared to 3.50% for the nine months ended September 30, 2020.

Net interest income and net interest margin increased primarily due to an increase in PPP fees and interest income in both the three and nine month comparative periods.

The Company earned $2.1 million and $4.4 million in PPP income for the three and nine months ended September 30, 2021, respectively, compared to $0.7 million and $1.2 million for the three and nine months ended September 30, 2020, respectively.

Average interest-earning assets increased $65.8 million, or 4.1%, to $1.67 billion for the quarter ended September 30, 2021 compared to $1.60 billion for the quarter ended September 30, 2020, and average interest-bearing liabilities decreased $26.8 million, or 2.3%, to $1.13 billion for the quarter ended September 30, 2021 compared to $1.16 billion for the quarter ended September 30, 2020.

Average interest-earning assets increased $123.2 million, or 8.0%, to $1.66 billion for the nine months ended September 30, 2021 compared to $1.54 billion for the nine months ended September 30, 2020, and average interest-bearing liabilities increased $4.9 million, or 0.4%, to $1.15 billion for the nine months ended September 30, 2021 compared to $1.14 billion for the nine months ended September 30, 2020.

Total interest income (expressed on a fully taxable equivalent basis) was $17.3 million and $49.3 million for the three and nine months ended September 30, 2021, respectively, compared to $16.2 million and $48.1 million for the three and nine months ended September 30, 2020, respectively.

The Company’s rates earned on interest earning assets were 4.12% and 3.97% for the three and nine months ended September 30, 2021, respectively, compared to 4.03% and 4.18% for the three and nine months ended September 30, 2020, respectively.

Interest income on loans held for investment was $15.6 million and $44.8 million for the three and nine months ended September 30, 2021, respectively, compared to $14.9 million and $44.0 million for the three and nine months ended September 30, 2020, respectively.

Average loans outstanding increased $11.5 million, or 0.9%, to $1.29 billion for the quarter ended September 30, 2021 compared to $1.27 billion for the quarter ended September 30, 2020.

The average yield on loans increased to 4.81% for the quarter ended September 30, 2021 compared to 4.66% for the quarter ended September 30, 2020.

Average loans outstanding increased $48.1 million, or 3.9%, to $1.28 billion for the nine months ended September 30, 2021 compared to $1.23 billion for the nine months ended September 30, 2020.

The average yield on loans decreased to 4.68% for the nine months ended September 30, 2021 compared to 4.78% for the nine months ended September 30, 2020.

Financial results for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 reflected a decrease in net interest income, on a tax equivalent basis, of $17,000, or 0.1%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.50% for the quarter ended March 31, 2022 compared to 3.61% for the quarter ended March 31, 2021.

Net interest income and net interest margin decreased primarily due to a decrease in PPP fees and interest income in the three month comparative periods.

The Company earned $0.3 million in PPP income for the three months ended March 31, 2022 compared to $1.5 million for the three months ended March 31, 2021.

Average interest-earning assets increased $50.1 million, or 3.0%, to $1.70 billion for the quarter ended March 31, 2022 compared to $1.65 billion for the quarter ended March 31, 2021, and average interest-bearing liabilities decreased $9.0 million, or 0.8%, to $1.16 billion for the quarter ended March 31, 2022 compared to $1.17 billion for the quarter ended March 31, 2021.

Total interest income (expressed on a fully taxable equivalent basis) was $16.0 million for the three months ended March 31, 2022 compared to $16.4 million for the three months ended March 31, 2021.

The Company’s rates earned on interest earning assets were 3.81% for the three months ended March 31, 2022 compared to 4.03% for the three months ended March 31, 2021.

Interest income on loans held for investment was $14.1 million for the three months ended March 31, 2022 compared to $15.1 million for the three months ended March 31, 2021.

Average loans outstanding increased $37.6 million, or 2.9%, to $1.32 billion for the quarter ended March 31, 2022 compared to $1.28 billion for the quarter ended March 31, 2021.

The average yield on loans decreased to 4.34% for the quarter ended March 31, 2022 compared to 4.81% for the quarter ended March 31, 2021.

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 $1.5 million and $4.0 million for the three and nine months ended September 30, 2021, respectively, compared to $1.1 million and $3.2 million for the three and nine months ended September 30, 2020, respectively.

Average securities increased $84.4 million, or 43.2%, to $279.9 million for the quarter ended September 30, 2021 compared to $195.5 million for the quarter ended September 30, 2020.

The average yield on securities was consistent at 2.15% for both quarters ended September 30, 2021 and 2020, respectively.

Average securities increased $59.1 million, or 30.7%, to $251.4 million for the nine months ended September 30, 2021 compared to $192.3 million for the nine months ended September 30, 2020.

The average yield on securities decreased to 2.10% for the nine months ended September 30, 2021 compared to 2.20% for the nine months ended September 30, 2020.

See the Liquidity Management section for further discussion.

Total interest expense decreased to $1.4 million and $4.6 million for the three and nine months ended September 30, 2021, respectively, compared to $2.1 million and $7.8 million for the three and nine months ended September 30, 2020, respectively.

The Company’s rates paid on interest bearing liabilities were 0.50% and 0.54% for the three and nine months ended September 30, 2021, respectively, compared to 0.73% and 0.91% for the three and nine months ended September 30, 2020, respectively.

