HAWTHORN BANCSHARES, INC. 10-Q

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the Company, we, our, or us), including, without limitation: ● statements that are not historical in nature, and ● statements preceded by, followed by or that include the words believes , expects, may, will, should, could, anticipates, estimates, intends, plans, hopes or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors: ● competitive pressures among financial services companies may increase significantly, ● changes in the interest rate environment may reduce interest margins, ● general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets, ● increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses, ● costs or difficulties related to any integration of any business of the Company and its acquisition targets may be greater than expected, ● legislative, regulatory or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged, ● changes may occur in the securities markets and, ● effects of the COVID-19 pandemic, or any resurgence thereof, or other adverse external events. We have described under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made. Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time. Overview Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.7 billion in assets at September 30, 2021, provides a broad range of commercial and personal banking services. The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (SBA) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area. 37 ​ The Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company’s business is commercial, commercial real estate development, and residential mortgage lending. The Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity. The success of the Company’s growth strategy depends primarily on the ability of the Bank to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company’s financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company’s growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control. The Bank is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services. The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System. 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. economy. The continuing impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the scope, severity and duration of any resurgence of the pandemic (including COVID-19 variants), the actions taken to contain the outbreak or any resurgence or mitigate their impacts, the 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 38 ​ 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. CRITICAL ACCOUNTING POLICIES The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations , where such policies affect the reported and expected financial results. Allowance for Loan Losses Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business operations is provided in note 1 to the Company’s unaudited consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of the Company. ​ 39 ​ 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, ​ September 30, ​ (In thousands, except per share data) 2021 ​ 2020 ​ 2021 ​ 2020 ​ Per Share Data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share $ 0.88 ​ $ 0.74 ​ $ 2.50 ​ $ 1.35 ​ Diluted earnings per share ​ ​ 0.88 ​ ​ 0.74 ​ ​ 2.50 ​ ​ 1.35 ​ Cash dividends paid on common stock ​ ​ 954 ​ ​ 749 ​ ​ 2,624 ​ ​ 2,252 ​ Book value per share ​ ​ ​ ​ ​ ​ ​ ​ 21.02 ​ ​ 18.43 ​ Market price per share ​ ​ ​ ​ ​ ​ ​ ​ 23.16 ​ ​ 18.21 ​ Selected Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Based on average balance sheet data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on total assets ​ ​ 1.33 % ​ 1.18 % ​ 1.28 % ​ 0.76 % Return on stockholders' equity ​ ​ 16.49 % ​ 15.99 % ​ 16.37 % ​ 10.15 % Stockholders' equity to total assets ​ ​ 8.05 % ​ 7.40 % ​ 7.82 % ​ 7.47 % Efficiency ratio (1) ​ ​ 61.23 % ​ 61.49 % ​ 62.49 % ​ 66.88 % Net interest spread ​ ​ 3.62 % ​ 3.30 % ​ 3.43 % ​ 3.27 % Net interest margin ​ ​ 3.78 % ​ 3.50 % ​ 3.60 % ​ 3.50 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Based on end-of-period data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders' equity to assets ​ ​ ​ ​ ​ ​ ​ ​ 8.00 % ​ 7.45 % Total risk-based capital ratio ​ ​ ​ ​ ​ ​ ​ ​ 15.01 % ​ 15.05 % Tier 1 risk-based capital ratio ​ ​ ​ ​ ​ ​ ​ ​ 13.64 % ​ 13.28 % Common equity Tier 1 capital ​ ​ ​ ​ ​ ​ ​ ​ 10.26 % ​ 9.97 % Tier 1 leverage ratio (2) ​ ​ ​ ​ ​ ​ ​ ​ 10.82 % ​ 9.99 % (1) Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue includes net interest income and 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. GAAP. In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the 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. 