HAWTHORN BANCSHARES, INC. Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)

Forward-looking statements

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

? statements which are not of a historical nature, and

statements preceded, followed or comprising the words believes,

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

hopes or similar expressions.


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

? competitive pressures among financial services firms may increase

significantly,

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

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

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

other assets,

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

? economic conditions may require an increase in our loan provisions

losses,

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

and its acquisition objectives may be greater than expectations,

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

to which the Company and its subsidiaries are committed,

? changes may occur in the securities markets and,

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

outdoor events.


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

Overview

Crucial to the Company's community banking strategy is growth in its commercial
banking services, retail mortgage lending and retail banking services. Through
the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the
Company, with $1.7 billion in assets at 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.

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

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

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

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

Important developments and transactions

Each item listed below materially affects the comparability of our results of
operations for the three and 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 has been actively involved in SBA Small Business Paycheck Protection (P3) programs since their inception. From September 30, 2021, the net balance of PPP loans amounts to $ 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) The efficiency ratio is calculated as non-interest expense as a percentage of

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

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

total consolidated assets

ANALYSIS OF OPERATION RESULTS

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

Increase in non-interest charges $ 0.08 million, i.e. 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 %

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

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

These adjustments totaled $ 0.5 million and $ 0.2 million for the three months

ended September 30, 2021 and 2020, respectively.

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

Commissions and charges on loans are included in interest income ($ 2.1 million and (3) $ 0.7 million PPP fees have been 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 %

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

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

totalized adjustments $ 1.3 million and $ 0.6 million for the nine months ended

September 30, 2021 and 2020, respectively.

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

Commissions and charges on loans are included in interest income ($ 4.4 million and (3) $ 1.2 million 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)     $

1781 $ 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 payments and other consumers

                   (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 repurchase agreements

               (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 an equivalent fully taxable basis

                          $     1,799     $       796     $ 

1003 $ 4,366 $ 3,675 $ 691

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

using the federal income tax rate of 21%, net of non-deductible items

interest expense, for the three and nine months ended September 30, 2021 and (1) 2020. These adjustments totaled $ 0.5 million and $ 0.2 million for the three

and nine months ended September 30, 2021, respectively, with respect to $ 1.3

millions and $ 0.6 million for the three and nine months ended September 30,

2020, respectively.

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

Commissions and charges on loans are included in interest income ($ 2.1 million and

$ 4.4 million PPP fees for the three and nine months ended September 30, (3) 2021, respectively, compared to $ 0.7 million and $ 1.2 million for the three

and nine months ended September 30, 2020 were included in the business 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 titles 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 return on securities was constant at 2.15% for the two 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 expenses

Non-interest income for the periods indicated is 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                                            (4.2)                                                4.8
fees                          $   782    $   816    $    (34)              %  $  2,285    $  2,181    $      104              %
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                                                 31.5                                                 NM
fees, net                          71         54           17                      495        (48)           543
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 income 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



The non-interest charges for the periods indicated were 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

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

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


Total non-interest expense 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.

Loan 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



The main classifications within the portfolio of investment loans held by the Company on the dates indicated are 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 PPP SBA loans, net at

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 %


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

of.

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

    owned and repossessed assets.



The total of non-productive assets was $ 44.4 million, i.e. 3.46% of total loans, at
September 30, 2021 compared to $ 46.9 million, i.e. 3.64% of total loans, at
December 31, 2020, and $ 18.4 million, i.e. 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 ToRs of the Company on 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 allowance

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 the allowance for loan losses at the end of the 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 write-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.

The total of the marketable securities pledged for these purposes was 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 the value of collateral for pledged assets, outstanding borrowings and letters of credit, in addition to the estimated future financing capacity available to the Company, as follows:





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

Total FHLB reserve bank Equivalent Total Advance Lines $ 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

TO September 30, 2021, loans from $ 556.0 million have been pledged to the FHLB as security for loans and letters of credit. TO September 30, 2021, investments totaling $ 10.8 million committed to securing federal funds purchase lines and borrowing capacity at 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

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