Interest income on available-for-sale securities was $1.8 million for the three months ended March 31, 2022 compared to $1.1 million for the three months ended March 31, 2021.

Average securities increased $88.6 million, or 41.1%, to $304.3 million for the quarter ended March 31, 2022 compared to $215.7 million for the quarter ended March 31, 2021.

The average yield on securities increased to 2.37% for the quarter ended March 31, 2022 compared to 2.04% for the quarter ended March 31, 2021.

See the Liquidity Management section for further discussion.

Interest expense on deposits decreased to $0.7 million and $2.5 million for the three and nine months ended September 30, 2021, respectively, compared to $1.3 million and $4.7 million for the three and nine months ended September 30, 2020, respectively.

Average interest-bearing deposits increased $3.3 million, or 0.4%, to $958.2 million for the quarter ended September 30, 2021 compared to $954.9 million for the quarter ended September 30, 2020.

The average cost of deposits decreased to 0.30% for the quarter ended September 30, 2021 compared to 0.53% for the quarter ended September 30, 2020.

Average interest-bearing deposits increased $25.3 million, or 2.7%, to $964.6 million for the nine months ended September 30, 2021 compared to $939.4 million for the nine months ended September 30, 2020.

The average cost of deposits decreased to 0.34% for the nine months ended September 30, 2021 compared to 0.67% for the nine months ended September 30, 2020.

Interest expense on borrowings was $0.7 million and $2.2 million for the three and nine months ended September 30, 2021, respectively, compared to $0.9 million and $3.1 million for the three and nine months ended September 30, 2020, respectively.

Average borrowings decreased to $172.8 million for the quarter ended September 30, 2021 compared to $202.9 million for the quarter ended September 30, 2020.

The average cost of borrowings decreased to 1.62% for the quarter ended September 30, 2021 compared to 1.68% for the quarter ended September 30, 2020.

Average borrowings decreased to $183.8 million for the nine months ended September 30, 2021 compared to $204.2 million for the nine months ended September 30, 2020.

The average cost of borrowings decreased to 1.57% for the nine months ended September 30, 2021 compared to 2.01% for the nine months ended September 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.

Total interest expense decreased to $1.3 million for the three months ended March 31, 2022 compared to $1.7 million for the three months ended March 31, 2021.

The Company’s rates paid on interest bearing liabilities were 0.45% for the three months ended March 31, 2022 compared to 0.59% for the three months ended March 31, 2021.

See the Liquidity Management section for further discussion.

Interest expense on deposits decreased to $0.7 million for the three months ended March 31, 2022 compared to $1.0 million for the three months ended March 31, 2021.

Average interest-bearing deposits increased $39.5 million, or 4.0%, to $1.02 billion for the quarter ended March 31, 2022 compared to $0.98 billion for the quarter ended March 31, 2021.

The average cost of deposits decreased to 0.28% for the quarter ended March 31, 2022 compared to 0.40% for the quarter ended March 31, 2021.

Interest expense on borrowings decreased to $0.6 million for the three months ended March 31, 2022 compared to $0.7 million for the three months ended March 31, 2021.

Average borrowings decreased to $140.7 million for the quarter ended March 31, 2022 compared to $189.1 million for the quarter ended March 31, 2021.

The average cost of borrowings increased to 1.69% for the quarter ended March 31, 2022 compared to 1.57% for the quarter ended March 31, 2021.

The increase in cost of funds primarily resulted from higher market interest rates.

Non-interest Income and Expense

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Three Months Ended March 31,

(Dollars in thousands) 2022 2021 $ Change % Change

Non-interest income

4 unchanged sentences

Gain on sales of mortgage loans, net 888 2,469 (1,581) (64.0) %

Other 513 137 376 274.5 %

Total non-interest income $ 3,726 $ 4,572 $ (846) (18.5) %

1 unchanged sentence

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

NM = Not meaningful

Total non-interest income decreased $1.4 million, or 28.2%, to $3.7 million for the quarter ended September 30, 2021 compared to $5.1 million for the quarter ended September 30, 2020, and increased $2.4 million, or 23.8%, to $12.7 million for the nine months ended September 30, 2021 compared to $10.3 million for the nine months ended September 30, 2020.

The decrease in non-interest income for the quarter end September 30, 2021 compared to the quarter ended September 30, 2020 was primarily due to the decrease in gain on sale of real estate mortgages due to lower volumes of real estate mortgage loans sold as further discussed below.

Bank Card and Credit card transaction fees increased $0.2 million, or 23.3%, to $1.0 million for the quarter ended September 30, 2021 compared to $0.8 million for the quarter ended September 30, 2020, and increased $0.5 million, or 24.4%, to $2.9 million for the nine months ended September 30, 2021, compared to $2.4 million for the nine months ended September 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 $17,000 to $71,000 for the quarter ended September 30, 2021 compared to $54,000 for the quarter ended September 30, 2020 and increased $543,000 to $495,000 for the nine months ended September 30, 2021 compared to $(48,000) for the nine months ended September 30, 2020.

Mortgage loan servicing fees earned on loans sold were $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, compared to $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively.