40 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ (In thousands) 2021 2020 $ Change % Change ​ 2021 2020 $ Change % Change ​ ​ Net interest income ​ $ 15,380 ​ $ 13,842 ​ $ 1,538 ​ ​ 11.1 % ​ $ 43,442 ​ $ 39,707 ​ $ 3,735 ​ ​ 9.4 % ​ Provision for loan losses ​ 300 ​ 1,200 ​ (900) ​ (75.0) ​ ​ 700 ​ 5,400 ​ (4,700) ​ (87.0) ​ ​ Non-interest income ​ 3,675 ​ 5,119 ​ (1,444) ​ (28.2) ​ ​ 12,707 ​ 10,266 ​ 2,441 ​ 23.8 ​ ​ Investment securities gains, net ​ ​ 126 ​ ​ 12 ​ ​ 114 ​ ​ 950.0 ​ ​ ​ 140 ​ ​ 18 ​ ​ 122 ​ ​ 677.8 ​ ​ Non-interest expense ​ 11,668 ​ 11,660 ​ 8 ​ 0.1 ​ ​ 35,088 ​ 33,421 ​ 1,667 ​ 5.0 ​ ​ Income before income taxes ​ 7,213 ​ 6,113 ​ 1,100 ​ 18.0 ​ ​ 20,501 ​ 11,170 ​ 9,331 ​ 83.5 ​ ​ Income tax expense ​ 1,417 ​ 1,153 ​ 264 ​ 22.9 ​ ​ 3,974 ​ 2,060 ​ 1,914 ​ 92.9 ​ ​ Net income ​ $ 5,796 ​ $ 4,960 ​ $ 836 ​ ​ 16.9 % ​ $ 16,527 ​ $ 9,110 ​ $ 7,417 ​ ​ 81.4 % ​ 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. 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. 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, 41 ​ 2021 compared to the nine months ended September 30, 2020. These changes are discussed in greater detail under the Non-interest Income and Expense section below. Average Balance Sheet Data Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest-bearing liabilities. The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three and nine month periods ended September 30, 2021 and 2020, respectively. 42 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ ​ Interest ​ Rate ​ ​ ​ ​ Interest ​ Rate ​ ​ ​ ​ Average ​ Income/ ​ Earned/ ​ Average ​ Income/ ​ Earned/ ​ ​ (In thousands) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) ​ ​ ASSETS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans: (2) (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 247,564 ​ $ 4,575 ​ 7.33 % $ 291,657 ​ $ 3,364 ​ 4.59 % ​ Real estate construction - residential ​ ​ 35,358 ​ ​ 453 ​ 5.08 ​ ​ 26,263 ​ ​ 345 ​ 5.23 ​ ​ Real estate construction - commercial ​ ​ 75,080 ​ ​ 885 ​ 4.68 ​ ​ 86,056 ​ ​ 989 ​ 4.57 ​ ​ Real estate mortgage - residential ​ ​ 270,464 ​ ​ 2,863 ​ 4.20 ​ ​ 253,451 ​ ​ 2,967 ​ 4.66 ​ ​ Real estate mortgage - commercial ​ 633,239 ​ 6,590 4.13 ​ 588,464 ​ 6,959 4.70 ​ Installment and other consumer ​ 24,363 ​ 242 3.94 ​ 28,691 ​ 297 4.12 ​ Total loans ​ $ 1,286,068 ​ $ 15,608 4.81 % $ 1,274,582 ​ $ 14,921 4.66 % ​ Loans held for sale ​ $ 3,092 ​ $ 24 ​ 3.08 % $ 11,573 ​ $ 41 ​ 1.41 % ​ Investment securities: ​ ​ ​ ​ ​ ​ U.S. Treasury ​ $ 3,033 ​ $ 4 0.52 % $ 2,808 ​ $ 8 1.13 % ​ U.S. government and federal agency obligations ​ 20,819 ​ 75 1.43 ​ 39,927 ​ 179 1.78 ​ ​ Obligations of states and political subdivisions ​ 114,804 ​ 868 3.00 ​ 45,609 ​ 305 2.60 ​ ​ Mortgage-backed securities ​ 130,658 ​ 443 1.35 ​ 96,017 ​ 411 1.70 ​ ​ Other debt securities ​ ​ 10,609 ​ 129 4.82 ​ 11,133 ​ 152 5.43 ​ ​ Total investment securities ​ $ 279,923 ​ $ 1,519 2.15 % $ 195,494 ​ $ 1,055 2.15 % ​ Other investment securities ​ 6,010 ​ 81 5.35 ​ 6,623 ​ 75 4.51 ​ ​ Federal funds sold and interest bearing deposits in other financial institutions ​ 91,654 ​ 78 0.34 ​ 112,710 ​ 111 0.39 ​ ​ Total interest earning assets ​ $ 1,666,747 ​ $ 17,310 4.12 % $ 1,600,982 ​ $ 16,203 4.03 % ​ All other assets ​ 83,998 ​ ​ ​ ​ ​ ​ 84,068 ​ ​ ​ Allowance for loan losses ​ (18,801) ​ ​ ​ ​ ​ ​ (16,727) ​ ​ ​ Total assets ​ $ 1,731,944 ​ ​ ​ ​ ​ ​ $ 1,668,323 ​ ​ ​ LIABILITIES AND STOCKHOLDERS' EQUITY ​ ​ ​ ​ ​ ​ NOW accounts ​ $ 225,351 ​ $ 130 0.23 % $ 198,913 ​ $ 124 0.25 % ​ Savings ​ 161,308 ​ 14 0.03 ​ 123,405 ​ 11 0.04 ​ ​ Interest checking ​ ​ 37,391 ​ ​ 45 ​ 0.48 ​ ​ 53,734 ​ ​ 75 ​ 0.56 ​ ​ Money market ​ 281,425 ​ 91 0.13 ​ 281,454 ​ 100 0.14 ​ ​ Time deposits ​ 252,732 ​ 437 0.69 ​ 297,359 ​ 950 1.27 ​ ​ Total interest bearing deposits ​ $ 958,207 ​ $ 717 0.30 % $ 954,865 ​ $ 1,260 0.53 % ​ Federal funds purchased and securities sold under agreements to repurchase ​ 29,753 ​ 19 0.25 ​ 36,412 ​ 25 0.27 ​ ​ Federal Home Loan Bank advances and other borrowings ​ 93,533 ​ 383 1.62 ​ 116,977 ​ 505 1.72 ​ ​ Subordinated notes ​ 49,486 ​ 305 2.45 ​ 49,486 ​ 326 2.62 ​ ​ Total borrowings ​ $ 172,772 ​ $ 707 1.62 % $ 202,875 ​ $ 856 1.68 % ​ Total interest bearing liabilities ​ $ 1,130,979 ​ $ 1,424 0.50 % $ 1,157,740 ​ $ 2,116 0.73 % ​ Demand deposits ​ 445,062 ​ ​ ​ ​ ​ ​ 368,709 ​ ​ ​ Other liabilities ​ 16,451 ​ ​ ​ ​ ​ ​ 18,486 ​ ​ ​ Total liabilities ​ $ 1,592,492 ​ ​ ​ ​ ​ ​ $ 1,544,935 ​ ​ ​ Stockholders' equity ​ 139,452 ​ ​ ​ ​ ​ ​ 123,388 ​ ​ ​ Total liabilities and stockholders' equity ​ $ 1,731,944 ​ ​ ​ ​ ​ ​ $ 1,668,323 ​ ​ ​ Net interest income (FTE) ​ ​ ​ ​ $ 15,886 ​ ​ ​ ​ ​ ​ $ 14,087 ​ ​ Net interest spread ​ ​ ​ ​ ​ ​ 3.62 % ​ ​ ​ 3.30 % ​ Net interest margin ​ ​ ​ ​ ​ ​ 3.78 % ​ ​ ​ 3.50 % ​ (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 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. (2) Non-accruing loans are included in the average amounts outstanding. (3) 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). ​ ​ ​ 43 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ Interest ​ Rate ​ ​ ​ ​ Interest ​ Rate ​ ​ ​ Average ​ Income/ ​ Earned/ ​ Average ​ Income/ ​ Earned/ ​ (In thousands) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) ​ ASSETS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans: (2) (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 253,878 ​ $ 11,732 ​ 6.18 % $ 257,328 ​ $ 9,055 ​ 4.70 % Real estate construction - residential ​ ​ 34,625 ​ ​ 1,274 ​ 4.92 ​ ​ 25,245 ​ ​ 999 ​ 5.29 ​ Real estate construction - commercial ​ ​ 77,115 ​ ​ 2,676 ​ 4.64 ​ ​ 85,486 ​ ​ 3,059 ​ 4.78 ​ Real estate mortgage - residential ​ ​ 264,699 ​ ​ 8,546 ​ 4.32 ​ ​ 251,029 ​ ​ 9,031 ​ 4.81 ​ Real estate mortgage - commercial ​ 624,455 ​ 19,809 4.24 ​ 582,568 ​ 20,955 4.80 Installment and other consumer ​ 25,044 ​ 750 4.00 ​ 30,063 ​ 950 4.22 Total loans ​ $ 1,279,816 ​ $ 44,787 4.68 % $ 1,231,719 ​ $ 44,049 4.78 % Loans held for sale ​ $ 4,263 ​ $ 79 ​ 2.48 % $ 8,338 ​ $ 96 ​ 1.54 % Investment securities: ​ ​ ​ ​ ​ ​ U.S. Treasury ​ $ 3,026 ​ $ 13 0.57 % $ 1,453 ​ $ 16 1.47 % U.S. government and federal agency obligations ​ 22,579 ​ 276 1.63 ​ 41,353 ​ 619 2.00 ​ Obligations of states and political subdivisions ​ 88,333 ​ 1,989 3.01 ​ 42,088 ​ 895 2.84 ​ Mortgage-backed securities ​ 125,814 ​ 1,249 1.33 ​ 100,186 ​ 1,348 1.80 ​ Other debt securities ​ ​ 11,674 ​ 430 4.92 ​ 7,229 ​ 294 5.43 ​ Total investment securities ​ $ 251,426 ​ $ 3,957 2.10 % $ 192,309 ​ $ 3,172 2.20 % Other investment securities ​ 6,021 ​ 246 5.46 ​ 6,765 ​ 247 4.88 ​ Federal funds sold and interest bearing deposits in other financial institutions ​ 118,999 ​ 268 0.30 ​ 98,238 ​ 553 0.75 ​ Total interest earning assets ​ $ 1,660,525 ​ $ 49,337 3.97 % $ 1,537,369 ​ $ 48,117 4.18 % All other assets ​ 84,600 ​ ​ ​ ​ ​ ​ 83,104 ​ ​ Allowance for loan losses ​ (18,579) ​ ​ ​ ​ ​ ​ (15,061) ​ ​ Total assets ​ $ 1,726,546 ​ ​ ​ ​ ​ ​ $ 1,605,412 ​ ​ LIABILITIES AND STOCKHOLDERS' EQUITY ​ ​ ​ ​ ​ NOW accounts ​ $ 227,925 ​ $ 402 0.24 % $ 190,734 ​ $ 533 0.37 % Savings ​ 153,730 ​ 40 0.03 ​ 112,917 ​ 43 0.05 ​ Interest checking ​ ​ 46,661 ​ ​ 168 ​ 0.48 ​ ​ 49,026 ​ ​ 323 ​ 0.88 ​ Money market ​ 280,838 ​ 255 0.12 ​ 278,244 ​ 647 0.31 ​ Time deposits ​ 255,495 ​ 1,612 0.84 ​ 308,442 ​ 3,156 1.37 ​ Total interest bearing deposits ​ $ 964,649 ​ $ 2,477 0.34 % $ 939,363 ​ $ 4,702 0.67 % Federal funds purchased and securities sold under agreements to repurchase ​ 38,797 ​ 72 0.25 ​ 34,028 ​ 121 0.48 ​ Federal Home Loan Bank advances and other borrowings ​ 95,486 ​ 1,164 1.63 ​ 120,650 ​ 1,749 1.94 ​ Subordinated notes ​ 49,486 ​ 921 2.49 ​ 49,486 ​ 1,208 3.26 ​ Total borrowings ​ $ 183,769 ​ $ 2,157 1.57 % $ 204,164 ​ $ 3,078 2.01 % Total interest bearing liabilities ​ $ 1,148,418 ​ $ 4,634 0.54 % $ 1,143,527 ​ $ 7,780 0.91 % Demand deposits ​ 426,290 ​ ​ ​ ​ ​ ​ 324,479 ​ ​ Other liabilities ​ 16,871 ​ ​ ​ ​ ​ ​ 17,498 ​ ​ Total liabilities ​ $ 1,591,579 ​ ​ ​ ​ ​ ​ $ 1,485,504 ​ ​ Stockholders' equity ​ 134,967 ​ ​ ​ ​ ​ ​ 119,908 ​ ​ Total liabilities and stockholders' equity ​ $ 1,726,546 ​ ​ ​ ​ ​ ​ $ 1,605,412 ​ ​ Net interest income (FTE) ​ ​ ​ ​ $ 44,703 ​ ​ ​ ​ ​ ​ $ 40,337 ​ Net interest spread ​ ​ ​ ​ ​ ​ 3.43 % ​ ​ ​ 3.27 % Net interest margin ​ ​ ​ ​ ​ ​ 3.60 % ​ ​ ​ 3.50 % (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 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. (2) Non-accruing loans are included in the average amounts outstanding. (3) 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). ​ 44 ​ 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 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, ​ 2021 vs. 2020 2021 vs. 2020 ​ ​ ​ ​ Change due to ​ ​ ​ ​ Change due to ​ Total Average Average Total Average Average (In thousands) Change Volume Rate Change Volume Rate Interest income on a fully taxable equivalent basis: (1) ​ ​ ​ ​ ​ ​ Loans: (2) (3) ​ ​ ​ ​ ​ ​ Commercial ​ $ 1,211 ​ $ (570) ​ $ 1,781 ​ $ 2,677 ​ $ (123) ​ $ 2,800 Real estate construction - residential ​ 108 ​ 116 ​ (8) ​ 275 ​ 349 ​ (74) Real estate construction - commercial ​ (104) ​ (129) ​ 25 ​ (383) ​ (293) ​ (90) Real estate mortgage - residential ​ (104) ​ 191 ​ (295) ​ (485) ​ 475 ​ (960) Real estate mortgage - commercial ​ (369) ​ 504 ​ (873) ​ (1,146) ​ 1,440 ​ (2,586) Installment and other consumer ​ (55) ​ (44) ​ (11) ​ (200) ​ (153) ​ (47) Loans held for sale ​ ​ (17) ​ ​ (44) ​ ​ 27 ​ ​ (17) ​ ​ (60) ​ ​ 43 Investment securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Treasury ​ (4) ​ 1 ​ (5) ​ (3) ​ 10 ​ (13) U.S. government and federal agency obligations ​ (104) ​ (74) ​ (30) ​ (343) ​ (244) ​ (99) Obligations of states and political subdivisions ​ 563 ​ 518 ​ 45 ​ 1,094 ​ 1,038 ​ 56 Mortgage-backed securities ​ 32 ​ 128 ​ (96) ​ (99) ​ 300 ​ (399) Other debt securities ​ (23) ​ (7) ​ (16) ​ 136 ​ 166 ​ (30) Other investment securities ​ ​ 6 ​ (7) ​ 13 ​ (1) ​ ​ (29) ​ 28 Federal funds sold and interest bearing deposits in other financial institutions ​ (33) ​ (19) ​ (14) ​ (285) ​ 99 ​ (384) Total interest income ​ $ 1,107 ​ $ 564 ​ $ 543 ​ $ 1,220 ​ $ 2,975 ​ $ (1,755) Interest expense: ​ ​ ​ ​ ​ ​ NOW accounts ​ 6 ​ 15 ​ (9) ​ (131) ​ 91 ​ (222) Savings ​ 3 ​ 3 ​ — ​ (3) ​ 13 ​ (16) Interest checking ​ (30) ​ (21) ​ (9) ​ (155) ​ (15) ​ (140) Money market ​ (9) ​ — ​ (9) ​ (392) ​ 6 ​ (398) Time deposits ​ (513) ​ (127) ​ (386) ​ (1,544) ​ (478) ​ (1,066) Federal funds purchased and securities sold under agreements to repurchase ​ (6) ​ (5) ​ (1) ​ (49) ​ 15 ​ (64) Federal Home Loan Bank advances and other borrowings ​ (122) ​ (97) ​ (25) ​ (585) ​ (332) ​ (253) Subordinated notes ​ (21) ​ — ​ (21) ​ (287) ​ — ​ (287) Total interest expense ​ $ (692) ​ $ (232) ​ $ (460) ​ $ (3,146) ​ $ (700) ​ $ (2,446) Net interest income on a fully taxable equivalent basis ​ $ 1,799 ​ $ 796 ​ $ 1,003 ​ $ 4,366 ​ $ 3,675 ​ $ 691 (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 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. (2) Non-accruing loans are included in the average amounts outstanding. (3) 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). ​ 45 ​ 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. 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. 46 ​ 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. 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. See the Liquidity Management section for further discussion. 47 ​ 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) 2021 2020 $ Change % Change 2021 2020 $ Change % Change ​ Non-interest income ​ ​ ​ ​ ​ ​ ​ ​ Service charges and other fees ​ $ 782 ​ $ 816 ​ $ (34) ​ ​ (4.2) % $ 2,285 ​ $ 2,181 ​ $ 104 ​ ​ 4.8 % Bank card income and fees ​ 1,043 ​ 846 ​ 197 ​ 23.3 ​ 2,925 ​ 2,351 ​ 574 ​ 24.4 ​ Trust department income ​ 308 ​ 263 ​ 45 ​ 17.1 ​ 910 ​ 920 ​ (10) ​ (1.1) ​ Real estate servicing fees, net ​ 71 ​ 54 ​ 17 ​ 31.5 ​ 495 ​ (48) ​ 543 ​ NM ​ Gain on sales of mortgage loans, net ​ 1,369 ​ 3,026 ​ (1,657) ​ (54.8) ​ 5,881 ​ 4,369 ​ 1,512 ​ 34.6 ​ Other ​ 102 ​ 114 ​ (12) ​ (10.5) ​ 211 ​ 493 ​ (282) ​ (57.2) ​ Total non-interest income ​ $ 3,675 ​ $ 5,119 ​ $ (1,444) ​ ​ (28.2) % $ 12,707 ​ $ 10,266 ​ $ 2,441 ​ ​ 23.8 % Non-interest income as a % of total revenue * ​ 19.3 % 27.0 % ​ ​ 22.6 % 20.5 % ​ ​ * 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. 48 ​ 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. 