The current quarter's MSR valuation decreased $13,000 from the prior linked quarter primarily due to a decrease in the Company's servicing portfolio.

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 was servicing $277.1 million of mortgage loans at September 30, 2021 compared to $292.7 million and $289.3 million at December 31, 2020 and September 30, 2020, respectively.

Gain on sales of mortgage loans decreased $1.6 million to $1.4 million for the quarter ended September 30, 2021 compared to $3.0 million for the quarter ended September 30, 2020 and increased $1.5 million to $5.9 million for the nine months ended September 30, 2021 compared to $4.4 million for the nine months ended September 30, 2020.

The Company sold $39.1 million and $167.6 million of loans for the three and nine months ended September 30, 2021, respectively, compared to $73.5 million and $133.2 million for the three and nine months ended September 30, 2020, respectively.

Loans sold to the secondary market were strong in the first six months but began to slow down in the third quarter of 2021.

Other Income decreased $12,000, or 10.5%, to $0.1 million for the quarter ended September 30, 2021 compared to $0.1 million for the quarter ended September 30, 2020, and decreased $0.3 million, or 57.2%, to $0.2 million for the nine months ended September 30, 2021 compared to $0.5 million for the nine months ended September 30, 2020.

The decreases primarily resulted from a decrease in net gains on sales of other real estate owned and a decrease in net gains on disposal of fixed assets.

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 and a forfeiture of an OREO escrow deposit.

Total non-interest income decreased $0.8 million, or 18.5%, to $3.7 million for the quarter ended March 31, 2022 compared to $4.6 million for the quarter ended March 31, 2021.

The decrease was primarily due to the decrease in gain on sale of real estate mortgages due to lower volumes of real estate mortgage loans sold as further discussed below.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) increased $0.2 million to $0.2 million for the quarter ended March 31, 2022 compared to $0.1 million for the quarter ended March 31, 2021.

Mortgage loan servicing fees earned on loans sold were $0.3 million for the three months ended March 31, 2022 compared to $0.2 million for the three months ended March 31, 2021.

The current quarter's MSR valuation increased $31,000 from the linked quarter primarily due to an increase in market rates.

The Company was servicing $261.5 million of mortgage loans at March 31, 2022 compared to $270.0 million and $288.9 million at December 31, 2021 and March 31, 2021, respectively.

Gain on sales of mortgage loans decreased $1.6 million to $0.9 million for the quarter ended March 31, 2022 compared to $2.5 million for the quarter ended March 31, 2021.

The Company sold $29.1 million of loans for the three months ended March 31, 2022 compared to $66.3 million for the three months ended March 31, 2021.

Loans sold to the secondary market slowed after strong sales during the first six months of 2021.

Other Income increased $0.4 million to $0.5 million for the quarter ended March 31, 2022 compared to $0.1 million for the quarter ended March 31, 2021.

The increase primarily resulted from mortgage banking derivative income, interest component of net pension cost, and income received from the Missouri Department of Transportation related to a land easement.

During the fourth quarter of 2021 the Company elected to record the fair value of derivatives related to interest rate lock commitments and mandatory commitments and the related changes due to volume and rates through non-interest income and non-interest expense.

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

Investment securities gains, net

Investment securities (losses) gains, net

Available-for-sale securities:

4 unchanged sentences

Fair value adjustments, net (4) 12

Investment securities gains, net

Investment securities (losses) gains, net $ (4) $ 14

Non-interest expense for the periods indicated was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Three Months Ended March 31,

(Dollars in thousands) 2022 2021 $ Change % Change

Non-interest expense

Salaries $ 5,156 $ 5,342 $ (187) (3.5) %

Employee benefits 1,730 1,804 (73) (4.1)

5 unchanged sentences

Postage, printing, and supplies 190 204 (14) (6.9)

Loan expense 145 174 (29) (16.7)

Other 1,590 1,087 503 46.3

Total non-interest expense $ 12,227 $ 11,780 $ 447 3.8 %

2 unchanged sentences

* Efficiency ratio is calculated as non-interest expense as a percent of revenue.

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

Total non-interest expense remained consistent at $11.7 million for both the quarters ended September 30, 2021 and 2020, respectively, and increased $1.7 million, or 5.0%, to $35.1 million for the nine months ended September 30, 2021 compared to $33.4 million for the nine months ended September 30, 2020.

Salaries decreased $0.2 million, or 3.1%, to $4.9 million for the quarter ended September 30, 2021 compared to $5.1 million for the quarter ended September 30, 2020 primarily due to reduced commissions due to a decrease in loan originations, and increased $0.8 million, or 5.7%, to $15.4 million for the nine months ended September 30, 2021 compared to $14.6 million for the nine months ended September 30, 2020 primarily due to an increase in commissions paid due to an increase in loan originations.

( See Gain on sales of mortgage loans discussion above ) In addition, annual merit increases averaged approximately 4.0% each year and were awarded in the first quarter of each year.

Employee benefits remained consistent at $1.7 million for both the quarters ended September 30, 2021 and 2020, respectively, and increased $0.5 million, or 11.1%, to $5.3 million for the nine months ended September 30, 2021 compared to $4.8 million for the nine months ended September 30, 2020.

The increases were primarily due to an increase in 401(k) plan contributions, payroll taxes, medical premiums, and pension cost due to lower annual discount rate assumptions compared to the prior year's annual assumptions.

Processing, network, and bank card expense increased $0.4 million, or 46.9%, to $1.3 million for the quarter ended September 30, 2021 compared to $0.9 million for the quarter ended September 30, 2020, and increased $0.7 million, or 25.4%, to $3.5 million for the nine months ended September 30, 2021 compared to $2.8 million for the nine months ended September 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 $0.2 million, or 41.9%, to $0.2 million for the quarter ended September 30, 2021 compared to $0.4 million for the quarter ended September 30, 2020, and decreased $0.2 million, or 22.1%, to $0.6 million for the nine months ended September 30, 2021 compared to $0.8 million for the nine months ended September 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 nine months ended September 30, 2021 compared to the three and nine months ended September 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 14.6%, to $1.0 million for the quarter ended September 30, 2021 compared to $1.2 million for the quarter ended September 30, 2020, and decreased $0.3 million, or 8.2%, to $3.0 million for the nine months ended September 30, 2021 compared to $3.3 million for the nine months ended September 30, 2020.

The decreases were primarily related to a decrease in donations, pension net interest cost, and miscellaneous charged-off items related to teller differences and debit card fraud.

In the quarter ended September 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, deposit product expense, and software expense due to new mortgage loan software.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 19.7% and 19.4% for the three and nine months ended September 30, 2021, respectively, compared to 18.9% and 18.4% for the three and nine months ended September 30, 2020, respectively.

The increase in the effective tax rate for each of the three and nine months ended September 30, 2021 compared to the three and nine months ended September 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 nine months ended September 30, 2021 and 2020, respectively, is lower than the U.S.

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

Total non-interest expense increased $0.4 million to $12.2 million for the quarter ended March 31, 2022 compared to $11.8 million for the quarter ended March 31, 2021.

Salaries decreased $0.2 million, or 3.5%, to $5.2 million for the quarter ended March 31, 2022 compared to $5.3 million for the quarter ended March 31, 2021 primarily due to reduced commissions based on loan volume.

See Gains on sales of mortgage loans discussion above.

Employee benefits decreased $0.1 million, or 4.1%, to $1.7 million for the quarter ended March 31, 2022 compared to $1.8 million for the quarter ended March 31, 2021.

The decreases were primarily due to a decrease in 401(k) plan contributions partially offset by an increase in medical premiums and pension cost due to lower annual discount rate assumptions compared to the prior year's annual assumptions.

Processing, network, and bank card expense increased $0.1 million, or 13.4%, to $1.1 million for the quarter ended March 31, 2022 compared to $1.0 million for the quarter ended March 31, 2021.

These increases were primarily related to increases in debit card processing and ATM interchange expenses, partially offset by decreases in network and processing expenses.

Other non-interest expense increased $0.5 million, or 46.3%, to $1.6 million for the quarter ended March 31, 2022 compared to $1.1 million for the quarter ended March 31, 2021.

The increases were primarily related to mortgage banking derivative expense, telephone, travel, donations and software expense, partially offset by a decrease in FDIC insurance assessments.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.8% for the three months ended March 31, 2022 compared to 18.9% for the three months ended March 31, 2021.

The decrease in the effective tax rate for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to the increase in earnings and an increase in state taxes attributed to elevated earnings partially offset by the benefit recorded pertaining to the historical tax credit.

The effective tax rate for each of the three months ended March 31, 2022 and 2021, respectively, is lower than the U.S.

federal statutory rate of 21% primarily due to tax-free revenues.

Included in the effective tax rate for the quarter ended March 31, 2022 is a $13,000 benefit associated with a historic tax credit investment.

The investment is expected to generate a $321,000 tax benefit over the life of the project and is being recognized under the deferral method of accounting.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company.

Net loans represented 72.7% of total assets as of September 30, 2021 compared to 73.2% as of December 31, 2020.

Net loans represented 76.0% of total assets as of March 31, 2022 compared to 70.2% as of December 31, 2021.

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors.

3 unchanged sentences

Major classifications within the Company’s held for investment loan portfolio as of the dates indicated is as follows:

September 30, 2021

December 31, 2020

(In thousands)

March 31, 2022 December 31, 2021

(Dollars in thousands) Amount % of Loans Amount % of Loans

Commercial, financial, and agricultural (a) $ 221,015 16.6 % $ 217,214 16.7 %

Real estate construction − residential

21,515 1.6 27,920 2.1

Real estate construction − commercial

103,478 7.8 91,369 7.0

Real estate mortgage − residential

287,879 21.6 279,346 21.5

Real estate mortgage − commercial

677,539 50.8 663,256 50.9

Installment and other consumer 22,497 1.7 23,028 1.8

Total loans held for investment $ 1,333,923 100.0 % $ 1,302,133 100.0 %

(a) Includes $26.0 million and $63.3 million of SBA PPP loans, net as of September 30, 2021 and December 31, 2020, respectively.

(a) Includes $2.3 million and $8.4 million of SBA PPP loans, net as of March 31, 2022 and December 31, 2021, respectively.

The Company extends credit to its local community markets through traditional real estate mortgage products.