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, ​ (in thousands) 2021 2020 2021 2020 ​ Investment securities gains, net ​ ​ ​ ​ ​ ​ Available-for-sale securities: ​ ​ ​ ​ ​ ​ Gross realized gains ​ $ 119 ​ $ 21 ​ $ 121 ​ $ 27 ​ Gross realized losses ​ — ​ (8) ​ — ​ (8) ​ Other-than-temporary impairment recognized ​ — ​ — ​ — ​ — ​ Other investment securities: ​ ​ ​ ​ ​ Fair value adjustments, net ​ 7 ​ (1) ​ 19 ​ (1) ​ Investment securities gains, net ​ $ 126 ​ $ 12 ​ $ 140 ​ $ 18 ​ ​ Non-interest expense for the periods indicated was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ Nine Months Ended September 30, ​ (In thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change ​ Non-interest expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Salaries ​ $ 4,954 ​ $ 5,112 ​ $ (158) ​ (3.1) % ​ $ 15,446 ​ $ 14,617 ​ $ 829 ​ 5.7 % Employee benefits ​ 1,711 ​ 1,659 ​ 52 ​ 3.1 ​ ​ 5,319 ​ 4,787 ​ 532 ​ 11.1 ​ Occupancy expense, net ​ 808 ​ 781 ​ 27 ​ 3.5 ​ ​ 2,298 ​ 2,303 ​ (5) ​ (0.2) ​ Furniture and equipment expense ​ 787 ​ 745 ​ 42 ​ 5.6 ​ ​ 2,284 ​ 2,259 ​ 25 ​ 1.1 ​ Processing, network and bank card expense ​ 1,288 ​ 877 ​ 411 ​ 46.9 ​ ​ 3,521 ​ 2,807 ​ 714 ​ 25.4 ​ Legal, examination, and professional fees ​ 357 ​ 381 ​ (24) ​ (6.3) ​ ​ 1,146 ​ 1,155 ​ (9) ​ (0.8) ​ Advertising and promotion ​ 310 ​ 316 ​ (6) ​ (1.9) ​ ​ 862 ​ 786 ​ 76 ​ 9.7 ​ Postage, printing, and supplies ​ 218 ​ 227 ​ (9) ​ (4.0) ​ ​ 608 ​ 661 ​ (53) ​ (8.0) ​ Loan expense ​ ​ 209 ​ ​ 360 ​ ​ (151) ​ (41.9) ​ ​ ​ 612 ​ ​ 786 ​ ​ (174) ​ (22.1) ​ Other ​ 1,026 ​ 1,202 ​ (176) ​ (14.6) ​ ​ 2,992 ​ 3,260 ​ (268) ​ (8.2) ​ Total non-interest expense ​ $ 11,668 ​ $ 11,660 ​ $ 8 ​ 0.1 % ​ $ 35,088 ​ $ 33,421 ​ $ 1,667 ​ 5.0 % Efficiency ratio* ​ 61.2 % 61.5 % ​ ​ ​ ​ ​ ​ 62.5 % 66.9 % ​ ​ ​ ​ ​ Number of full-time equivalent employees ​ 302 ​ 301 ​ ​ ​ ​ ​ ​ ​ 302 ​ 301 ​ ​ ​ ​ ​ ​ * 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. 49 ​ 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 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. federal statutory rate of 21% primarily due to tax-free revenues. 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. Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior managers of the Bank. 50 ​ 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) Amount ​ % of Loans ​ Amount % of Loans Commercial, financial, and agricultural (a) ​ $ 232,532 ​ 18.1 % ​ $ 272,918 21.2 % ​ Real estate construction − residential ​ 33,514 ​ 2.6 ​ ​ 29,692 2.3 ​ ​ Real estate construction − commercial ​ 72,031 ​ 5.6 ​ ​ 78,144 6.1 ​ ​ Real estate mortgage − residential ​ 273,768 ​ 21.3 ​ ​ 262,339 20.4 ​ ​ Real estate mortgage − commercial ​ 647,043 ​ 50.4 ​ ​ 617,133 48.0 ​ ​ Installment and other consumer ​ 23,932 ​ 1.9 ​ ​ 26,741 2.1 ​ ​ Total loans held for investment ​ $ 1,282,820 ​ 100.0 % ​ $ 1,286,967 100.0 % ​ (a) Includes $26.0 million and $63.3 million of SBA PPP loans, net as of September 30, 2021 and December 31, 2020, respectively. The Company extends credit to its local community markets through traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in non-accrual, past due, or restructured loans if such assets were loans. The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the 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. Risk Elements of the Loan Portfolio Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The senior loan committee reviews and reports to the Board of Directors, at scheduled meetings: past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be considered impaired. Management follows the guidance provided in the Financial Accounting Standards Board's (FASB) ASC Topic 310-10-35 in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio. 51 ​ Non-performing Assets The following table summarizes non-performing assets at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ September 30, ​ (In thousands) 2021 2020 2020 Non-accrual loans: ​ ​ ​ ​ Commercial, financial, and agricultural ​ $ 6,292 ​ $ 6,717 ​ $ 878 ​ Real estate construction − residential ​ — ​ 192 ​ — ​ Real estate construction − commercial ​ 108 ​ 200 ​ 552 ​ Real estate mortgage − residential ​ 1,475 ​ 2,105 ​ 2,236 ​ Real estate mortgage − commercial ​ 24,940 ​ 25,314 ​ 1,933 ​ Installment and other consumer ​ 20 ​ 31 ​ 33 ​ Total ​ $ 32,835 ​ $ 34,559 ​ $ 5,632 ​ Loans contractually past - due 90 days or more and still accruing: ​ ​ ​ ​ Real estate mortgage - residential ​ $ — ​ $ — ​ $ 175 ​ Installment and other consumer ​ — ​ 17 ​ 8 ​ Total ​ $ — ​ $ 17 ​ $ 183 ​ Total non-performing loans (a) ​ ​ 32,835 ​ ​ 34,576 ​ ​ 5,815 ​ Other real estate owned and repossessed assets ​ ​ 11,614 ​ ​ 12,291 ​ ​ 12,601 ​ Total non-performing assets ​ $ 44,449 ​ $ 46,867 ​ $ 18,416 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans held for investment ​ $ 1,282,820 ​ $ 1,286,967 ​ $ 1,279,165 ​ Allowance for loan losses to loans ​ 1.48 % 1.41 % 1.39 % Non-performing loans to loans (a) ​ 2.56 % 2.69 % 0.45 % Non-performing assets to loans (b) ​ 3.46 % 3.64 % 1.44 % Non-performing assets to assets (b) ​ 2.56 % 2.70 % 1.10 % Allowance for loan losses to non-performing loans ​ 57.65 % 52.39 % 305.49 % (a) Non-performing loans include loans 90 days past due and accruing, non-accrual loans, and non-performing TDRs included in non-accrual loans and 90 days past due. (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. 52 ​ The following table summarizes the Company’s TDRs at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 ​ December 31, 2020 ​ Number of Recorded Specific Number of Recorded Specific (In thousands) contracts Investment Reserves ​ contracts Investment Reserves Performing TDRs ​ ​ ​ ​ ​ Commercial, financial and agricultural 5 ​ $ 273 ​ $ 27 ​ 7 ​ $ 835 ​ $ 90 Real estate mortgage − residential 6 ​ 1,268 ​ 55 ​ 5 ​ 1,521 ​ 28 Real estate mortgage − commercial 2 ​ 332 ​ 7 ​ 2 ​ 343 ​ 7 Installment and other consumer ​ 4 ​ ​ 38 ​ ​ 4 ​ 5 ​ ​ 77 ​ ​ 10 Total performing TDRs 17 ​ $ 1,911 ​ $ 93 ​ 19 ​ $ 2,776 ​ $ 135 Non-performing TDRs ​ ​ ​ ​ ​ Commercial, financial and agricultural — ​ $ — ​ $ — ​ 1 ​ $ 4 ​ $ 1 Real estate mortgage − residential 5 ​ ​ 624 ​ ​ 40 ​ 8 ​ ​ 895 ​ ​ 78 Total non-performing TDRs 5 ​ $ 624 ​ $ 40 ​ 9 ​ $ 899 ​ $ 79 Total TDRs 22 ​ $ 2,535 ​ $ 133 ​ 28 ​ $ 3,675 ​ $ 214 ​ ​ 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. 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. Allowance for Loan Losses and Provision Allowance for Loan Losses The following table is a summary of the allocation of the allowance for loan losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ (In thousands) 2021 2020 ​ Allocation of allowance for loan losses at end of period: ​ ​ ​ Commercial, financial, and agricultural ​ $ 4,701 ​ $ 5,121 ​ Real estate construction − residential ​ 235 ​ 213 ​ Real estate construction − commercial ​ 425 ​ 475 ​ Real estate mortgage − residential ​ 2,673 ​ 2,679 ​ Real estate mortgage − commercial ​ 10,681 ​ 9,354 ​ Installment and other consumer ​ 255 ​ 264 ​ Unallocated ​ (41) ​ 7 ​ Total ​ $ 18,929 ​ $ 18,113 ​ ​ 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. 53 ​ The following table is a summary of the general and specific allocations of the ALL: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ (In thousands) 2021 2020 ​ Allocation of allowance for loan losses: ​ ​ ​ Individually evaluated for impairment − specific reserves ​ $ 4,932 ​ $ 5,113 ​ Collectively evaluated for impairment − general reserves ​ 13,997 ​ 13,000 ​ Total ​ $ 18,929 ​ $ 18,113 ​ ​ The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At 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. The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by asset type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type. The look-back period begins with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward. Management determined that the look-back period should be expanded until a loss producing downturn is recognized. This would be accomplished by allowing the look-back period to shift forward by eliminating the earliest loss period and replenishing it with losses from the most recent period. The look-back period is consistently evaluated for relevance given the current facts and circumstances. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss. The Company’s methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices. The specific and general reserve allocations represent management’s best estimate of probable losses inherent in the loan portfolio at the evaluation date. Although the ALL is comprised of specific and general allocations, the entire ALL is available to absorb any credit losses. The ALL changes from December 31, 2020 to 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. ​ 54 ​ Provision 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. 