5 unchanged sentences

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 nine months ended September 30, 2021, the Company sold approximately $167.6 million of loans to investors compared to $133.2 million for the nine months ended September 30, 2020.

At September 30, 2021, the Company was servicing approximately $277.1 million of loans sold to the secondary market compared to $292.7 million at December 31, 2020, and $289.3 million at September 30, 2020.

During the three months ended March 31, 2022, the Company sold approximately $29.1 million of loans to investors compared to $66.3 million for the three months ended March 31, 2021.

At March 31, 2022, the Company was servicing approximately $261.5 million of loans sold to the secondary market compared to $270.0 million at December 31, 2021, and $288.9 million at March 31, 2021.

Risk Elements of the Loan Portfolio

8 unchanged sentences

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.

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.

2 unchanged sentences

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

September 30,

(In thousands)

March 31, December 31,

(Dollars in thousands) 2022 2021

Non-accrual loans:

Commercial, financial, and agricultural $ 136 $ 153

Real estate construction − residential

Real estate construction − commercial 100 105

2 unchanged sentences

Installment and other consumer 125 43

Total $ 17,096 $ 25,459

Loans contractually past - due 90 days or more and still accruing:

1 unchanged sentence

Installment and other consumer 3 —

Total $ 3 $ 14

Total non-performing loans (a) 17,099 25,473

3 unchanged sentences

Allowance for loan losses to loans 1.07 % 1.30 %

Non-accrual loans to total loans 1.28 % 1.96 %

Non-performing loans to loans (a) 1.28 % 1.96 %

1 unchanged sentence

Non-performing assets to assets (b) 1.55 % 1.97 %

Allowance for loan losses to non-accrual loans 83.52 % 66.39 %

Allowance for loan losses to non-performing loans 83.51 % 66.36 %

1 unchanged sentence

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

Total non-performing assets were $44.4 million, or 3.46% of total loans, at September 30, 2021 compared to $46.9 million, or 3.64% of total loans, at December 31, 2020, and $18.4 million, or 1.44% of total loans, at September 30, 2020, respectively.

Total non-accrual loans at September 30, 2021 decreased $1.7 million, or 5.0%, to $32.8 million compared to $34.6 million at December 31, 2020.

There were no loans past due 90 days and still accruing interest at September 30, 2021 compared to $17,000 at December 31, 2020.

Other real estate and repossessed assets were $11.6 million and $12.3 million at September 30, 2021 and December 31, 2020, respectively.

During the nine months ended September 30, 2021, $142,000 of non-accrual loans, net of charge-offs taken, moved to other real estate owned and repossessed assets compared to $73,000 during the nine months ended September 30, 2020.

As of September 30, 2021, approximately $6.0 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 $4.7 million at December 31, 2020 and September 30, 2020, respectively.

Management believes the allowance for loan losses was sufficient to cover the risks and probable losses related to such loans at September 30, 2021 and December 31, 2020, respectively.

Total non-performing assets were $26.9 million, or 2.01% of total loans, at March 31, 2022 compared to $36.0 million, or 2.76% of total loans, at December 31, 2021.

Total non-accrual loans at March 31, 2022 decreased $8.4 million, or 32.8%, to $17.1 million compared to $25.5 million at December 31, 2021.

There were $3,000 in loans past due 90 days and still accruing interest at March 31, 2022 compared to $14,000 at December 31, 2021.

Other real estate and repossessed assets were $9.8 million and $10.5 million at March 31, 2022 and December 31, 2021, respectively.

During the three months ended March 31, 2022 there were no additions to other real estate owned compared to $30,000 of non-accrual loans, net of charge-offs taken, during the three months ended March 31, 2021.

During the first quarter ended March 31, 2022, an additional $52,000 charge-off was recorded related to a property that moved into other real estate owned at the end of the fourth quarter of 2021.

As of March 31, 2022, approximately $21.9 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 $13.8

million at December 31, 2021.

Management believes the allowance for loan losses was sufficient to cover the risks and probable losses related to such loans at March 31, 2022 and December 31, 2021, respectively.

The following table summarizes the Company’s TDRs at the dates indicated:

September 30, 2021

December 31, 2020

(In thousands)

March 31, 2022 December 31, 2021

(Dollars in thousands) Number of contracts Recorded Investment Specific Reserves Number of contracts Recorded Investment Specific Reserves

Performing TDRs

1 unchanged sentence

Real estate mortgage − residential

5 1,170 46 6 1,262 56

Real estate mortgage − commercial

2 323 38 2 328 38

Installment and other consumer 2 15 2 2 17 2

1 unchanged sentence

Non-performing TDRs

Commercial, financial and agricultural

Real estate mortgage − residential

5 $ 551 $ 70 5 $ 561 $ 39

Total non-performing TDRs 5 $ 551 $ 70 5 $ 561 $ 39

At September 30, 2021, loans classified as TDRs totaled $2.5 million, with $133,000 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 $0.6 million of loans classified as TDRs at September 30, 2021 compared to $0.9 million at December 31, 2020.

Total TDRs 16 $ 2,242 $ 179 17 $ 2,356 $ 159

At March 31, 2022, loans classified as TDRs totaled $2.2 million, with $0.2 million of specific reserves, compared to $2.4 million of loans classified as TDRs, with $0.2 million of specific reserves at December 31, 2021.

Non-performing loans, included $0.6 million of loans classified as TDRs at March 31, 2022 compared to $0.6 million at December 31, 2021.

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 September 30, 2021 was primarily due to $1.2 million of payments received on TDRs.

The net decrease in total TDRs from December 31, 2021 to March 31, 2022 was primarily due to $115,000 of payments received on TDRs.

Allowance for Loan Losses and Provision

1 unchanged sentence

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

September 30,

(In thousands)

March 31, 2022 December 31, 2021

(In thousands) Amount % of loans in each category to total loans Amount % of loans in each category to total loans

Allocation of allowance for loan losses at end of period:

5 unchanged sentences

Installment and other consumer 273 1.7 256 1.8

The allowance for loan losses (ALL) was $18.9 million, or 1.48% of loans outstanding, at September 30, 2021 compared to $18.1 million, or 1.41%, at December 31, 2020, and $17.8 million, or 1.39% at September 30, 2020.

The ratio of the ALL to non-performing loans was 57.65% at September 30, 2021, compared to 52.39% at December 31, 2020, and 305.49% at September 30, 2020.

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

September 30,

(In thousands)

Unallocated 182 — 61 —

Total $ 14,279 100.0 % $ 16,903 100.0 %

The allowance for loan losses was $14.3 million, or 1.07%, of loans outstanding at March 31, 2022 compared to $16.9 million, or 1.30%, of loans outstanding at December 31, 2021.

The ratio of the allowance for loan losses to non-performing loans was 83.51% at March 31, 2022, compared to 66.36% at December 31, 2021.

The following table is a summary of the general and specific allocations of the allowance for loan losses:

(In thousands) March 31, 2022 December 31, 2021

Allocation of allowance for loan losses:

Individually evaluated for impairment − specific reserves

$ 317 $ 3,044

Collectively evaluated for impairment − general reserves

13,962 13,859

Total $ 14,279 $ 16,903

The specific reserve component applies to loans evaluated individually for impairment.

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Once the impairment amount is calculated, a specific reserve allocation is recorded.

At September 30, 2021, $4.9 million of the Company’s ALL was allocated to impaired loans totaling approximately $34.7 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 $11.9 million, or 34%, of total impaired loans required no reserve allocation at September 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.

At March 31, 2022, $0.3 million of the Company’s ALL was allocated to impaired loans totaling approximately $18.8 million compared to $3.0 million of the Company’s ALL allocated to impaired loans totaling approximately $27.3 million at December 31, 2021.

Management determined that $16.1 million, or 86%, of total impaired loans required no reserve allocation at March 31, 2022 compared to $16.6 million, or 61%, at December 31, 2021, 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.

10 unchanged sentences

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 September 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.

A $0.3 million and $0.7 million provision for loan losses was required for the three and nine months ended September 30, 2021, respectively, compared to a $1.2 million and $5.4 million provision for the three and nine months ended September 30, 2020, respectively.

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 changes in the allowance for loan losses from December 31, 2021 to March 31, 2022 primarily resulted from transitioning loans impacted by COVID-19 from non-accrual status back to performing status.

This transition was made according to the Company’s established internal loan policies regarding loan performance as well as consultation with industry experts.

This transition back to performing status also reduced specific reserves based on the attributes of the individual loan collateral, to the general allocations method described above.

The Company continues to monitor the risks associated with its non-performing loans.

The Company recognized a negative provision expense for loan losses of $2.5 million for the three months ended March 31, 2022 compared to no provision expense for the three months ended March 31, 2021.

The negative provision expense primarily resulted from the release of specific reserves totaling $2.8 million in the first quarter of 2022 due to returning significant loan balances to accrual from non-accrual status or other collateral valuation adjustments.

No provision was required during the first quarter of 2021 primarily due to the impact of net recoveries and improvement in

the economic outlook as the economy began to recover from the impacts of the COVID-19 pandemic experienced throughout 2020.

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

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

Analysis of allowance for loan losses:

Balance beginning of period

Commercial, financial, and agricultural

Real estate mortgage − residential

Real estate mortgage − commercial

Installment and other consumer

Total charge-offs

Three Months Ended March 31,

(Dollars in thousands) Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans

Commercial, financial, and agricultural $ 15 $ 220,888 0.01 % $ (122) $ 257,623 (0.05) %

Real estate construction − residential

— 23,455 — (13) 33,492 (0.04)

Real estate construction − commercial

— 95,935 — — 78,578 —

Real estate mortgage − residential

(3) 281,824 — (168) 260,040 (0.06)

Real estate mortgage − commercial

73 670,713 0.01 23 621,877 —

Installment and other consumer 39 22,342 0.17 32 25,992 0.12

Total recoveries

Net charge-offs (recoveries)

Provision for loan losses

Balance end of period

Total $ 124 $ 1,315,157 0.01 % $ (248) $ 1,277,602 (0.02) %

Net Loan Charge-offs (recoveries)

The Company’s net charge-offs were $106,000 for the three months ended September 30, 2021 compared to net charge-offs of $58,000 for the three months ended September 30, 2020, and net recoveries were $116,000 for the nine months ended September 30, 2021 compared to net charge-offs of $113,000 for the nine months ended September 30, 2020.