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, which significantly impacted provision in 2020. 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 following table summarizes loan loss experience for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ (In thousands) 2021 2020 2021 2020 ​ Analysis of allowance for loan losses: ​ ​ ​ ​ ​ ​ Balance beginning of period ​ $ 18,735 ​ $ 16,622 ​ $ 18,113 ​ $ 12,477 ​ Charge-offs: ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, financial, and agricultural ​ 45 ​ 46 ​ 100 ​ 130 ​ Real estate mortgage − residential ​ 18 ​ — ​ 22 ​ 52 ​ Real estate mortgage − commercial ​ 15 ​ 13 ​ 42 ​ 37 ​ Installment and other consumer ​ 78 ​ 42 ​ 181 ​ 133 ​ Total charge-offs ​ $ 156 ​ $ 101 ​ $ 345 ​ $ 352 ​ Recoveries: ​ ​ ​ ​ ​ Commercial, financial, and agricultural ​ $ 19 ​ $ 11 ​ $ 202 ​ $ 102 ​ Real estate construction − residential ​ — ​ 13 ​ 13 ​ 44 ​ Real estate mortgage − residential ​ 8 ​ 4 ​ 183 ​ 40 ​ Real estate mortgage − commercial ​ 1 ​ — ​ 1 ​ 3 ​ Installment and other consumer ​ 22 ​ 15 ​ 62 ​ 50 ​ Total recoveries ​ $ 50 ​ $ 43 ​ $ 461 ​ $ 239 ​ Net charge-offs (recoveries) ​ 106 ​ 58 ​ (116) ​ 113 ​ Provision for loan losses ​ 300 ​ 1,200 ​ 700 ​ 5,400 ​ Balance end of period ​ $ 18,929 ​ $ 17,764 ​ $ 18,929 ​ $ 17,764 ​ ​ 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. Loans Held For Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company carries them at the lower of cost or fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors. At September 30, 2021, the carrying amount of these loans was $4.6 million compared to $5.1 million at December 31, 2020. 55 ​ Liquidity and Capital Resources Liquidity Management The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet these demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service relationships with customers as the primary sources of funding. The Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the Company’s liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company’s liquidity. The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess reserves held at the Federal Reserve. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ (In thousands) 2021 2020 ​ Federal funds sold and other interest-bearing deposits ​ $ 94,262 ​ $ 161,128 ​ Certificates of deposit in other banks ​ 6,673 ​ 9,376 ​ Available-for-sale investment securities ​ 278,528 ​ 198,030 ​ Total ​ $ 379,463 ​ $ 368,534 ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $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 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. Total investment securities pledged for these purposes were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ (In thousands) 2021 2020 ​ Investment securities pledged for the purpose of securing: ​ ​ ​ Federal Reserve Bank borrowings ​ $ 10,755 ​ $ 9,115 ​ Federal funds purchased and securities sold under agreements to repurchase ​ 36,207 ​ 59,695 ​ Other deposits ​ 157,861 ​ 85,130 ​ Total pledged, at fair value ​ $ 204,823 ​ $ 153,940 ​ ​ Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000. At September 30, 2021, such deposits totaled $1.3 billion and represented 93.1% 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. 56 ​ Core deposits at September 30, 2021 and December 31, 2020 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ (In thousands) 2021 2020 ​ Core deposit base: ​ ​ ​ ​ ​ ​ ​ Non-interest bearing demand ​ $ 461,626 ​ $ 382,492 ​ Interest checking ​ 249,806 ​ 292,375 ​ Savings and money market ​ 423,061 ​ 391,248 ​ Other time deposits ​ 178,512 ​ 183,072 ​ Total ​ $ 1,313,005 ​ $ 1,249,187 ​ ​ 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. Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of 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. 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. 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. 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, ​ December 31, ​ (In thousands) 2021 2020 Borrowings: ​ ​ ​ ​ ​ ​ ​ Federal funds purchased and securities sold under agreements to repurchase ​ $ 27,443 ​ $ 45,154 ​ Federal Home Loan Bank advances ​ 93,479 ​ 106,660 ​ Subordinated notes ​ 49,486 ​ 49,486 ​ Other borrowings ​ 14 ​ 14 ​ Total ​ $ 170,422 ​ $ 201,314 ​ ​ The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window. ​ ​ 57 ​ 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, ​ December 31, ​ 2021 ​ 2020 ​ ​ ​ ​ ​ Federal ​ ​ ​ ​ ​ ​ Federal ​ ​ ​ ​ ​ ​ ​ ​ Funds ​ ​ ​ ​ ​ ​ ​ ​ Funds ​ ​ ​ ​ ​ ​ ​ ​ Federal Purchased ​ ​ ​ ​ ​ ​ ​ Federal Purchased ​ ​ ​ (In thousands) ​ FHLB ​ Reserve Bank Lines ​ Total ​ FHLB ​ Reserve Bank Lines ​ Total Advance equivalent ​ $ 284,161 ​ $ 10,301 ​ $ 60,000 ​ $ 354,462 ​ $ 300,633 ​ $ 8,898 ​ $ 56,835 ​ $ 366,366 Letters of credit ​ (3,000) ​ — ​ — ​ (3,000) ​ (123,000) ​ — ​ — ​ (123,000) Advances outstanding ​ (93,479) ​ — ​ — ​ (93,479) ​ (106,660) ​ — ​ — ​ (106,660) Total available ​ $ 187,682 ​ $ 10,301 ​ $ 60,000 ​ $ 257,983 ​ $ 70,973 ​ $ 8,898 ​ $ 56,835 ​ $ 136,706 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. 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 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. In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had $385.5 million in unused loan commitments and standby letters of credit as of September 30, 2021. Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low. The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock. The Company paid cash 58 ​ dividends to its shareholders totaling approximately $2.6 million and $2.3 million for the nine months ended September 30, 2021 and 2020, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $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. 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 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. The Company may continue to repurchase shares under its share repurchase authorizations, but the amount and timing of such repurchases will be dependent on a number of factors, including the price of its common stock and other cash flow needs. There is no assurance that the Company will repurchase up to the full amount remaining under its share repurchase authorizations. ​ Capital Management The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that the Company maintain a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. 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. 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 59 ​ information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations. In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%. Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue to classify 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- ​ ​ Actual ​ ​ Fully Phased-In ​ ​ Capitalized ​ (in thousands) Amount Ratio ​ Amount Ratio ​ Amount Ratio ​ September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Capital (to risk-weighted assets): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 205,829 ​ 15.01 % ​ $ 143,969 ​ 10.50 % ​ $ — ​ N.A % Bank ​ ​ 203,980 ​ 14.92 ​ ​ ​ 143,540 ​ 10.50 ​ ​ ​ 136,705 ​ 10.00 ​ Tier 1 Capital (to risk-weighted assets): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 187,031 ​ 13.64 % ​ $ 116,546 ​ 8.50 % ​ $ — ​ N.A % Bank ​ ​ 186,868 ​ 13.67 ​ ​ ​ 116,199 ​ 8.50 ​ ​ ​ 109,364 ​ 8.00 ​ Common Equity Tier 1 Capital (to risk-weighted assets): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 140,666 ​ 10.26 % ​ $ 95,979 ​ 7.00 % ​ $ — ​ N.A % Bank ​ ​ 186,868 ​ 13.67 ​ ​ ​ 95,694 ​ 7.00 ​ ​ ​ 88,858 ​ 6.50 ​ Tier 1 leverage ratio (to adjusted average assets): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 187,031 ​ 10.82 % ​ $ 69,134 ​ 4.00 % ​ $ — ​ N.A % Bank ​ ​ 186,868 ​ 10.86 ​ ​ ​ 68,823 ​ 4.00 ​ ​ ​ 86,028 ​ 5.00 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Capital (to risk-weighted assets): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 193,220 ​ 14.97 % ​ $ 135,518 ​ 10.50 % ​ $ — ​ N.A % Bank ​ ​ 191,504 ​ 14.87 ​ ​ ​ 135,186 ​ 10.50 ​ ​ ​ 128,748 ​ 10.00 ​ Tier 1 Capital (to risk-weighted assets): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 172,591 ​ 13.37 % ​ $ 109,705 ​ 8.50 % ​ $ — ​ N.A % Bank ​ ​ 175,384 ​ 13.62 ​ ​ ​ 109,436 ​ 8.50 ​ ​ ​ 102,999 ​ 8.00 ​ Common Equity Tier 1 Capital (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 129,061 ​ 10.00 % ​ $ 90,345 ​ 7.00 % ​ $ — ​ N.A % Bank ​ ​ 175,384 ​ 13.62 ​ ​ ​ 90,124 ​ 7.00 ​ ​ ​ 83,686 ​ 6.50 ​ Tier 1 leverage ratio: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company $ 172,591 ​ 10.19 % ​ $ 67,724 ​ 4.00 % ​ $ — ​ N.A % Bank ​ ​ 175,384 ​ 10.41 ​ ​ ​ 67,394 ​ 4.00 ​ ​ ​ 84,243 ​ 5.00 ​ ​ ​ 60 ​