The net recovery for the nine months ended September 30, 2021 was primarily related to a commercial and a real estate mortgage recovery received from two loan relationships in the first quarter of 2021.

The Company’s net charge-offs were $0.1 million, or 0.01%, of average loans for the three months ended March 31, 2022 compared to net recoveries of $0.2 million, (0.02)%, for the three months ended March 31, 2021.

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 Company designates certain long-term fixed rate personal real estate loans as held for sale.

In the fourth quarter of 2021, the Company elected the fair value option for all newly originated long-term personal real estate loans held for sale.

As of December 31, 2021, all loans held for sale were carried at fair value.

The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors.

At September 30, 2021, the carrying amount of these loans was $4.6 million compared to $5.1 million at December 31, 2020.

At March 31, 2022, the carrying amount of these loans was $0.9 million compared to $2.2 million at December 31, 2021.

Liquidity and Capital Resources

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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.

September 30,

(In thousands)

Federal funds sold and other interest-bearing deposits

(In thousands) March 31, 2022 December 31, 2021

Federal funds sold $ 419 $ 7,122

Other interest-bearing deposits 27,552 135,500

Certificates of deposit in other banks 4,701 5,193

Available-for-sale investment securities 286,754 310,870

Total $ 319,426 $ 458,685

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 $278.5 million at September 30, 2021 and included an unrealized net gain of $0.05 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $4.8 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s deposit base.

The fair value of the available-for-sale investment portfolio was $286.8 million at March 31, 2022 and included an unrealized net loss of $24.3 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $5.5 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s borrowings.

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 as required or permitted by law.

At September 30, 2021 and December 31, 2020, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $73.7 million and $44.1 million, respectively.

At March 31, 2022 and December 31, 2021, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $97.3 million and $35.5 million, respectively.

Total investment securities pledged for these purposes were as follows:

September 30,

(In thousands)

(In thousands) March 31, 2022 December 31, 2021

Investment securities pledged for the purpose of securing:

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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 September 30, 2021, such deposits totaled $1.3 billion and represented 93.1% of the Company’s total deposits.

At March 31, 2022, such deposits totaled $1.4 billion and represented 92.8% 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.

Core deposits at September 30, 2021 and December 31, 2020 were as follows:

September 30,

(In thousands)

Core deposits at March 31, 2022 and December 31, 2021 were as follows:

(In thousands) March 31, 2022 December 31, 2021

Core deposit base:

3 unchanged sentences

Other time deposits 168,568 175,827

Time deposits and certificates of deposit of $250,000 and greater at September 30, 2021 and December 31, 2020 were $77.1 million and $91.3 million, respectively.

The Company had brokered deposits totaling $20.2 million and $40.2 million at September 30, 2021 and December 31, 2020, respectively.

Total $ 1,350,748 $ 1,427,049

Estimated uninsured deposits totaled $430.4 million, including $84.7 million of certificates of deposit, at March 31, 2022, compared to $513.5 million, including $69.1 million of certificates of deposit, at December 31, 2021.

The Company had brokered deposits totaling $20.2 million and $20.2 million at March 31, 2022 and December 31, 2021, respectively.

Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit.

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Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines.

As of September 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 $10.3 million on a secured basis.

There were no federal funds purchased outstanding at September 30, 2021.

As of March 31, 2022, under agreements

with these unaffiliated banks, the Bank may borrow up to $60.0 million in federal funds on an unsecured basis and $8.9 million on a secured basis.

There were no federal funds purchased outstanding at March 31, 2022.

Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio.

At September 30, 2021, there were $27.4 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 September 30, 2021.

At March 31, 2022, there were $5.5 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 March 31, 2022.

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 September 30, 2021, the Bank had $93.5 million in outstanding borrowings with the FHLB.

As of March 31, 2022, the Bank had $77.4 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 September 30, 2021 and December 31, 2020 were as follows:

September 30,

(In thousands)

Borrowings outstanding at March 31, 2022 and December 31, 2021 were as follows:

(In thousands) March 31, 2022 December 31, 2021

Federal funds purchased and securities sold under agreements to repurchase $ 5,514 $ 23,829

1 unchanged sentence

Subordinated notes 49,486 49,486

Other borrowings

Total $ 132,357 $ 150,733

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.

3 unchanged sentences

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

September 30,

(In thousands)

March 31, 2022 December 31, 2021

(In thousands) FHLB Federal Reserve Bank Federal Funds Purchased Lines Total FHLB Federal Reserve Bank Federal Funds Purchased Lines Total

Advance equivalent $ 278,761 $ 8,947 $ 60,000 $ 347,708 $ 273,479 $ 10,384 $ 60,000 $ 343,863

2 unchanged sentences

Total available $ 201,404 $ 8,947 $ 60,000 $ 270,351 $ 165,061 $ 10,384 $ 60,000 $ 235,445

At September 30, 2021, loans of $556.0 million were pledged at the FHLB as collateral for borrowings and letters of credit.

At September 30, 2021, investments totaling $10.8 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

At March 31, 2022, loans of $567.4 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

At March 31, 2022, investments with a market value of $9.4 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.

Sources and Uses of Funds

Cash and cash equivalents were $113.3 million at September 30, 2021 compared to $180.4 million at December 31, 2020.

The $67.1 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 nine months ended September 30, 2021.

Cash and cash equivalents were $50.5 million at March 31, 2022 compared to $159.9 million at December 31, 2021.

The $109.4 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 three months ended March 31, 2022.

Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items.

Operating activities provided cash flow of $19.5 million for the nine months ended September 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 $78.4 million during the nine months ended September 30, 2021.

The cash outflow primarily consisted of $136.7 million in purchases of investment securities partially offset by $50.8 million from maturities and calls and sales of investment securities.

Financing activities used total cash of $8.2 million during the nine months ended September 30, 2021, resulting primarily from a $51.7 million decrease in interest-bearing transaction accounts and time deposits, a $17.7 million decrease in securities sold under agreements to repurchase, and a $13.2 million repayment of FHLB advances, partially offset by a $79.1 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.

Operating activities provided cash flow of $4.4 million for the three months ended March 31, 2022.

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 $33.1 million during the three months ended March 31, 2022.

The cash outflow primarily consisted of a net increase in loans held for investment of $31.8 million and $14.6 million in purchases of investment securities partially offset by $13.5 million from maturities and calls and sales of investment securities.

Financing activities used total cash of $80.7 million during the three months ended March 31, 2022, resulting primarily from a $66.2 million decrease in interest-bearing transaction accounts and a $18.3 million decrease in securities sold under agreements to repurchase.

The decrease in interest-bearing accounts was due primarily to reductions in deposits for public funds customers, resulting from the distribution of prior year tax collections.

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.

1 unchanged sentence

Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity.

The Company had $385.5 million in unused loan commitments and standby letters of credit as of September 30, 2021.

The Company had $418.5 million in unused loan commitments and standby letters of credit as of March 31, 2022.

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.

1 unchanged sentence

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 $2.6 million and $2.3 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company paid cash dividends to its shareholders totaling approximately $1.0 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively.

A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends.

The Bank declared and paid $6.5 million and $2.5 million in dividends to the Company during the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, the Company had cash and cash equivalents totaling $2.3 million and $2.0 million, respectively.

The Bank declared and paid $3.5 million and $4.5 million in dividends to the Company during the three months ended March 31, 2022 and 2021, respectively.

At March 31, 2022 and December 31, 2021, the Company had cash and cash equivalents totaling $4.1 million and $1.8 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 third quarter of 2021.

The Company's 2019 Repurchase Plan was amended during the second quarter 2021 to authorize the purchase of up to an additional $5.0 million in market value of the Company's common stock.

Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

During the first quarter 2022, the Company repurchased 23,536 common shares at an average cost of $25.75 per share totaling $0.6 million.

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 September 30, 2021, $5.0 million remained available for the repurchase of shares pursuant to the share repurchase authorizations.

As of March 31, 2022, $4.4 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.

5 unchanged sentences

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.

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.

1 unchanged sentence

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 September 30, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Management believes, as of March 31, 2022, 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 September 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.

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of March 31, 2022 and December 31, 2021.

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.

3 unchanged sentences

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 its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

Under the Basel III requirements, at September 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-

Fully Phased-In

(in thousands)

September 30, 2021

Under the Basel III requirements, at March 31, 2022 and December 31, 2021, 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:

Actual Minimum Capital Required - Basel III Fully Phased-In Required to be Considered Well- Capitalized

(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

March 31, 2022

Total Capital (to risk-weighted assets):

Company $ 213,114 14.66 % $ 152,691 10.50 % $ — N.A%

Bank 211,027 14.52 % 152,575 10.50 % 145,309 10.00 %

Tier 1 Capital (to risk-weighted assets):

Company $ 195,471 13.44 % $ 123,607 8.50 % $ — N.A%

Bank 196,588 13.53 % 123,513 8.50 % 116,248 8.00 %

Common Equity Tier 1 Capital (to risk-weighted assets):

Company $ 150,675 10.36 % $ 101,794 7.00 % $ — N.A%

Bank 196,588 13.53 % 101,717 7.00 % 94,451 6.50 %

Tier 1 leverage ratio (to adjusted average assets):

Company $ 195,471 10.99 % $ 71,122 4.00 % $ — N.A%

Bank 196,588 11.12 % 70,747 4.00 % 88,434 5.00 %

December 31, 2021

Total Capital (to risk-weighted assets):

Company $ 210,726 14.79 % $ 149,640 10.50 % $ — N.A%

Bank 210,148 14.78 % 149,339 10.50 % 142,228 10.00 %

Tier 1 Capital (to risk-weighted assets):

Company $ 193,663 13.59 % $ 121,137 8.50 % $ — N.A%

Bank 193,085 13.58 % 120,894 8.50 % 113,782 8.00 %

Common Equity Tier 1 Capital (to risk-weighted assets):

Company $ 145,663 10.22 % $ 99,760 7.00 % $ — N.A%

Bank 193,085 13.58 % 99,559 7.00 % 92,448 6.50 %

Tier 1 leverage ratio:

Company $ 193,663 11.01 % $ 70,342 4.00% $ — N.A%

Bank 193,085 11.04 % 69,959 4.00 % 87,449 5.00 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis