Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

FORM 10-Q

(Mark One)

[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended SeptemberJune 30, 20172020

[  ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period __________ to __________

Commission File Number:0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction of

incorporation or organization)

63-0885779

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn, Alabama 36830

(334)821-9200

(Address and telephone number of principal executive offices)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” inRule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

(Do not check if a smaller reporting company)

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

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

AUBN

NASDAQ Global Market

Indicate the number of shares outstanding of each of the issuer’sissuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at August 5, 2020

ClassOutstanding at October 26, 2017

Common Stock, $0.01 par value per share

3,643,668

3,566,221 shares


Table of Contents


AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PAGE

Item 1

Financial Statement

Item 1

Financial Statements

Consolidated Balance Sheets (Unaudited)
as of SeptemberJune 30, 20172020 and December 31, 20162019

3

Consolidated Statements of Earnings (Unaudited)
for the quarter and ninesix months ended SeptemberJune 30, 20172020 and 20162019

4

Consolidated Statements of Comprehensive Income (Unaudited)
for the quarter and ninesix months ended SeptemberJune 30, 20172020 and 20162019

5

Consolidated Statements of Stockholders’ Equity (Unaudited)
for the ninequarter and six months ended SeptemberJune 30, 20172020 and 20162019

6

Consolidated Statements of Cash Flows (Unaudited)
for the ninesix months ended SeptemberJune 30, 20172020 and 20162019

7

Notes to Consolidated Financial Statements (Unaudited)(Unaudited)

8

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

27

Table 1 – Explanation ofNon-GAAP Financial Measures

48

47

Table 2 – Selected Quarterly Financial Data

49

48

Table 3 – Selected Financial Data

50

49

Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended SeptemberJune 30, 20172020 and 20162019

51

50

Table 5 – Average Balances and Net Interest Income Analysis – for the ninesix months ended SeptemberJune 30, 20172020 and 20162019

52

51

Table 6 – Loan Portfolio Composition

53

52

Table 7 – Allowance for Loan Losses and Nonperforming Assets

54

53

Table 8 – Allocation of Allowance for Loan Losses

55

54

Table 9 – CDs and Other Time Deposits of $100,000 or more

56

55

Item 3

Quantitative and Qualitative Disclosures About Market Risk

57

56

Item 4

Controls and Procedures

57

56

PART II. OTHER INFORMATION

Item 1Legal Proceedings57

Item 1A

Risk Factors

57

Item 1

Legal Proceedings

56

Item 1A

Risk Factors

56

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

57

60

Item 3

Defaults Upon Senior Securities

57

60

Item 4

Mine Safety Disclosures

57

60

Item 5

Other Information

60

Item 5Other Information57

Item 6

Exhibits

Exhibits

58

60


Table of Contents


PART 1. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

June 30,

 

 

December 31,

(Dollars in thousands, except share data)

 

2020

 

 

2019

Assets:

 

 

 

 

 

Cash and due from banks

$

24,518

 

$

15,172

Federal funds sold

 

17,755

 

 

25,944

Interest-bearing bank deposits

 

95,562

 

 

51,327

 

 

Cash and cash equivalents

 

137,835

 

 

92,443

Securities available-for-sale

 

302,193

 

 

235,902

Loans held for sale

 

2,620

 

 

2,202

Loans, net of unearned income

 

464,274

 

 

460,901

 

Allowance for loan losses

 

(5,308)

 

 

(4,386)

 

 

Loans, net

 

458,966

 

 

456,515

Premises and equipment, net

 

14,451

 

 

14,743

Bank-owned life insurance

 

19,014

 

 

19,202

Other assets

 

7,808

 

 

6,872

 

 

Total assets

$

942,887

 

$

827,879

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

$

247,429

 

$

196,218

 

Interest-bearing

 

582,381

 

 

527,934

 

 

Total deposits

 

829,810

 

 

724,152

Federal funds purchased and securities sold under agreements to repurchase

 

1,995

 

 

1,069

Accrued expenses and other liabilities

 

5,783

 

 

4,330

 

 

Total liabilities

 

837,588

 

 

729,551

Stockholders' equity:

 

 

 

 

 

Preferred stock of $.01 par value; authorized 200,000 shares;

 

 

 

 

 

 

no shares issued

 

 

 

Common stock of $.01 par value; authorized 8,500,000 shares;

 

 

 

 

 

 

issued 3,957,135 shares

 

39

 

 

39

Additional paid-in capital

 

3,785

 

 

3,784

Retained earnings

 

103,444

 

 

101,801

Accumulated other comprehensive income, net

 

7,386

 

 

2,059

Less treasury stock, at cost - 390,959 shares and 390,989 at June 30, 2020

 

 

 

 

 

 

and December 31, 2019 , respectively

 

(9,355)

 

 

(9,355)

 

 

Total stockholders’ equity

 

105,299

 

 

98,328

 

 

Total liabilities and stockholders’ equity

$

942,887

 

$

827,879

See accompanying notes to consolidated financial statements

 

 

 

 

 

3


Table of Contents

(Dollars in thousands, except share data)

  

September 30,

2017

  

December 31,

2016

 

 

Assets:

   

Cash and due from banks

  $14,144  $15,673   

Federal funds sold

   21,555   42,096   

Interest bearing bank deposits

   42,391   63,508   

 

 

Cash and cash equivalents

   78,090   121,277   

 

 

Securitiesavailable-for-sale

   265,171   243,572   

Loans held for sale

   924   1,497   

Loans, net of unearned income

   449,378   430,946   

Allowance for loan losses

   (4,670  (4,643)  

 

 

Loans, net

   444,708   426,303   

 

 

Premises and equipment, net

   13,835   12,602   

Bank-owned life insurance

   18,217   17,888   

Other real estate owned

   103   152   

Other assets

   7,498   8,652   

 

 

Total assets

  $828,546  $831,943   

 

 

Liabilities:

   

Deposits:

   

Noninterest-bearing

  $184,752  $181,890   

Interest-bearing

   547,896   557,253   

 

 

Total deposits

   732,648   739,143   

Federal funds purchased and securities sold under agreements to repurchase

   3,573   3,366   

Long-term debt

   3,217   3,217   

Accrued expenses and other liabilities

   2,570   4,040   

 

 

Total liabilities

   742,008   749,766   

 

 

Stockholders’ equity:

   

Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares

   —     —     

Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares

   39   39   

Additionalpaid-in capital

   3,771   3,767   

Retained earnings

   89,223   85,716   

Accumulated other comprehensive income (loss), net

   142   (708)  

Less treasury stock, at cost - 313,467 shares and 313,612 shares at September 30, 2017 and December 31, 2016, respectively

   (6,637  (6,637)  

 

 

Total stockholders’ equity

   86,538   82,177   

 

 

Total liabilities and stockholders’ equity

  $          828,546  $          831,943   

 

 

See accompanying notes to consolidated financial statements    

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

 

 

 

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

(In thousands, except share and per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

5,494

 

$

5,763

 

$

10,906

 

$

11,490

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,056

 

 

985

 

 

2,167

 

 

2,000

 

 

Tax-exempt

 

476

 

 

544

 

 

929

 

 

1,093

 

Federal funds sold and interest-bearing bank deposits

 

27

 

 

311

 

 

306

 

 

663

 

 

 

 

Total interest income

 

7,053

 

 

7,603

 

 

14,308

 

 

15,246

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

981

 

 

1,004

 

 

2,022

 

 

2,025

 

Short-term borrowings

 

2

 

 

2

 

 

4

 

 

4

 

 

 

 

Total interest expense

 

983

 

 

1,006

 

 

2,026

 

 

2,029

 

Net interest income

 

6,070

 

 

6,597

 

 

12,282

 

 

13,217

Provision for loan losses

 

450

 

 

 

 

850

 

 

 

 

Net interest income after provision for loan losses

 

5,620

 

 

6,597

 

 

11,432

 

 

13,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

126

 

 

176

 

 

298

 

 

360

 

Mortgage lending

 

683

 

 

187

 

 

913

 

 

376

 

Bank-owned life insurance

 

108

 

 

107

 

 

506

 

 

217

 

Other

 

365

 

 

407

 

 

794

 

 

1,079

 

Securities gains, net

 

81

 

 

8

 

 

87

 

 

13

 

 

Total noninterest income

 

1,363

 

 

885

 

 

2,598

 

 

2,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

2,597

 

 

2,799

 

 

5,428

 

 

5,737

 

Net occupancy and equipment

 

920

 

 

381

 

 

1,517

 

 

765

 

Professional fees

 

389

 

 

275

 

 

647

 

 

503

 

Other

 

1,053

 

 

1,174

 

 

2,223

 

 

2,235

 

 

Total noninterest expense

 

4,959

 

 

4,629

 

 

9,815

 

 

9,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

2,024

 

 

2,853

 

 

4,215

 

 

6,022

Income tax expense

 

363

 

 

546

 

 

753

 

 

1,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

1,661

 

$

2,307

 

$

3,462

 

$

4,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

0.47

 

$

0.64

 

$

0.97

 

$

1.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

3,566,166

 

 

3,577,409

 

 

3,566,156

 

 

3,595,972

See accompanying notes to consolidated financial statements

4


Table of Contents

        Quarter ended September 30,        Nine months ended September 30, 
(In thousands, except share and per share data)   

 

2017

     

 

2016

    

 

2017

    

 

2016

 

 

 

Interest income:

        

Loans, including fees

 $  5,296  $   5,105  $  15,398  $  15,373  

Securities:

        

 Taxable

   1,071    747    3,204    2,420  

 Tax-exempt

   590    616    1,758    1,864  

Federal funds sold and interest bearing bank deposits

   215    191    598    473  

 

 

 Total interest income

   7,172    6,659    20,958    20,130  

 

 

Interest expense:

        

Deposits

   872    984    2,600    2,932  

Short-term borrowings

   5    4    14    11  

Long-term debt

   34    63    93    190  

 

 

Total interest expense

   911    1,051    2,707    3,133  

 

 

Net interest income

   6,261    5,608    18,251    16,997  

Provision for loan losses

   —      —      100    (600) 

 

 

 Net interest income after provision for loan losses

   6,261    5,608    18,151    17,597  

 

 

Noninterest income:

        

Service charges on deposit accounts

   191    197    563    588  

Mortgage lending

   254    246    558    740  

Bank-owned life insurance

   112    114    329    339  

Other

   362    358    1,096    1,075  

Securities gains, net

   49    148    51    148  

 

 

 Total noninterest income

   968    1,063    2,597    2,890  

 

 

Noninterest expense:

        

Salaries and benefits

   2,516    2,471    7,289    7,322  

Net occupancy and equipment

   385    389    1,117    1,107  

Professional fees

   276    220    760    625  

FDIC and other regulatory assessments

   79    76    257    320  

Other real estate owned, net

   4    (194   (5   (217) 

Other

   965    1,018    2,940    2,953  

 

 

 Total noninterest expense

   4,225    3,980    12,358    12,110  

 

 

 Earnings before income taxes

   3,004    2,691    8,390    8,377  

Income tax expense

   868    740    2,369    2,304  

 

 

 Net earnings

 $  2,136  $   1,951  $  6,021  $  6,073  

 

 

Net earnings per share:

        

Basic and diluted

 $  0.59  $   0.54  $  1.65  $  1.67  

 

 

Weighted average shares outstanding:

        

Basic and diluted

   3,643,659    3,643,506    3,643,598    3,643,498  

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

Net earnings

$

1,661

 

$

2,307

 

$

3,462

 

$

4,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net holding gain on securities

 

1,043

 

 

2,057

 

 

5,392

 

 

4,453

 

Reclassification adjustment for net gain on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

recognized in net earnings

 

(60)

 

 

(6)

 

 

(65)

 

 

(10)

Other comprehensive income

 

983

 

 

2,051

 

 

5,327

 

 

4,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

2,644

 

$

4,358

 

$

8,789

 

$

9,293

See accompanying notes to consolidated financial statements

5


Table of Contents

          Quarter ended September 30,          Nine months ended September 30, 
(Dollars in thousands)    2017     2016     2017     2016 

 

 

Net earnings

 $   2,136  $   1,951  $   6,021  $   6,073  

Other comprehensive income (loss), net of tax:

            

Unrealized net holding gain (loss) on securities

    171     (792)     882     1,584  

Reclassification adjustment for net gain on securities recognized in net earnings

    (31    (93)     (32    (93) 

 

 

Other comprehensive income (loss)

    140     (885)     850     1,491  

 

 

Comprehensive income

 $   2,276  $   1,066  $   6,871  $   7,564  

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’Stockholders' Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

Additional

 

 

 

other

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

 

paid-in

 

Retained

comprehensive

Treasury

 

 

 

(Dollars in thousands, except share data)

Outstanding

 

 

Stock

 

capital

 

earnings

income (loss)

stock

 

Total

Quarter ended June 30, 2020

Balance, March 31, 2020

3,566,146

 

$

39

 

$

3,784

 

$

102,692

 

$

6,403

 

$

(9,355)

 

$

103,563

Net earnings

 

 

 

 

 

 

1,661

 

 

 

 

 

 

1,661

Other comprehensive income

 

 

 

 

 

 

 

 

983

 

 

 

 

983

Cash dividends paid ($.255 per share)

 

 

 

 

 

 

(909)

 

 

 

 

 

 

(909)

Sale of treasury stock

30

 

 

 

 

1

 

 

 

 

 

 

 

 

1

Balance, June 30, 2020

3,566,176

 

$

39

 

$

3,785

 

$

103,444

 

$

7,386

 

$

(9,355)

 

$

105,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2019

Balance, March 31, 2019

3,581,485

 

$

39

 

$

3,783

 

$

97,280

 

$

(1,371)

 

$

(8,782)

 

$

90,949

Net earnings

 

 

 

 

 

 

2,307

 

 

 

 

 

 

2,307

Other comprehensive income

 

 

 

 

 

 

 

 

2,051

 

 

 

 

2,051

Cash dividends paid ($.25 per share)

 

 

 

 

 

 

(893)

 

 

 

 

 

 

(893)

Stock repurchases

(9,687)

 

 

 

 

 

 

 

 

 

 

(350)

 

 

(350)

Sale of treasury stock

30

 

 

 

 

 

 

 

 

 

 

1

 

 

1

Balance, June 30, 2019

3,571,828

 

$

39

 

$

3,783

 

$

98,694

 

$

680

 

$

(9,131)

 

$

94,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2020

Balance, December 31, 2019

3,566,146

 

$

39

 

$

3,784

 

$

101,801

 

$

2,059

 

$

(9,355)

 

$

98,328

Net earnings

 

 

 

 

 

 

3,462

 

 

 

 

 

 

3,462

Other comprehensive income

 

 

 

 

 

 

 

 

5,327

 

 

 

 

5,327

Cash dividends paid ($.51 per share)

 

 

 

 

 

 

(1,819)

 

 

 

 

 

 

(1,819)

Sale of treasury stock

30

 

 

 

 

1

 

 

 

 

 

 

 

 

1

Balance, June 30, 2020

3,566,176

 

$

39

 

$

3,785

 

$

103,444

 

$

7,386

 

$

(9,355)

 

$

105,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2019

Balance, December 31, 2018

3,643,868

 

$

39

 

$

3,779

 

$

95,635

 

$

(3,763)

 

$

(6,635)

 

$

89,055

Net earnings

 

 

 

 

 

 

4,850

 

 

 

 

 

 

4,850

Other comprehensive income

 

 

 

 

 

 

 

 

4,443

 

 

 

 

4,443

Cash dividends paid ($.50 per share)

 

 

 

 

 

 

(1,791)

 

 

 

 

 

 

(1,791)

Stock repurchases

(72,205)

 

 

 

 

 

 

 

 

 

 

(2,497)

 

 

(2,497)

Sale of treasury stock

165

 

 

 

 

4

 

 

 

 

 

 

1

 

 

5

Balance, June 30, 2019

3,571,828

 

$

39

 

$

3,783

 

$

98,694

 

$

680

 

$

(9,131)

 

$

94,065

See accompanying notes to consolidated financial statements

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              Accumulated       
        Additional     other       
        Common Stock        

 

paid-in

  Retained  comprehensive  Treasury    

 

(Dollars in thousands, except share data)

 

 

 

Shares

  

 

Amount

  capital  earnings  income (loss)  stock  Total 

 

 

Balance, December 31, 2015

  3,957,135  $39  $          3,766  $          80,845  $        1,937  $(6,638 $          79,949   

Net earnings

  —               —     —     6,073   —                   —     6,073   

Other comprehensive income

  —     —     —     —     1,491   —     1,491   

Cash dividends paid ($0.675 per share)

  —     —     —     (2,459  —     —     (2,459)  

Sale of treasury stock (45 shares)

  —     —     1   —     —     —     1   

 

 

Balance, Septemer 30, 2016

  3,957,135  $39  $3,767  $84,459  $3,428  $(6,638 $85,055   

 

 

Balance, December 31, 2016

  3,957,135  $39  $3,767  $85,716  $(708 $(6,637 $82,177   

Net earnings

  —     —     —     6,021   —     —     6,021   

Other comprehensive income

  —     —     —     —     850   —     850   

Cash dividends paid ($0.69 per share)

  —     —     —     (2,514)   —     —     (2,514)  

Sale of treasury stock (145 shares)

  —     —     4   —     —     —     4   

 

 

Balance, September 30, 2017

  3,957,135  $39  $3,771  $89,223  $142  $(6,637 $86,538   

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

Six months ended June 30,

(In thousands)

 

2020

 

 

2019

Cash flows from operating activities:

 

 

 

 

 

Net earnings

$

3,462

 

$

4,850

Adjustments to reconcile net earnings to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Provision for loan losses

 

850

 

 

 

Depreciation and amortization

 

989

 

 

448

 

Premium amortization and discount accretion, net

 

1,081

 

 

886

 

Net gain on securities available-for-sale

 

(87)

 

 

(13)

 

Net gain on sale of loans held for sale

 

(847)

 

 

(188)

 

Net gain on other real estate owned

 

(17)

 

 

 

Loans originated for sale

 

(36,385)

 

 

(11,312)

 

Proceeds from sale of loans

 

36,576

 

 

9,786

 

Increase in cash surrender value of bank-owned life insurance

 

(224)

 

 

(217)

 

Income recognized from death benefit on bank-owned life insurance

 

(282)

 

 

 

Net increase in other assets

 

(1,014)

 

 

(900)

 

Net (decrease) increase in accrued expenses and other liabilities

 

(334)

 

 

983

 

 

 

Net cash provided by operating activities

 

3,768

 

 

4,323

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales of securities available-for-sale

 

9,062

 

 

7,662

Proceeds from prepayments and maturities of securities available-for-sale

 

22,085

 

 

22,222

Purchase of securities available-for-sale

 

(91,318)

 

 

(33,839)

(Increase) decrease in loans, net

 

(3,400)

 

 

826

Net purchases of premises and equipment

 

(372)

 

 

(1,459)

Proceeds from bank-owned life insurance death benefit

 

694

 

 

(Increase) decrease in FHLB stock

 

(9)

 

 

32

Proceeds from sale of other real estate owned

 

116

 

 

 

 

 

Net cash used in investing activities

 

(63,142)

 

 

(4,556)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

51,211

 

 

5,223

Net increase in interest-bearing deposits

 

54,447

 

 

11,085

Net increase (decrease) in federal funds purchased and securities sold

 

 

 

 

 

 

under agreements to repurchase

 

926

 

 

(1,200)

Proceeds from sale of treasury stock

 

1

 

 

5

Stock repurchases

 

 

 

(2,497)

Dividends paid

 

(1,819)

 

 

(1,791)

 

 

 

Net cash provided by financing activities

 

104,766

 

 

10,825

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

45,392

 

 

10,592

Cash and cash equivalents at beginning of period

 

92,443

 

 

65,076

Cash and cash equivalents at end of period

$

137,835

 

$

75,668

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

2,023

 

$

2,029

Income taxes

 

678

 

 

1,499

Supplemental disclosure of non-cash transactions:

 

 

 

 

 

Initial recognition of operating lease right of use assets

 

 

 

891

Initial recognition of operating lease liabilities

 

 

 

889

Real estate acquired through foreclosure

 

99

 

 

82

See accompanying notes to consolidated financial statements

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     Nine months ended September 30, 
(In thousands)    

 

2017

  

 

2016

 

 

 

Cash flows from operating activities:

    

Net earnings

 

$

   6,021  $6,073   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Provision for loan losses

    100   (600)  

Depreciation and amortization

    772   876   

Premium amortization and discount accretion, net

    1,612   1,137   

Net gain on securitiesavailable-for-sale

    (51  (148)  

Net gain on sale of loans held for sale

    (366  (609)  

(Decrease) increase in MSR valuation allowance

    (1  21   

Net gain on other real estate owned

    (11  (238)  

Loans originated for sale

    (21,957  (33,331)  

Proceeds from sale of loans

    22,731   34,537   

Increase in cash surrender value of bank-owned life insurance

    (329  (339)  

Net decrease in other assets

    382   196   

Net (decrease) increase in accrued expenses and other liabilities

    (1,466  577   

 

 

  Net cash provided by operating activities

    7,437   8,152   

 

 

Cash flows from investing activities:

    

Proceeds from sales of securitiesavailable-for-sale

    10,374   5,126   

Proceeds from prepayments and maturities of securitiesavailable-for-sale

    25,909   50,934   

Purchase of securitiesavailable-for-sale

    (58,097  (62,556)  

Increase in loans, net

    (18,506  (189)  

Net purchases of premises and equipment

    (1,549  (1,173)  

Increase in FHLB stock

    (13  (25)  

Proceeds from sale of other real estate owned

    60   695   

 

 

  Net cash used in investing activities

    (41,822  (7,188)  

 

 

Cash flows from financing activities:

    

Net increase in noninterest-bearing deposits

    2,862   22,759   

Net (decrease) increase in interest-bearing deposits

    (9,357  5,529   

Net increase in federal funds purchased and securities sold under agreements to repurchase

    207   556   

Dividends paid

    (2,514  (2,459)  

 

 

  Net cash (used in) provided by financing activities

    (8,802  26,385   

 

 

Net change in cash and cash equivalents

    (43,187  27,349   

Cash and cash equivalents at beginning of period

    121,277   113,930   

 

 

Cash and cash equivalents at end of period

 

$

   78,090  $141,279   

 

 
    

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

 

$

   2,791  $3,193   

Income taxes

    2,674   1,703   

Supplemental disclosure ofnon-cash transactions:

    

Real estate acquired through foreclosure

    —     285   

 

 

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

General

Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individual and corporate customers in Lee County, Alabama and surrounding counties through its wholly owned subsidiary, AuburnBank (the “Bank”). The Company does not have any segments other than banking that are considered material.

Basis of Presentation and Use of Estimates

The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’sCompany's Annual Report on Form10-K for the year ended December 31, 2016.2019.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I is an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned.owned (“OREO”).

Revenue Recognition

On January 1, 2018, the Company implemented Accounting Standards Update (“ASU” or “updates”) 2014-09, Revenue from Contracts with Customers, codified at Accounting Standards Codification (“ASC”) 606. The Company adopted ASC 606 using the modified retrospective transition method. The majority of the Company’s revenue stream is generated from interest income on loans and deposits which are outside the scope of ASC 606.

The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, investment services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606:

Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period.

Gains on sales of OREOA gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. In addition to the loan-to-value, the analysis is based on various other factors, including the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability.

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Table of Contents

Reclassifications

Certain amounts reported in the prior period have been reclassified to conform to the current-period presentation. These reclassifications had no impact on the Company’s previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to SeptemberJune 30, 2017.2020. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first ninesix months of 2017,2020, the Company adopted no new accounting guidance.guidance related to the following ASUs:

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement; and

ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

Information about these pronouncements is described in more detail below.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption was permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. The Company adopted this ASU on January 1, 2020. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

ASU 2018- 15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption was permitted. The Company adopted this ASU on January 1, 2020. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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Table of Contents

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At SeptemberJune 30, 20172020 and 2016,2019, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective periods are presented below.

 

 

 

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

(In thousands, except share and per share data)

 

 

2020

 

 

2019

 

 

2020

 

 

2019

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,661

 

$

2,307

 

$

3,462

 

$

4,850

 

Weighted average common shares outstanding

 

 

3,566,166

 

 

3,577,409

 

 

3,566,156

 

 

3,595,972

 

 

Net earnings per share

 

$

0.47

 

$

0.64

 

$

0.97

 

$

1.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

        Quarter ended September  30,        

   

        Nine months ended  September 30,        

 
(In thousands, except share and per share data)  2017   2016   2017   2016 

 

 

Basic and diluted:

        

Net earnings

  $2,136   $1,951   $6,021   $6,073 

Weighted average common shares outstanding

       3,643,659        3,643,506        3,643,598        3,643,498 

 

 

 Net earnings per share

  $0.59   $0.54   $1.65   $1.67 

 

 

NOTE 3: VARIABLE INTEREST ENTITIESSECURITIES

Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust, or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.

At SeptemberJune 30, 2017, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE, discussed below.

Trust Preferred Securities

The Company owns the common stock of a subsidiary business trust, Auburn National Bancorporation Capital Trust I (the “Trust”), which issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $7.0 million at the time of issuance. The Trust meets the definition of a VIE of which the Company is not the primary beneficiary; the Trust’s only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock.

In October 2016, the Company purchased $4.0 million par amount of outstanding trust preferred securities issued by the Trust. These securities were sold to us by the FDIC, as receiver of a failed bank that previously held the trust preferred securities. The Company used dividends from the Bank to purchase these trust preferred securities and has deemed an equivalent amount of the related junior subordinated debentures issued by the Company as no longer outstanding. The remaining junior subordinated debentures of approximately $3.2 million are included in long-term debt and the Company’s equity interest of $0.2 million in the Trust is included in other assets. Interest expense on the junior subordinated debentures that remain outstanding is included in interest expense on long-term debt.

The following table summarizes VIEs that are not consolidated by the Company as of September 30, 2017.

(Dollars in thousands)

Maximum

Loss Exposure

Liability

Recognized

                    Classification                     

Type:

Trust preferred issuances

N/A$3,217Long-term debt

NOTE 4: SECURITIES

At September 30, 20172020 and December 31, 2016,2019, respectively, all securities within the scope of Accounting Standards Codification (“ASC”)ASC 320,Investments – Debt and Equity Securities,were classified asavailable-for-sale. The fair value and amortized cost for securitiesavailable-for-sale by contractual maturity at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, are presented below.

  

 

 

 
  1 year   1 to 5   5 to 10   After 10   Fair       Gross Unrealized   Amortized 

 

 

1 year

1 to 5

5 to 10

After 10

Fair

 

Gross Unrealized

 

Amortized

(Dollars in thousands)  or less   years   years   years   Value   Gains   Losses   Cost 

(Dollars in thousands)

 

or less

years

Value

 

Gains

Losses

 

Cost

 

September 30, 2017

                

June 30, 2020

June 30, 2020

 

 

 

 

 

 

 

Agency obligations (a)

  $—             29,496        24,009        —          53,505        230          654     $    53,929   

Agency obligations (a)

$

5,027

30,232

40,209

5,340

80,808

 

3,210

 

$

77,598

Agency RMBS (a)

   —         —      12,028    127,778    139,806    606      1,174      140,374   

Agency RMBS (a)

 

1,461

9,001

144,144

154,606

 

3,488

163

 

 

151,281

State and political subdivisions

   —         2,097    10,716    59,047    71,860    1,580      363      70,643   

State and political subdivisions

 

97

1,168

6,581

58,933

66,779

 

3,337

10

 

 

63,452

 

Total available-for-sale

$

5,124

32,861

55,791

208,417

302,193

 

10,035

173

 

$

292,331

Totalavailable-for-sale

  $—         31,593    46,753    186,825    265,171    2,416      2,191     $264,946   

 

December 31, 2016

                

Agency obligations (a)

  $        3,047       22,531    19,893    —      45,471    331      973     $46,113   

Agency RMBS (a)

   —         972    16,171    110,644    127,787    551      1,805      129,041   

State and political subdivisions

   —         2,480    10,210    57,624    70,314    1,509      734      69,539   

 

Totalavailable-for-sale

  $3,047       25,983    46,274    168,268    243,572    2,391      3,512     $244,693   

 

(a) Includes securities issued by U.S. government agencies or government sponsored entities.

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Agency obligations (a)

$

4,993

27,245

18,470

50,708

 

215

98

 

$

50,591

Agency RMBS (a)

 

560

4,510

118,207

123,277

 

798

261

 

 

122,740

State and political subdivisions

 

1,355

6,166

54,396

61,917

 

2,104

9

 

 

59,822

 

Total available-for-sale

$

4,993

29,160

29,146

172,603

235,902

 

3,117

368

 

$

233,153

(a) Includes securities issued by U.S. government agencies or government-sponsored entities.

Securities with aggregate fair values of $155.5$150.3 million and $137.2$147.8 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

Included in other assets on the accompanying consolidated balance sheets are cost-methodnon-marketable equity investments. The carrying amounts of cost-methodnon-marketable equity investments were $1.4 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. Cost-method investments primarily includenon-marketableNon-marketable equity investments such asinclude FHLB of Atlanta stock andStock, Federal Reserve Bank (“FRB”) stock.stock, and stock in a privately held financial institution.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

     Less than 12 Months   12 Months or Longer      Total 
(Dollars in thousands)    

 

Fair

 

Value

   

 

Unrealized

 

Losses

   

 

Fair

 

Value

   

 

Unrealized

 

Losses

      

 

Fair

 

Value

   

 

Unrealized

 

Losses

 

 

 

September 30, 2017:

               

Agency obligations

 $   9,871    67    15,655    587   $   25,526    654 

Agency RMBS

    46,620    375    34,051    799      80,671    1,174 

State and political subdivisions

    8,164    151    7,710    212      15,874    363 

 

 

  Total

 $       64,655    593    57,416    1,598   $       122,071        2,191 

 

 

December 31, 2016:

               

Agency obligations

 $   20,352    973    —      —     $   20,352    973 

Agency RMBS

    89,062    1,805    —      —        89,062    1,805 

State and political subdivisions

    20,444    734    —      —        20,444    734 

 

 

  Total

 $   129,858    3,512    —      —     $   129,858    3,512 

 

 

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Table of Contents

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

(Dollars in thousands)

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency obligations

$

28,480

 

 

163

 

 

 

 

 

$

28,480

 

 

163

State and political subdivisions

 

1,337

 

 

10

 

 

 

 

 

 

1,337

 

 

10

 

 

Total

$

29,817

 

 

173

 

 

 

 

 

$

29,817

 

 

173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency obligations

$

24,734

 

 

97

 

 

4,993

 

 

1

 

$

29,727

 

 

98

Agency RMBS

 

40,126

 

 

98

 

 

21,477

 

 

163

 

 

61,603

 

 

261

State and political subdivisions

 

2,741

 

 

9

 

 

 

 

 

 

2,741

 

 

9

 

 

Total

$

67,601

 

 

204

 

 

26,470

 

 

164

 

$

94,071

 

 

368

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the securitysecurities before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.

In determining whether a loss is temporary, the Company considers all relevant information including:

the length of time and the extent to which the fair value has been less than the amortized cost basis;

adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);

the historical and implied volatility of the fair value of the security;

the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;

failure of the issuer of the security to make scheduled interest or principal payments;

any changes to the rating of the security by a rating agency; and

recoveries or additional declines in fair value subsequent to the balance sheet date.

Agency obligations

The unrealized losses associated with agency obligations were primarily driven by changesincreases in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.

Agency RMBS

The unrealized losses associated with agency residential mortgage-backed securities (“RMBS”) were primarily driven by changesincreases in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.

11


Table of Contents

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by changesincreases in interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a bond insurer, but management did not rely on the guarantee in making its investment decision. These securities will continue to be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost basis of these securities.

Cost-method investments

At September 30, 2017, cost-method investments with an aggregate cost of $1.4 million were not evaluated for impairment because the Company had not identified any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of an issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the security. As a result, there is a risk that other-than-temporary impairment charges may occur in the future.

Other-Than-Temporarily Impaired Securities

Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales of securities.

Realized Gains and Losses

Realized Gains and Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents the gross realized gains and losses on sales of securities.

The following table presents the gross realized gains and losses on sales of securities.

 

 

           Quarter ended September 30,                 Nine months ended September 30,       

 

 

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

(Dollars in thousands)   2017   2016   2017   2016 

(Dollars in thousands)

 

 

2020

 

 

2019

 

 

2020

 

2019

Gross realized gains

Gross realized gains

 

$

100

 

 

27

 

$

106

 

 

32

Gross realized losses

Gross realized losses

 

 

(19)

 

 

(19)

 

 

(19)

 

(19)

 

Realized gains, net

 

$

81

 

 

8

 

$

87

 

 

13

Gross realized gains

 

$

   49    148  $   51    148 

 

Realized gains, net

 $   49    148  $   51    148 

 

NOTE 5:4: LOANS AND ALLOWANCE FOR LOAN LOSSES

(In thousands)  

September 30,

 

2017

   

December 31,

 

2016

 

 

 

Commercial and industrial

  $50,101    $49,850  

Construction and land development

   47,455     41,650  

Commercial real estate:

    

Owner occupied

   41,633     49,745  

Multi-family

   47,794     46,998  

Other

   142,953     123,696  

 

 

Total commercial real estate

   232,380     220,439  

Residential real estate:

    

Consumer mortgage

   63,056     65,564  

Investment property

   47,103     45,291  

 

 

Total residential real estate

   110,159     110,855  

Consumer installment

   9,877     8,712  

 

 

Total loans

   449,972     431,506  

Less: unearned income

   (594)    (560) 

 

 

Loans, net of unearned income

  $        449,378    $        430,946  

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

(In thousands)

 

 

2020

 

 

2019

Commercial and industrial

 

$

87,754

 

$

56,782

Construction and land development

 

 

32,967

 

 

32,841

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied

 

 

50,036

 

 

48,860

 

Hotel/motel

 

 

43,183

 

 

43,719

 

Multi-family

 

 

31,974

 

 

44,839

 

Other

 

 

125,395

 

 

132,900

 

 

Total commercial real estate

 

 

250,588

 

 

270,318

Residential real estate:

 

 

 

 

 

 

 

Consumer mortgage

 

 

40,967

 

 

48,923

 

Investment property

 

 

44,858

 

 

43,652

 

 

Total residential real estate

 

 

85,825

 

 

92,575

Consumer installment

 

 

8,631

 

 

8,866

 

 

Total loans

 

 

465,765

 

 

461,382

Less: unearned income

 

 

(1,491)

 

 

(481)

 

 

Loans, net of unearned income

 

$

464,274

 

$

460,901

Loans secured by real estate were approximately 86.7% 79.3%of the Company’s total loan portfolio at SeptemberJune 30, 2017.2020. At SeptemberJune 30, 2017,2020, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

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Table of Contents

In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk.

The following describedescribes the risk characteristics relevant to each of the portfolio segments and classes.

Commercial and industrial (“C&I”) —includes loans to finance business operations, equipment purchases, or other needs for small andmedium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower.

Construction and land development (“C&D”) —includes both loans and credit lines for the purpose of purchasing, carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is dependent upon the sale or refinance of the real estate collateral.

Commercial real estate (“CRE”) —includes loans disaggregated into three classes: (1) owner occupied, (2) multifamily and (3) other.

Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small andmedium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property.

Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property.

Multi-family – primarily includes loans to finance income-producing multi-family properties. Loans in this class include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Other – primarily includes loans to finance income-producing commercial properties that are not owner occupied. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local businesses. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Hotel/motel – includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Multi-family – primarily includes loans to finance income-producing multi-family properties. Loans in this class include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Other – primarily includes loans to finance income-producing commercial properties that are not owner occupied. Loans in this class include loans for neighborhood retail centers, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local businesses. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Residential real estate (“RRE”) —includes loans disaggregated into two classes: (1) consumer mortgage and (2) investment property.

Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value.

Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value.

Investment property – primarily includes loans to finance income-producing1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

Consumer installment —includes loans to individuals both secured by personal property and unsecured. Loans include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and, if applicable, property value.

13


Table of Contents

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of SeptemberJune 30, 20172020 and December 31, 2016.2019.

(In thousands)  Current   

Accruing

 

30-89 Days

 

Past Due

   

Accruing

 

Greater than

 

90 days

   

Total

 

Accruing

 

Loans

   

Non-

 

    Accrual    

       

Total

 

Loans

 

 

     

September 30, 2017:

              

Commercial and industrial

  $50,004    64    —      50,068    33   $    50,101  

Construction and land development

   47,280    175    —      47,455    —        47,455  

Commercial real estate:

              

Owner occupied

   41,633    —      —      41,633    —        41,633  

Multi-family

   47,794    —      —      47,794    —        47,794  

Other

   140,453    —      —      140,453    2,500      142,953  

 

 

Total commercial real estate

   229,880    —      —      229,880    2,500      232,380  

Residential real estate:

              

Consumer mortgage

   62,300    403    —      62,703    353      63,056  

Investment property

   46,993    110    —      47,103    —        47,103  

 

 

Total residential real estate

   109,293    513    —      109,806    353      110,159  

Consumer installment

   9,823    33    5    9,861    16      9,877  

 

 

Total

  $446,280    785    5    447,070    2,902   $    449,972  

 

 

December 31, 2016:

              

Commercial and industrial

  $49,747    66    —      49,813    37   $    49,850  

Construction and land development

   41,223    395    —      41,618    32      41,650  

Commercial real estate:

              

Owner occupied

   49,564    43    —      49,607    138      49,745  

Multi-family

   46,998    —      —      46,998    —        46,998  

Other

   121,608    199    —      121,807    1,889      123,696  

 

 

Total commercial real estate

   218,170    242    —      218,412    2,027      220,439  

Residential real estate:

              

Consumer mortgage

   64,059    1,282    —      65,341    223      65,564  

Investment property

   45,243    19    —      45,262    29      45,291  

 

 

Total residential real estate

   109,302    1,301    —      110,603    252      110,855  

Consumer installment

   8,652    38    —      8,690    22      8,712  

 

 

Total

  $        427,094    2,042    —      429,136    2,370   $        431,506  

 

 

 

 

 

 

 

 

 

 

 

Accruing

Accruing

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

30-89 Days

Greater than

Accruing

Non-

 

 

Total

(In thousands)

 

Current

Past Due

90 days

Loans

Accrual

 

 

Loans

June 30, 2020:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

87,671

83

87,754

 

$

87,754

Construction and land development

 

 

32,967

32,967

 

 

32,967

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

49,958

78

50,036

 

 

50,036

 

Hotel/motel

 

 

43,183

43,183

 

 

43,183

 

Multi-family

 

 

31,974

31,974

 

 

31,974

 

Other

 

 

125,087

90

125,177

218

 

 

125,395

 

 

Total commercial real estate

 

 

250,202

168

250,370

218

 

 

250,588

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgage

 

 

40,189

430

40,619

348

 

 

40,967

 

Investment property

 

 

44,557

190

44,747

111

 

 

44,858

 

 

Total residential real estate

 

 

84,746

620

85,366

459

 

 

85,825

Consumer installment

 

 

8,573

8

49

8,630

1

 

 

8,631

 

 

Total

 

$

464,159

879

49

465,087

678

 

$

465,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

56,758

24

56,782

 

$

56,782

Construction and land development

 

 

32,385

456

32,841

 

 

32,841

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

48,860

48,860

 

 

48,860

 

Hotel/motel

 

 

43,719

43,719

 

 

43,719

 

Multi-family

 

 

44,839

44,839

 

 

44,839

 

Other

 

 

132,900

132,900

 

 

132,900

 

 

Total commercial real estate

 

 

270,318

270,318

 

 

270,318

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgage

 

 

47,151

1,585

48,736

187

 

 

48,923

 

Investment property

 

 

43,629

23

43,652

 

 

43,652

 

 

Total residential real estate

 

 

90,780

1,608

92,388

187

 

 

92,575

Consumer installment

 

 

8,802

64

8,866

 

 

8,866

 

 

Total

 

$

459,043

2,152

461,195

187

 

$

461,382

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partiallycharged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

14


Table of Contents

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previouslycharged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At September��June 30, 20172020 and December 31, 2016,2019, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The Company regularlyre-evaluates its practices in determining the allowance for loan losses. Beginning withSince the fourth quarter ended December 31,of 2016, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. First, the Companyhas increased its look-back period for calculating average losses for all loan segments to 31 quarters. Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20each quarter look-back period. For the quarter ended September 30, 2017, the Company increased its look-back period to 34 quarters to continue to include the losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second,For the quarter ended June 30, 2020, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30, 2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. Ifto 45 quarters to continue to include losses incurred by the Company did not makebeginning with the changes described above,first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the Company’s calculated allowance for loaneffects of at least one economic downturn in its loss allocation would have decreased by approximately $0.9 million, or 0.21%history. During the first six months of total loans, at December 31, 2016. Other than the changes discussed above,2020, the Company has not made any materialadjusted certain qualitative and economic factors related to changes to its methodology that wouldin economic conditions driven by the impact the calculation of the allowance for loan losses or provision for loan losses for the periods includednovel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse economic conditions, including higher unemployment in the accompanying consolidated balance sheets and statementsour primary market area.

15


Table of earnings.

Contents

The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods.

  September 30, 2017 
(In thousands) 

Commercial and

industrial

  

 

Construction

and land

development

  

Commercial

real estate

  

Residential

real estate

  

Consumer

installment

  Total 

 

 

Quarter ended:

      

Beginning balance

 $677   874   2,121   1,119   174  $        4,965  

Charge-offs

  (449  —     —     (30  (10  (489) 

Recoveries

  39   133   —     20   2   194  

 

 

Net (charge-offs) recoveries

  (410  133   —     (10  (8  (295) 

Provision for loan losses

  237   (156  (60  (32  11   —    

 

 

Ending balance

 $504   851   2,061   1,077   177  $4,670  

 

 

Nine months ended:

      

Beginning balance

 $540   812   2,071   1,107   113  $4,643  

Charge-offs

  (449  —     —     (108  (16  (573) 

Recoveries

  45   347   —     97   11   500  

 

 

Net (charge-offs) recoveries

  (404  347   —     (11  (5  (73) 

Provision for loan losses

  368   (308  (10  (19  69   100  

 

 

Ending balance

 $504   851   2,061   1,077   177  $4,670  

 

 
  

 

September 30, 2016

 
(In thousands) 

Commercial and

industrial

  

 

Construction

and land

development

  Commercial
real estate
  Residential
real estate
  Consumer
installment
  Total 

 

 

Quarter ended:

      

Beginning balance

 $506   744   2,092   1,061   125  $4,528  

Charge-offs

  —     —     —     (7  (1  (8) 

Recoveries

  3   5   —     49   1   58  

 

 

Net recoveries

  3   5   —     42   —     50  

Provision for loan losses

  6   (76  140   (83  13   —    

 

 

Ending balance

 $515   673   2,232   1,020   138  $4,578  

 

 

Nine months ended:

      

Beginning balance

 $523   669   1,879   1,059   159  $4,289  

Charge-offs

  (83  —     (194  (162  (29  (468) 

Recoveries

  26   1,207   —     115   9   1,357  

 

 

Net (charge-offs) recoveries

  (57  1,207   (194  (47  (20  889  

Provision for loan losses

  49   (1,203  547   8   (1  (600) 

 

 

Ending balance

 $515   673   2,232   1,020   138  $4,578  

 

 

 

 

 

June 30, 2020

(In thousands)

Commercial and industrial

 

Construction and land development

 

Commercial real estate

 

Residential real estate

 

Consumer installment

 

 

 

Total

Quarter ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

675

 

582

 

2,596

 

877

 

137

 

 

$

4,867

Charge-offs

 

(4)

 

 

 

 

(27)

 

 

 

(31)

Recoveries

 

2

 

 

 

14

 

6

 

 

 

22

 

Net (charge-offs) recoveries

 

(2)

 

 

 

14

 

(21)

 

 

 

(9)

Provision for loan losses

 

6

 

31

 

319

 

63

 

31

 

 

 

450

Ending balance

$

679

 

613

 

2,915

 

954

 

147

 

 

$

5,308

Six months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

577

 

569

 

2,289

 

813

 

138

 

 

$

4,386

Charge-offs

 

(4)

 

 

 

 

(32)

 

 

 

(36)

Recoveries

 

55

 

 

 

45

 

8

 

 

 

108

 

Net recoveries (charge-offs)

 

51

 

 

 

45

 

(24)

 

 

 

72

Provision for loan losses

 

51

 

44

 

626

 

96

 

33

 

 

 

850

Ending balance

$

679

 

613

 

2,915

 

954

 

147

 

 

$

5,308

 

 

 

June 30, 2019

(In thousands)

Commercial and industrial

 

Construction and land development

 

Commercial real estate

 

Residential real estate

 

Consumer installment

 

 

 

Total

Quarter ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

686

 

773

 

2,251

 

930

 

168

 

 

$

4,808

Charge-offs

 

 

 

 

 

(1)

 

 

 

(1)

Recoveries

 

6

 

 

1

 

33

 

4

 

 

 

44

 

Net recoveries (charge-offs)

 

6

 

 

1

 

33

 

3

 

 

 

43

Provision for loan losses

 

34

 

8

 

35

 

(59)

 

(18)

 

 

 

Ending balance

$

726

 

781

 

2,287

 

904

 

153

 

 

$

4,851

Six months ended:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

778

 

700

 

2,218

 

946

 

148

 

 

$

4,790

Charge-offs

 

 

 

 

 

(16)

 

 

 

(16)

Recoveries

 

24

 

 

1

 

47

 

5

 

 

 

77

 

Net recoveries (charge-offs)

 

24

 

 

1

 

47

 

(11)

 

 

 

61

Provision for loan losses

 

(76)

 

81

 

68

 

(89)

 

16

 

 

 

Ending balance

$

726

 

781

 

2,287

 

904

 

153

 

 

$

4,851

16


Table of Contents

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of SeptemberJune 30, 20172020 and 2016.2019.

 

 

 

Collectively evaluated (1)

 

Individually evaluated (2)

 

Total

 

 

 

Allowance

Recorded

 

Allowance

Recorded

 

Allowance

Recorded

     Collectively evaluated (1)       Individually evaluated (2)     Total 

 

 

 

for loan

investment

 

for loan

investment

 

for loan

investment

(In thousands)   

 

Allowance

 

for loan

 

losses

   

 

Recorded

 

investment

 

in loans

   

 

Allowance

 

for loan

 

losses

   

 

Recorded

 

investment

 

in loans

   

 

  Allowance  

 

for loan

 

losses

   

 

  Recorded   

 

investment 

 

in loans 

 

(In thousands)

 

losses

in loans

 

losses

in loans

 

losses

in loans

 

September 30, 2017:

             

June 30, 2020:

June 30, 2020:

 

 

 

 

 

 

Commercial and industrial

 $   471    50,068     33    33    504    50,101  

Commercial and industrial

$

679

87,754

 

 

679

87,754

Construction and land development

    851    47,455     —      —      851    47,455  

Construction and land development

 

613

32,967

 

 

613

32,967

Commercial real estate

    2,045    229,700     16    2,680    2,061    232,380  

Commercial real estate

 

2,915

250,370

 

218

 

2,915

250,588

Residential real estate

    1,077    110,159     —      —      1,077    110,159  

Residential real estate

 

954

85,714

 

111

 

954

85,825

Consumer installment

    177    9,877     —      —      177    9,877  

Consumer installment

 

147

8,631

 

 

147

8,631

 

 

Total

$

5,308

465,436

 

329

 

5,308

465,765

Total

 $   4,621    447,259     49    2,713    4,670    449,972  

 

September 30, 2016:

             

Commercial and industrial

 $   515    50,858     —      23    515    50,881  

Construction and land development

    673    43,959     —      45    673    44,004  

Commercial real estate

    2,196    209,840     36    1,718    2,232    211,558  

Residential real estate

    1,020    112,303     —      —      1,020    112,303  

Consumer installment

    138    8,996     —      —      138    8,996  

 

Total

 $   4,542    425,956     36    1,786    4,578    427,742  

 

(1)Represents loans collectively evaluated for impairment in accordance with ASC450-20,Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU2010-20 regarding allowance fornon-impaired loans.
(2)Represents loans individually evaluated for impairment in accordance with ASC310-30,Receivables (formerly FAS 114), and pursuant to amendments by ASU2010-20 regarding allowance for impaired loans.

June 30, 2019:

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

726

54,307

 

 

726

54,307

Construction and land development

 

781

45,395

 

 

781

45,395

Commercial real estate

 

2,287

268,500

 

 

2,287

268,500

Residential real estate

 

904

99,292

 

 

904

99,292

Consumer installment

 

153

9,091

 

 

153

9,091

 

 

Total

$

4,851

476,585

 

 

4,851

476,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies, and

 

pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.

(2)

Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables, and

 

pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows:

Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected.

Nonaccrual – includes loans where management has determined that full payment of principal and interest is not expected.

(In thousands)  Pass          

Special        

Mention        

  

Substandard

Accruing

      Nonaccrual       Total loans     

 

 

September 30, 2017:

       

Commercial and industrial

  $49,817    121    130   33    $50,101  

Construction and land development

   46,778    404    273   —       47,455  

Commercial real estate:

       

Owner occupied

   41,048    244    341   —       41,633  

Multi-family

   47,794    —      —     —       47,794  

Other

   139,671    356    426   2,500     142,953  

 

 

Total commercial real estate

   228,513    600    767   2,500     232,380  

Residential real estate:

       

Consumer mortgage

   57,087    2,032    3,584   353     63,056  

Investment property

   46,054    109    940   —       47,103  

 

 

Total residential real estate

   103,141    2,141    4,524   353     110,159  

Consumer installment

   9,694    71    96   16     9,877  

 

 

Total

  $     437,943                3,337    5,790   2,902    $449,972  

 

 

December 31, 2016:

       

Commercial and industrial

  $49,558    22    233   37    $49,850  

Construction and land development

   41,165    113    340   32     41,650  

Commercial real estate:

       

Owner occupied

   48,788    414    405   138     49,745  

Multi-family

   46,998    —      —     —       46,998  

Other

   121,326    32    449   1,889     123,696  

 

 

Total commercial real estate

   217,112    446    854   2,027     220,439  

Residential real estate:

       

Consumer mortgage

   59,450    2,613    3,278   223     65,564  

Investment property

   44,109    105    1,048   29     45,291  

 

 

Total residential real estate

   103,559    2,718    4,326   252     110,855  

Consumer installment

   8,580    20    90   22     8,712  

 

 

Total

  $     419,974                3,319    5,843   2,370    $      431,506  

 

 

17


Table of Contents

(In thousands)

 

Pass

 

Special Mention

 

Substandard Accruing

 

Nonaccrual

 

 

Total loans

June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

85,347

 

2,196

 

211

 

 

$

87,754

Construction and land development

 

32,399

 

 

568

 

 

 

32,967

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

48,988

 

902

 

146

 

 

 

50,036

 

Hotel/motel

 

43,183

 

 

 

 

 

43,183

 

Multi-family

 

28,444

 

3,530

 

 

 

 

31,974

 

Other

 

124,285

 

873

 

19

 

218

 

 

125,395

 

 

Total commercial real estate

 

244,900

 

5,305

 

165

 

218

 

 

250,588

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgage

 

37,453

 

739

 

2,427

 

348

 

 

40,967

 

Investment property

 

43,991

 

538

 

218

 

111

 

 

44,858

 

 

Total residential real estate

 

81,444

 

1,277

 

2,645

 

459

 

 

85,825

Consumer installment

 

8,520

 

55

 

55

 

1

 

 

8,631

 

 

Total

$

452,610

 

8,833

 

3,644

 

678

 

$

465,765

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

54,340

 

2,176

 

266

 

 

$

56,782

Construction and land development

 

31,798

 

 

1,043

 

 

 

32,841

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

47,865

 

917

 

78

 

 

 

48,860

 

Hotel/motel

 

43,719

 

 

 

 

 

43,719

 

Multi-family

 

44,839

 

 

 

 

 

44,839

 

Other

 

132,030

 

849

 

21

 

 

 

132,900

 

 

Total commercial real estate

 

268,453

 

1,766

 

99

 

 

 

270,318

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgage

 

45,247

 

962

 

2,527

 

187

 

 

48,923

 

Investment property

 

42,331

 

949

 

372

 

 

 

43,652

 

 

Total residential real estate

 

87,578

 

1,911

 

2,899

 

187

 

 

92,575

Consumer installment

 

8,742

 

60

 

64

 

 

 

8,866

 

 

Total

$

450,911

 

5,913

 

4,371

 

187

 

$

461,382

Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fullycharged-off are not included in the following tables. The related allowance generally represents the following components that correspond to impaired loans:

Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans).

Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans).

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at SeptemberJune 30, 20172020 and December 31, 2016.2019.

    September 30, 2017 
(In thousands)   

Unpaid principal

balance (1)

   

 

Charge-offs and

payments applied

(2)

   

Recorded

investment (3)

     Related allowance 

 

    

 

 

 

With no allowance recorded:

         

Commercial real estate:

         

Other

 $  3,590    (1,090)    2,500     

 

    

Total commercial real estate

   3,590    (1,090)    2,500     

 

    

Total

 $  3,590    (1,090)    2,500     

 

    

With allowance recorded:

 

   

Commercial and industrial

 $  53    (20)    33    $  33  

Commercial real estate:

         

Owner occupied

   180    —       180      16  

 

    

 

 

 

Total commercial real estate

   180    —       180      16  

 

    

 

 

 

Total

   233    (20)    213      49  

 

    

 

 

 

Total impaired loans

 $  3,823    (1,110)    2,713    $  49  

 

    

 

 

 

18

(1)Unpaid principal balance represents the contractual obligation due from the customer.
(2)Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3)Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.

    December 31, 2016 
(In thousands)   

Unpaid principal

balance (1)

   

 

Charge-offs and

payments applied

(2)

   

Recorded

investment (3)

     Related allowance 

 

    

 

 

 

With no allowance recorded:

         

Commercial and industrial

 $  15    —       15     

Construction and land development

   140    (108)    32     

Commercial real estate:

         

Other

   2,874    (984)    1,890     

 

    

Total commercial real estate

   2,874    (984)    1,890     

 

    

Total

 $  3,029    (1,092)    1,937     

 

    

With allowance recorded:

         

Commercial real estate:

         

Owner occupied

 $  193    —       193    $  31  

 

    

 

 

 

Total commercial real estate

   193    —       193      31  

 

    

 

 

 

Total

   193    —       193      31  

 

    

 

 

 

Total impaired loans

 $  3,222    (1,092)    2,130    $  31  

 

    

 

 

 

(1)Unpaid principal balance represents the contractual obligation due from the customer.
(2)Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3)Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.
Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

(In thousands)

 

Unpaid principal balance (1)

Charge-offs and payments applied (2)

Recorded investment (3)

 

 

Related allowance

With no allowance recorded:

Commercial real estate:

 

 

 

 

 

 

 

 

Other

$

218

218

 

$

 

 

Total commercial real estate

 

218

218

 

 

Residential real estate:

 

 

 

 

 

 

 

 

Investment property

 

111

111

 

 

 

 

Total residential real estate

 

111

111

 

 

 

 

Total impaired loans

$

329

329

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Unpaid principal balance represents the contractual obligation due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been

 

applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before

 

any related allowance for loan losses.

 

 

 

 

 

 

 

December 31, 2019

(In thousands)

 

Unpaid principal balance (1)

Charge-offs and payments applied (2)

Recorded investment (3)

 

 

Related allowance

With no allowance recorded:

Commercial and industrial

$

335

(236)

99

 

$

 

 

Total impaired loans

$

335

(236)

99

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Unpaid principal balance represents the contractual obligation due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been

 

applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before

 

any related allowance for loan losses.

The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the respective periods.

        Quarter ended September 30, 2017          Nine months ended September 30, 2017     
    Average  Total interest  Average  Total interest 
    

 

recorded

  income  recorded  income 
(In thousands)   

 

        investment        

          recognized                  investment                  recognized         

 

 

Impaired loans:

 

Commercial and industrial

  $126   —     55   —   

Construction and land development

   —     —     15   —   

Commercial real estate:

     

Owner occupied

   182   2   186   8 

Other

   2,148   —     1,971   —   

 

 

Total commercial real estate

   2,330   2   2,157   8 

 

 

Total

  $2,456   2   2,227   8 

 

 
    Quarter ended September 30, 2016  Nine months ended September 30, 2016 
    Average  Total interest  Average  Total interest 
    

 

recorded

  income  recorded  income 
(In thousands)   

 

        investment        

          recognized                  investment                  recognized         

 

 

Impaired loans:

 

Commercial and industrial

  $26   —     36   2 

Construction and land development

   48   —     111   —   

Commercial real estate:

     

Owner occupied

   465   3   850   29 

Other

   1,532   —     1,662   —   

 

 

Total commercial real estate

   1,997   3   2,512   29 

 

 

Total

  $2,071   3   2,659   31 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2020

 

Six months ended June 30, 2020

 

 

 

 

 

 

 

Average

 

Total interest

 

Average

 

Total interest

 

 

 

 

 

 

 

recorded

 

income

 

recorded

 

income

(In thousands)

 

investment

 

recognized

 

investment

 

recognized

Impaired loans:

Commercial real estate:

 

 

 

 

 

 

 

 

 

Other

$

54

 

 

31

 

 

 

Total commercial real estate

 

54

 

 

31

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Investment property

 

28

 

 

16

 

 

 

Total residential real estate

 

28

 

 

16

 

 

 

Total

$

82

 

 

47

 

19


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Quarter ended June 30, 2019

 

Six months ended June 30, 2019

 

 

 

 

 

 

 

Average

 

Total interest

 

Average

 

Total interest

 

 

 

 

 

 

 

recorded

 

income

 

recorded

 

income

(In thousands)

 

investment

 

recognized

 

investment

 

recognized

Impaired loans:

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

$

 

 

45

 

9

 

 

Total commercial real estate

 

 

 

45

 

9

 

 

Total

$

 

 

45

 

9

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10 TDR classifications for a limited period of time to account for the effects of COVID-19. On April 7, 2020, the Federal Reserve and the other banking agencies and regulators issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (the “Interagency Statement on COVID-19 Loan Modifications”), to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain COVID-19-related modifications. If a loan modification is eligible, a bank may elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible under section 4013, or if the bank elects not to account for the loan modification under section 4013, the Revised Statement includes criteria when a bank may presume a loan modification is not a TDR in accordance with ASC 310-40.

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the Interagency Statement on COVID-19 Loan Modifications in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. In the normal course of business, management may grant concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date, or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect, wherewhen due, all amounts owed, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In making the determination of whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each modification. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by establishing a valuation allowance as part of the allowance for loan losses or acharge-off to the allowance for loan losses. In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.

The Company had no TDRs as of December 31, 2019. There were no loans modified in a TDR during the quarter and six months ended June 30, 2020 and 2019, respectively. For the same periods, the Company had no loans modified in a TDR within the previous 12 months for which there was a payment default.

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of SeptemberJune 30, 2017 and December 31, 2016.2020.

    TDRs     
               Related 
(In thousands)           Accruing              Nonaccrual                  Total                  Allowance       

 

   

 

 

 

September 30, 2017

      

Commercial and industrial

 $  —     33    33   $  33  

Commercial real estate:

      

Owner occupied

   180   —      180     16  

Other

   —     1,693    1,693     —    

 

   

 

 

 

Total commercial real estate

   180   1,693    1,873     16  

 

   

 

 

 

Total

 $  180   1,726    1,906   $  49  

 

   

 

 

 

December 31, 2016

  

Commercial and industrial

 $  15   —      15   $  —    

Construction and land development

   —     32    32     —    

Commercial real estate:

      

Owner occupied

   193   —      193     31  

Other

   —     1,818    1,818     —    

 

   

 

 

 

Total commercial real estate

   193   1,818    2,011     31  

 

   

 

 

 

Total

 $  208   1,850    2,058   $  31  

 

   

 

 

 

The following table summarizes loans modified in a TDR during the respective periods both before and after their modification.20


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   Quarter ended September 30,   Nine months ended September 30, 
       

 

Pre-

   

 

Post -

       

 

Pre-

   

 

Post -

 
       

 

modification

   

 

modification

       

 

modification

   

 

modification

 
   Number   

 

outstanding

   

 

outstanding

   

 

Number

   

 

outstanding

   

 

outstanding

 
   

 

of

   

 

recorded

   

 

recorded

   

 

of

   

 

recorded

   

 

recorded

 
(Dollars in thousands)  

 

contracts

   

 

investment

   

 

investment

   

 

contracts

   

 

investment

   

 

investment

 

 

 

2017:

 

          

Commercial and industrial

   1   $34    34    1   $34    34  

Commercial real estate:

            

Other

   —      —      —      1    1,275    1,266  

 

 

Total commercial real estate

   —      —      —      1    1,275    1,266  

 

 

Total

   1   $34    34    2   $1,309    1,300  

 

 

2016:

 

          

Commercial real estate:

            

Other

   —      —      —      1   $1,509    1,509  

 

 

Total commercial real estate

   —      —      —      1    1,509    1,509  

 

 

Total

   —      —      —      1   $1,509    1,509  

 

 

The majority of the loans modified in a TDR during the quarter and nine months ended September 30, 2017 and 2016, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

During the three and nine months ended September 30, 2017 and 2016, there were no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due).

 

 

 

 

 

 

 

TDRs

 

 

 

 

 

 

 

 

 

 

 

 

Related

(In thousands)

 

Accruing

Nonaccrual

Total

 

 

Allowance

June 30, 2020

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

Other

$

218

218

 

$

 

 

Total commercial real estate

 

218

218

 

 

Residential real estate:

 

 

 

 

 

 

 

 

Investment property

 

111

111

 

 

 

 

Total residential real estate

 

111

111

 

 

 

 

Total

$

329

329

 

$

NOTE 6:5: MORTGAGE SERVICING RIGHTS, NET

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income.

The Company has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells conforming, fixed-rate,closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets.

The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income.

The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods.

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

MSRs, net:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,249

 

$

1,410

 

$

1,299

 

$

1,441

Additions, net

 

188

 

 

39

 

 

237

 

 

80

Amortization expense

 

(166)

 

 

(94)

 

 

(265)

 

 

(166)

Ending balance

$

1,271

 

$

1,355

 

$

1,271

 

$

1,355

 

 

 

 

 

 

 

 

 

 

 

 

Valuation allowance included in MSRs, net:

 

 

 

 

 

Beginning of period

$

 

$

 

$

 

$

End of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of amortized MSRs:

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

$

1,917

 

$

2,591

 

$

2,111

 

$

2,697

End of period

 

1,690

 

 

2,333

 

 

1,690

 

 

2,333

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          Quarter ended September 30,          Nine months ended September 30, 
(Dollars in thousands)     2017  2016      2017  2016 

 

 

MSRs, net:

        

Beginning balance

 $    1,762  $2,146  $    1,952  $2,316 

Additions, net

    72   97     165   242 

Amortization expense

    (131  (192    (415  (506

(Increase) decrease in valuation allowance

    —     (20    1   (21

 

 

Ending balance

 $    1,703  $2,031  $    1,703  $2,031 

 

 

Valuation allowance included in MSRs, net:

 

    

Beginning of period

 $    —    $1  $    1  $—   

End of period

    —     21     —     21 

 

 

Fair value of amortized MSRs:

        

Beginning of period

 $    2,520  $2,539  $    2,678  $3,086 

End of period

    2,441   2,455     2,441   2,455 

 

 

NOTE 7: DERIVATIVE INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities on the accompanying consolidated balance sheets. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as part of a hedging relationship, the gain or loss is recognized in current earnings within other noninterest income on the accompanying consolidated statements of earnings. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these swaps, the Company enters into offsetting positions in order to minimize the risk to the Company. These swaps qualify as derivatives, but are not designated as hedging instruments.

Interest rate swap agreements involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument is negative, the Company owes the customer or counterparty and therefore, has no credit risk.

A summary of the Company’s interest rate swap agreements at September 30, 2017 and December 31, 2016 is presented below.

               Other       Other 
               Assets       Liabilities 
               Estimated           Estimated     
(Dollars in thousands)      Notional       Fair Value           Fair Value     

 

 

September 30, 2017:

        

Pay fixed / receive variable

  $    3,704    —      96  

Pay variable / receive fixed

     3,704    96    —    

 

 

Total interest rate swap agreements

  $    7,408    96    96  

 

 

December 31, 2016:

        

Pay fixed / receive variable

  $    3,967    —      241  

Pay variable / receive fixed

     3,967    241    —    

 

 

Total interest rate swap agreements

  $    7,934    241    241  

 

 

NOTE 8:6: FAIR VALUE

Fair Value Hierarchy

“Fair value” is defined by ASC 820,Fair Value Measurements and Disclosures, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the ninesix months ended SeptemberJune 30, 2017,2020, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securitiesavailable-for-sale

Securities available-for-sale

Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company obtains pricing from third party pricing services. These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtainnon-binding third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used with management.

Interest rate swap agreements

The carrying amount of interest rate swap agreements was included in other assets and accrued expenses and other liabilities on the accompanying consolidated balance sheets. The fair value measurements for our interest rate swap agreements were based on information obtained from a third party bank. This information is periodically tested by the Company and validated against other third party valuations. If needed, other third party market participants may be utilized to corroborate the fair value measurements for our interest rate swap agreements. The Company classified these derivative assets and liabilities within Level 2 of the valuation hierarchy. These swaps qualify as derivatives, but are not designated as hedging instruments.

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above).

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Quoted Prices in

 

   

        Significant        

 

     
       

Active Markets

 

   

        Other        

 

   

Significant    

 

 
       

for

 

   

        Observable        

 

   

Unobservable    

 

 
       

Identical Assets

 

   

        Inputs    

 

   

Inputs    

 

 
(Dollars in thousands)  Amount   (Level 1)           (Level 2)           (Level 3)     

 

 

September 30, 2017:

        

Securitiesavailable-for-sale:

        

Agency obligations

  $53,505        53,505    —   

Agency RMBS

   139,806        139,806    —   

State and political subdivisions

   71,860        71,860    —   

 

 

Total securitiesavailable-for-sale

   265,171        265,171    —   

Other assets(1)

   96        96    —   

 

 

Total assets at fair value

  $        265,267        265,267    —   

 

 

Other liabilities(1)

  $96        96    —   

 

 

Total liabilities at fair value

  $96        96    —   

 

 

December 31, 2016:

        

Securitiesavailable-for-sale:

        

Agency obligations

  $45,471        45,471    —   

Agency RMBS

   127,787        127,787    —   

State and political subdivisions

   70,314        70,314    —   

 

 

Total securitiesavailable-for-sale

   243,572        243,572    —   

Other assets(1)

   241        241    —   

 

 

Total assets at fair value

  $243,813        243,813    —   

 

 

Other liabilities(1)

  $241        241    —   

 

 

Total liabilities at fair value

  $241        241    —   

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

(Dollars in thousands)

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

June 30, 2020:

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

Agency obligations

$

80,808

 

 

80,808

 

 

Agency RMBS

 

154,606

 

 

154,606

 

 

State and political subdivisions

 

66,779

 

 

66,779

 

Total securities available-for-sale

 

302,193

 

 

302,193

 

 

 

Total assets at fair value

$

302,193

 

 

302,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019:

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

Agency obligations

$

50,708

 

 

50,708

 

 

Agency RMBS

 

123,277

 

 

123,277

 

 

State and political subdivisions

 

61,917

 

 

61,917

 

Total securities available-for-sale

 

235,902

 

 

235,902

 

 

 

Total assets at fair value

$

235,902

 

 

235,902

 

(1)Represents the fair value of interest rate swap agreements.

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value hierarchy.

Impaired Loans

Loans considered impaired under ASC310-10-35,Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

The fair value of impaired loans werewas primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

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Other real estate owned

Other real estate owned (“OREO”), consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the loan’s carrying amount or the fair value of collateral less costs to sell upon transfer of the loans to other real estate. Subsequently, other real estateOREO is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense.

Mortgage servicing rights, net

Mortgage servicing rights,

MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):

       Quoted Prices in         
       Active Markets       Other         Significant   
       for       Observable       Unobservable 
   Carrying   Identical Assets       Inputs         Inputs   
(Dollars in thousands)  Amount   (Level 1)       (Level 2)         (Level 3)   

 

 

September 30, 2017:

        

Loans held for sale

  $924    —       924     —    

Loans, net(1)

   2,664    —       —       2,664  

Other real estate owned

   103    —       —       103  

Other assets(2)

   1,703    —       —       1,703  

 

 

Total assets at fair value

  $             5,394    —       924     4,470  

 

 

December 31, 2016:

        

Loans held for sale

  $1,497    —       1,497     —    

Loans, net(1)

   2,099    —       —       2,099  

Other real estate owned

   152    —       —       152  

Other assets(2)

   1,952    —       —       1,952  

 

 

Total assets at fair value

  $5,700    —       1,497     4,203  

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

(Dollars in thousands)

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

June 30, 2020:

 

 

 

 

 

 

 

 

Loans held for sale

$

2,620

 

 

2,620

 

Loans, net(1)

 

329

 

 

 

329

Other assets (2)

 

1,271

 

 

 

1,271

 

Total assets at fair value

$

4,220

 

 

2,620

 

1,600

December 31, 2019:

 

 

 

 

 

 

 

 

Loans held for sale

$

2,202

 

 

2,202

 

Loans, net(1)

 

99

 

 

 

99

Other assets (2)

 

1,299

 

 

 

1,299

 

Total assets at fair value

$

3,600

 

 

2,202

 

1,398

(1)Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in impaired loans, net

of any related allowance for loan losses

(2)Represents MSRs, net and other real estate owned, both of which are carried at lower of cost or estimated fair value.

(1)Loans considered impaired under ASC310-10-35,Receivables. This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses.

(2)Represents MSRs, net, carried at lower of cost or estimated fair value.

Quantitative Disclosures for Level 3 Fair Value Measurements

At SeptemberJune 30, 2017,2020, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on anon-recurring basis at SeptemberJune 30, 2017,2020, the significant unobservable inputs used in the fair value measurements are presented below.

                 Weighted     
       Carrying               Average     
(Dollars in thousands)      Amount           Valuation Technique             Significant Unobservable Input           of Input     

 

  

 

  

 

  

 

 

 

Nonrecurring:

       

Impaired loans

 $        2,664   

Appraisal

  

Appraisal discounts (%)

 16.9%   

Other real estate owned

  103   

Appraisal

  

Appraisal discounts (%)

 18.9%   

Mortgage servicing rights, net

  1,703   

Discounted cash flow

  

Prepayment speed or CPR (%)

 11.0%   
      

Discount rate (%)

 10.0%   

 

24


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Carrying

 

Significant

 

 

 

 

 

 

Average

(Dollars in thousands)

 

Amount

Valuation Technique

Unobservable Input

 

Range

 

of Input

June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

329

 

Appraisal

Appraisal discounts

 

10.0

 

-

10.0

%

 

10.0

%

Mortgage servicing rights, net

 

1,271

 

Discounted cash flow

Prepayment Speed or CPR

 

14.7

 

-

18.4

%

 

16.8

%

 

 

 

 

 

 

Discount rate

 

10.0

 

-

12.0

%

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

99

 

Appraisal

Appraisal discounts

 

 

 

 

 

 

 

10.0

%

Mortgage servicing rights, net

 

1,299

 

Discounted cash flow

Prepayment Speed or CPR

 

 

 

 

 

 

 

11.6

%

 

 

 

 

 

 

Discount rate

 

 

 

 

 

 

 

10.0

%

 

 

Fair Value of Financial Instruments

ASC 825,Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820 and generally produces a higher value than an exit-price approach. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. ASU2016-01 described under “Current Accounting Developments” requires public company use of exit prices when measuring theThe fair value of financial instruments for disclosure purposes for fiscal years beginning after December 31, 2017. The effects of ASU2016-01 on the Company’s consolidated financial statements are being evaluated.loans was measured using an exit price notion.

Loans held for sale

Fair values of loans held for sale are determined using quoted secondary market prices for similar loans.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar remaining maturities.

Long-term debt

The fair value of the Company’s fixed rate long-term debt is estimated using discounted cash flows based on estimated current market rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate long-term debt approximates its fair value.

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at SeptemberJune 30, 20172020 and December 31, 20162019 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings depositsdeposits. Fair value approximates carrying value in these financial liabilities due to these products having no stated maturity. In addition,Additionally, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase.

25


Table of Contents

             Fair Value Hierarchy 
   

 

Carrying

   

 

Estimated

     

 

Level 1

   

 

Level 2

   

 

Level 3

 
(Dollars in thousands)  amount   fair value     inputs   inputs   Inputs 

 

 

September 30, 2017:

           

Financial Assets:

           

Loans, net (1)

  $       444,708    $        445,776    $                  —      $—      $         445,776  

Loans held for sale

   924     931      —       931     —    

Financial Liabilities:

           

Time Deposits

  $194,131    $192,463    $  —      $         192,463    $—    

Long-term debt

   3,217     3,217      —       3,217     —    

 

 

December 31, 2016:

           

Financial Assets:

           

Loans, net (1)

  $426,303    $428,446    $  —      $—      $428,446 

Loans held for sale

   1,497     1,507      —       1,507     —    

Financial Liabilities:

           

Time Deposits

  $208,137    $207,791    $  —      $207,791    $—    

Long-term debt

   3,217     3,217      —       3,217     —    

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Hierarchy

 

 

 

 

Carrying

 

 

Estimated

 

 

Level 1

 

 

Level 2

 

 

Level 3

(Dollars in thousands)

 

 

amount

 

 

fair value

 

 

inputs

 

 

inputs

 

 

Inputs

June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net (1)

 

$

458,966

 

$

458,957

 

$

 

$

 

$

458,957

 

Loans held for sale

 

 

2,620

 

 

2,743

 

 

 

 

2,743

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

��

 

 

 

Time Deposits

 

$

165,351

 

$

167,026

 

$

 

$

167,026

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net (1)

 

$

456,515

 

$

453,705

 

$

 

$

 

$

453,705

 

Loans held for sale

 

 

2,202

 

 

2,251

 

 

 

 

2,251

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

$

167,199

 

$

168,316

 

$

 

$

168,316

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit price notion.

(1) Represents loans, net26


Table of unearned income and the allowance for loan losses.Contents

ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

General

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, as well as the information contained in our annual reportAnnual Report on Form10-K for the year ended December 31, 20162019 and our quarterly reportsQuarterly Reports on Form10-Q for the quarters ended March 31, 2017 and June 30, 2017. 10-Q.

Special Notice Regarding Forward-Looking Statements

Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to, the protections of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, achievements, or financial condition of the Company to be materially different from future results, performance, achievements, or financial condition expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

the effects of future economic, business, and market conditions and changes, domestic and foreign, including seasonality;

the significant disruptive effects of the COVID-19 pandemic, and local, state, national and international economic activity, including decreases in gross domestic product (“GDP”) and increases in unemployment;

governmental monetary and fiscal policies;

policies, generally, and reductions of market interest rates, injections of liquidity by the Federal Reserve federal lending and market support programs and facilities, government spending and aid to businesses and consumers as a result of the COVID-19 pandemic, and its effects and public health and economic activity;

the effects of public health, economic activity and measures taken to restore public health in light of the COVID-19 pandemic;

legislative and regulatory changes, including the CARES Act, changes in banking, securities, and tax laws, regulations and rules and their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost of FDIC insurance;

insurance, including temporary other changes to address the effects of the COVID-19 pandemic and stabilize and stimulate the economy;

changes in accounting policies, rules, and practices;

the risks of changes in interest rates on the levels, composition, and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities, and the risks and uncertainty of the amounts realizable;

changes in borrower credit risks and payment behaviors;behaviors, especially in light of the economic effects of COVID-19;

27


Table of Contents

changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;

changes in the prices, values, and sales volumes of residential and commercial real estate;

the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services, including the disruptive effects of financial technology and other competitors who are not subject to the same regulations as the Company and the Bank;

the failure of assumptions and estimates underlying the establishment of allowances for possible loan and other asset impairments, losses, valuations of assets and liabilities and other estimates;

estimates, including the timing and effect of the implementation of the current expected credit losses model to financial instruments, and the significant changes in economic conditions, unemployment and GDP resulting from the COVID-19 pandemic, local and state shelter in place orders and other national health initiatives that result in workplace shutdowns, supply chain failures and economic and personal disruption;

the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

changes in our technology or products that may be more difficult, costly, or less effective than anticipated;

our business continuity planning, and changes in the ways we communicate with, and provide services to our customers, implemented during the COVID-19 pandemic;

the effects of war, or other conflicts, acts of terrorism, pandemics or other catastrophic events that may affect general economic conditions;

cyber attacks and data breaches that may compromise our systems or customers’ information;

information, including increased fraud during the COVID-19 pandemic;

the failure of assumptions and estimates, as well as differences in, and changes to, economic, market, and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan portfolio stress tests and other evaluations;

evaluations, including price and market volatility and liquidity issues resulting from the COVID-19 pandemic;

the risk that our deferred tax assets, if any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss carry-forwards, if any, that we may be able to utilize for income tax purposes; and

the

other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form10-K for the year ended December 31, 20162019 and subsequent quarterly and current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

Business

Business

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after it acquired its Alabama predecessor, which was a bank holding company established in 1984. The Bank, the Company’s principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates 8 full-service branches in Auburn, Opelika, Notasulga, and Valley, Alabama. The Bank also operates a loan production officeoffices in Auburn and Phenix City, Alabama.

Summary

28


Table of Results of OperationsContents

         Quarter ended September 30,              Nine months ended September 30,    
(Dollars in thousands, except per share amounts)     2017    2016      2017    2016 

 

 

Net interest income (a)

      $    6,565   $5,924        $    19,156   $17,957  

Less:tax-equivalent adjustment

     304    316       905    960  

 

 

  Net interest income (GAAP)

     6,261    5,608       18,251    16,997  

Noninterest income

     968    1,063       2,597    2,890  

 

 

  Total revenue

     7,229    6,671       20,848    19,887  

Provision for loan losses

     —        —           100    (600)  

Noninterest expense

     4,225    3,980       12,358    12,110  

Income tax expense

     868    740       2,369    2,304  

 

 

  Net earnings

      $    2,136   $1,951        $    6,021   $6,073  

 

 

Basic and diluted earnings per share

      $    0.59   $0.54        $    1.65   $1.67  

 

 

Summary of Results of Operations

 

 

 

 

 

 

Quarter ended June 30,

 

 

Six months ended June 30,

(Dollars in thousands, except per share amounts)

 

2020

 

 

2019

 

 

2020

 

 

2019

Net interest income (a)

$

6,197

 

$

6,742

 

$

12,529

 

$

13,508

Less: tax-equivalent adjustment

 

127

 

 

145

 

 

247

 

 

291

 

 

 

Net interest income (GAAP)

 

 

6,070

 

 

6,597

 

 

12,282

 

 

13,217

Noninterest income

 

1,363

 

 

885

 

 

2,598

 

 

2,045

 

 

 

Total revenue

 

 

7,433

 

 

7,482

 

 

14,880

 

 

15,262

Provision for loan losses

 

450

 

 

 

 

850

 

 

Noninterest expense

 

4,959

 

 

4,629

 

 

9,815

 

 

9,240

Income tax expense

 

363

 

 

546

 

 

753

 

 

1,172

 

 

 

Net earnings

 

$

1,661

 

$

2,307

 

$

3,462

 

$

4,850

 

Basic and diluted earnings per share

$

0.47

 

$

0.64

 

$

0.97

 

$

1.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(a)Tax-equivalent. See “Table 1 - Explanation ofNon-GAAP Financial Measures.”

Financial Summary

The Company’s net earnings were $6.0$3.5 million for the first ninesix months of 2017,2020, compared to $6.1$4.9 million for the first ninesix months of 2016.2019. Basic and diluted earnings per share were $1.65$0.97 per share for the first ninesix months of 2017,2020, compared to $1.67$1.35 per share for the first ninesix months of 2016.2019.

Net interest income(tax-equivalent) was $19.2$12.5 million for the first ninesix months of 20172020, a 7% decrease compared to $18.0$13.5 million for the first ninesix months of 2016.2019. This increasedecrease was primarily due an increaseto the lower rate environment, including a 150 basis point reduction in interest income from securitiesavailable-for-sale as management reduced its investmentthe Fed Funds rate that occurred late in federal funds sold and interest-bearing bank deposits and increased its investment securities as market yields improved. The Company also lowered its deposit costs and repaid higher-cost wholesale funding sources.the first quarter of 2020. Average loans were $436.7also down 3% to $459.1 million in the first ninesix months of 2017,2020, compared to $431.2$475.3 million in the first ninesix months of 2016. Average deposits were $738.3 million2019. The Company’s net interest margin (tax-equivalent) decreased to 3.09% in the first ninesix months of 2017, an2020, compared to 3.52% for the first six months of 2019 primarily due to the lower rate environment and changes in our asset mix from the significant short-term liquidity increase of $4.0in customer deposits.

At June 30, 2020, the Company’s allowance for loan losses was $5.3 million, or 1%, from1.14% of total loans, compared to $4.4 million, or 0.95% of total loans, at December 31, 2019, and $4.9 million, or 1.02% of total loans, at June 30, 2019. At June 30, 2020, the first nine monthsCompany’s allowance for loan losses was 1.24% of 2016.

total loans, excluding PPP loans. The Company recorded a $0.1 million provision for loan losses for the first nine months of 2017, compared to a negative provision of $0.6was $0.9 million for the first ninesix months of 2016. Annualized net charge-offs as a percent of average loans were 0.02% for the first nine months of 20172020, compared to annualized net recoveries 0.27%no provision for the first nine months of 2016. The Company recognized a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan losses during the first ninesix months of 2016.2019. The increase in the provision for loan losses was related to changes in economic conditions driven by the impact of COVID-19 and resulting adverse economic conditions, including higher unemployment in our primary market area. The provision for loan losses is based upon various factors,estimates and judgements, including the absolute level of loans, loan growth, credit quality and the amount of net charge-offs.

Noninterest income was $2.6 for the first nine months of 2017, compared to $2.9 million for the first ninesix months of 2016.2020 compared to $2.0 million for the first six months of 2019. The decreaseincrease was primarily due to a $0.2an increase mortgage lending income of $0.5 million decreaseduring first six months of 2020 compared to the first six months of 2019. The increase was primarily due to an increase in mortgage lending income as lower interest rates for mortgage loan production declined.loans positively affected refinance activity and pricing margins improved.

Noninterest expense was $12.4$9.8 million for the first ninesix months of 20172020 compared to $12.1$9.2 million for the first ninesix months of 2016. This2019. The increase was primarily due to $0.2$0.8 million of various expenses related to the redevelopment of the Company’s headquarters in gains from the sale of OREO, which reduced noninterestdowntown Auburn, including revised depreciation estimates and temporary relocation costs. The Company expects it will incur additional expense in the first nine months of 2016. The Company had an improved efficiency ratio of 56.81%2020 related to this redevelopment project.

Income tax expense was $0.8 million and $1.2 million for the first ninesix months of 2017, compared to 58.09% in the first nine months of 2016.

Income tax expense2020 and the2019, respectively, reflecting an effective tax rate were $2.4 millionof 17.86% and 28.24%19.46%, respectively, for the first nine months of 2017, compared to $2.3 million and 27.50%, respectively, for the first nine months of 2016. The increase in the effective tax raterespectively. This change was primarily due to a decrease in the level of earnings before taxes relative to tax-exempt sources of income. The Company’s effective income tax preference items such as incomerate is principally impacted by tax-exempt earnings from the Company’s investments in municipal securities and bank ownedbank-owned life insurance.

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Table of Contents

The Company paid cash dividends of $0.69$0.51 per share in the first ninesix months of 2017,2020, an increase of 2.2%2% from the same period of 2016.2019. At SeptemberJune 30, 2017,2020, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under current regulatory standards.standards with a total risk-based capital ratio of 19.04%, a tier 1 leverage ratio of 10.62% and a common equity tier 1 (“CET1”) ratio of 18.00% at June 30, 2020.

In

For the thirdsecond quarter of 2017,2020, net earnings were $2.1$1.7 million, or $0.59$0.47 per share, compared to $2.0$2.3 million, or $0.54$0.64 per share, for the thirdsecond quarter of 2016.2019. Net interest income(tax-equivalent) was $6.6$6.2 million for the thirdsecond quarter of 2017,2020 compared to $5.9$6.7 million for the thirdsecond quarter of 2016. This increase was2019. The Company’s net interest margin (tax-equivalent) decreased to 2.95% in the second quarter of 2020, compared to 3.50% for the second quarter of 2019 primarily due to the same factors as described above.lower rate environment and changes in our asset mix from the significant short-term liquidity increase in customer deposits. The Company recorded noa provision for loan losses inof $0.5 million during the thirdsecond quarter of 20172020 and 2016.no provision during the second quarter 2019. Noninterest income was $1.0$1.4 million in the thirdsecond quarter of 2017, compared to $1.12020 and $0.9 million in the thirdsecond quarter of 2016.2019. The decrease was due to a $0.1 million decline in securities gains, net. Noninterest expense was $4.2 million in the third quarter of 2017 compared to $4.0 million in the third quarter of 2016. This increase was primarily due to $0.2an increase in mortgage lending income as lower interest rates for mortgage loans positively affected refinance activity and pricing margins improved. Noninterest expense was $5.0 million in gains from the salesecond quarter of OREO, which reduced noninterest expense2020 compared to $4.6 million during the second quarter of 2019. The increase was mainly due to $0.6 million of various expenses related to the redevelopment of the Company’s headquarters in the first nine months of 2016.downtown Auburn, including revised depreciation estimates and temporary relocation costs. Income tax expense was $0.9$0.4 million for the thirdsecond quarter of 2017,2020 compared to $0.7$0.5 million in the thirdduring second quarter of 2016.2019. The Company’sCompany's effective tax rate for the thirdsecond quarter of 20172020 was 28.89%17.93%, compared to 27.50%19.14% in the thirdsecond quarter of 2016.2019.

COVID-19 Impact Assessment

In December 2019, COVID-19 was first reported in China and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, the State of Alabama, and most other states, have taken preventative or protective actions to prevent the spread of the virus, including imposing restrictions on travel and business operations and a statewide mask mandate, advising or requiring individuals to limit or forego their time outside of their homes, limitations on gathering of people and social distancing, and causing temporary closures of businesses that have been deemed to be non-essential. Though certain of these measures have been relaxed or eliminated, recent increases in reported cases could cause these measures to be reestablished. Auburn University, a major source of economic activity in Lee County, went to remote instruction on March 16, 2020. Auburn University announced its guidelines for the fall semester of 2020, which will involve both remote and in person instruction as well as other social distancing measures. The economic effects of these measures are not presently known.

COVID-19 has significantly affected local state, national and global health and economic activity and its future effects are uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, the development and distribution of COVID-19 testing and contact tracing, effective drug treatments and vaccines, together with governmental, regulatory and private sector responses. COVID-19 has had significant effects on the economy, financial markets and our employees, customers and vendors. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to make deposits and repay their loans, the value of collateral underlying our secured loans, market value, stability and liquidity and demand for loans and other products and services we offer, all of which are affected by the pandemic.

We have implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and shareholders

We believe our business continuity plan has worked to provide essential banking services to our communities and customers, while protecting our employees’ health. As part of our efforts to exercise social distancing in accordance with the guidelines of the Centers for Disease Control, starting March 23, we limited branch lobby service to appointment only while continuing to operate our branch drive-thru facilities and automated teller machines (“ATMs”). We continue to provide services through our online and other electronic channels. In addition, we established remote work access to help employees stay at home where job duties permit. On June 1, 2020 we re-opened some of our branch lobbies as permitted by state public health guidelines.

We are focused on servicing the financial needs of our commercial and consumer clients with extensions and deferrals to loan customers effected by COVID-19, provided such customers were not more than 30 days past due at the time of the request; and

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We are a participating lender in the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirement of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness with that 10-month period. We believe these loans and our participation in the program is good for our customers and the communities we serve. A summary of our loans as of June 30, 2020 follows:

(Dollars in thousands)

# of SBA Approved

Mix

 

 

 

$ of SBA Approved

Mix

SBA Tier:

 

 

 

 

 

 

 

 

$2 million to $10 million

%

 

$

%

$350,000 to less than $2 million

22

5

 

 

 

14,687

40

 

Up to $350,000

400

95

 

 

 

21,784

60

 

Total

422

100

%

 

$

36,471

100

%

The Company extended a total of $36.5 million in loans to 422 small businesses under the Small Business Administration’s Paycheck Protection Program during the second quarter of 2020. We collected approximately $1.5 million in fees related to our PPP loans, which will be recognized net of related costs, as a yield adjustment over the life of the underlying PPP loans.

We continue to closely monitor this pandemic, and are working to continue our services during the pandemic and to address developments as those occur. Our results of operations for the six months ended June 30, 2020, and our financial condition at that date reflect only the initial effects of the pandemic, and may not be indicative of future results or financial conditions.

As of June 30, 2020, all of our capital ratios were in excess of all regulatory requirements to be well capitalized. The effects of the COVID-19 pandemic on our borrowers could result in adverse changes to credit quality and our regulatory capital ratios. We continue to closely monitor this pandemic, and are working to continue our services during the pandemic and to address developments as those occur.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting principlesGAAP and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary impairment, recurring andnon-recurring fair value measurements the valuation of other real estate owned, and the valuation of OREO and deferred tax assets, were critical to the determination of our financial position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partiallycharged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

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An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previouslycharged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At SeptemberJune 30, 20172020 and December 31, 2016,2019, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The Company regularlyre-evaluates its practices in determining the allowance for loan losses. Beginning withSince the fourth quarter ended December 31,of 2016, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. First, the Companyhas increased its look-back period for calculating average losses for all loan segments to 31 quarters. Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20each quarter look-back period. For the quarter ended September 30, 2017, the Company increased its look-back period to 34 quarters to continue to include the losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second,For the quarter ended June 30, 2020, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30, 2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. Ifto 45 quarters to continue to include losses incurred by the Company did not makebeginning with the changes described above,first quarter of 2009. The Company will likely continue to increase its look-back period to incorporate the Company’s calculated allowance for loaneffects of at least one economic downturn in its loss allocation would have decreased by approximately $0.9 million, or 0.21%history. During the first six months of total loans, at December 31, 2016. Other than the changes discussed above,2020, the Company has not made any materialadjusted certain qualitative and economic factors related to changes to its methodology that wouldin economic conditions driven by the impact the calculation of the allowance for loan losses or provision for loan losses for the periods includedCOVID-19 pandemic and resulting adverse economic conditions, including higher unemployment in the accompanying consolidated balance sheets and statementsour primary market area.

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Table of earnings.Contents

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity securities with an unrealized loss, the Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses).

For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

Fair Value Determination

U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value, including investments classified asavailable-for-sale and derivatives. ASC 820,Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. For more information regarding fair value measurements and disclosures, please refer to Note 8,6, Fair Value, of the consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates, prepayments, market volatility, and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned (“OREO”),

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or fair value of collateral, less estimated costs to sell at the date acquired, with any loss recognized as acharge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other OREO. At June 30, 2020 and December 31, 2019 the company had no OREO properties.

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Table of Contents

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it ismore-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at SeptemberJune 30, 2017.2020. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

RESULTS OF OPERATIONS

Average Balance SheetUnder the CARES Act, net operating losses arising in tax years beginning after December 31, 2017, and Interest Ratesbefore January 1, 2021 may be carried back to each of the five tax years preceding the tax year of such loss. Since the enactment of the Tax Cuts and Jobs Act, net operating losses generally could not be carried back but could be carried forward indefinitely. Further, the Tax Cuts and Jobs Act limited net operating loss absorption to 80% of taxable income. The CARES Act temporarily removes the 80% limitation, reinstating it for tax years beginning after 2020.

   Nine months ended September 30, 
   2017   2016 
(Dollars in thousands)  

 

Average

 

Balance

   

 

Yield/        

 

Rate        

   

 

Average

 

Balance

   

 

Yield/        

 

Rate        

 

 

  

 

 

   

 

 

 

Loans and loans held for sale

   $    437,707    4.70%    $    432,628    4.75% 

Securities - taxable

   198,842    2.15%    161,484    2.00% 

Securities -tax-exempt

   69,770    5.10%    67,701    5.57% 

 

  

 

 

   

 

 

 

 Total securities

   268,612    2.92%    229,185    3.06% 

Federal funds sold

   33,430    1.00%    53,420    0.50% 

Interest bearing bank deposits

   45,310    1.03%    71,384    0.51% 

 

  

 

 

   

 

 

 

 Total interest-earning assets

   785,059    3.72%    786,617    3.58% 

 

  

 

 

   

 

 

 

Deposits:

        

NOW

   125,968    0.19%    123,049    0.31% 

Savings and money market

   232,076    0.37%    232,893    0.38% 

Time Deposits

   200,690    1.18%    213,659    1.24% 

 

  

 

 

   

 

 

 

 Total interest-bearing deposits

   558,734    0.62%    569,601    0.69% 

Short-term borrowings

   3,626    0.52%    2,872    0.51% 

Long-term debt

   3,217    3.87%    7,217    3.52% 

 

  

 

 

   

 

 

 

 Total interest-bearing liabilities

   565,577    0.64%    579,690    0.72% 

 

  

 

 

   

 

 

 

Net interest income and margin(tax-equivalent)

   $      19,156    3.26%    $      17,957    3.05% 

 

  

 

 

   

 

 

 

RESULTS OF OPERATIONS

 

Average Balance Sheet and Interest Rates

 

 

Six months ended June 30,

 

 

2020

 

2019

 

 

Average

Yield/

 

Average

Yield/

(Dollars in thousands)

 

Balance

Rate

 

Balance

Rate

Loans and loans held for sale

 

$

461,245

4.75%

 

$

476,063

4.87%

Securities - taxable

 

 

211,503

2.06%

 

 

173,528

2.32%

Securities - tax-exempt

 

 

62,822

3.76%

 

 

68,386

4.08%

 

Total securities

 

 

274,325

2.45%

 

 

241,914

2.82%

Federal funds sold

 

 

30,716

0.71%

 

 

19,198

2.36%

Interest bearing bank deposits

 

 

50,365

0.79%

 

 

36,683

2.41%

 

Total interest-earning assets

 

 

816,651

3.58%

 

 

773,858

4.05%

Deposits:

 

 

 

 

 

 

 

 

 

NOW

 

 

151,785

0.43%

 

 

134,242

0.54%

 

Savings and money market

 

 

226,240

0.46%

 

 

215,892

0.41%

 

Time Deposits

 

 

166,685

1.42%

 

 

173,423

1.43%

 

Total interest-bearing deposits

 

 

544,710

0.75%

 

 

523,557

0.78%

Short-term borrowings

 

 

1,394

0.50%

 

 

1,615

0.74%

 

Total interest-bearing liabilities

 

 

546,104

0.75%

 

 

525,172

0.78%

Net interest income and margin (tax-equivalent)

 

$

12,529

3.09%

 

$

13,508

3.52%

Net Interest Income and Margin

Net interest income(tax-equivalent) was $19.2$12.5 million for the first ninesix months of 20172020 compared to $18.0$13.5 million for the first ninesix months of 2016.2019. This increasedecrease was primarily due to an increasea decline in the Company’s net interest income from securitiesavailable-for-sale as management reduced its investment in federal funds sold and interest bearing bank deposits and increased its investment securities as market yields improved. margin (tax-equivalent).

The Company also lowered its deposit costs and repaid higher-cost wholesale funding sources.

Thetax-equivalent yield on total interest-earning assets increaseddecreased by 1447 basis points to 3.58% in the first ninesix months of 20172020 compared to 4.05% in the first six months of 2019. This decrease was primarily due to the lower rate environment, including a 150 basis point reduction in the Fed Funds rate that occurred late in the first quarter of 2020 and changes in our asset mix from the first nine months of 2016. Increasessignificant short-term liquidity increase in yields on short-term assets, including federal funds sold and interest bearing bank deposits, due to recent increases in the Federal Reserve’s federal funds rate targets, were partially offset by declining loan yields resulting from pricing competition for quality loan opportunities in our markets and declining securities yields due to lower reinvestment rates for municipal bonds.customer deposits.

The cost of total interest-bearing liabilities decreased 8 basis points inwas 0.75% and 0.78%, for the first ninesix months of 2017 from the first nine months2020 and 2019, respectively.

34


Table of 2016 to 0.64%. The net decrease was largely a result of the continued shift in our funding mix, as we increased our lower-cost interest-bearing demand deposits (NOW accounts) and concurrently reduced our balances of higher-cost certificates of deposits and long-term debt.Contents

The Company continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations. The Company’s net interest margin could continue to experience pressure due to decliningreduced earning asset yields during this extended period of low interest rates,and increased competition for quality loan opportunities, and possible increases in our costs of funds and our variable rate assets, ifopportunities. Management anticipates the Federal Reserve continues its gradual increase in interest rates. Despite this challenging environment, we believe ourCompany’s net interest income shouldand margin will likely continue to increasedecrease in 20172020 compared to 2016 due2019 as the Company’s ability to shiftslower its deposit costs will likely continue to lag the current decrease in ourearning asset mix, and our belief that interest rates should, depending on competitive pressures, rise faster in our assets than our liabilities.

yields.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. The Company recorded a provision for loan losses of $0.1was $0.9 million for the first ninesix months of 2017,2020, compared to a negative $0.6 millionno provision for loan losses for the first ninesix months of 2016 due2019. The increase in the provision for loan losses was related to adverse changes in economic conditions driven by the payoffimpact of the nonperforming loan described below. Annualized net charge-offs as a percent of average loans were 0.02% for the first nine months of 2017 compared to annualized net recoveries as a percent of average loans of 0.27% for the first nine months of 2016. The Company recognized a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan during the first nine months of 2016.COVID-19 pandemic, including higher unemployment in our primary market area. The provision for loan losses is based upon various factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance for loan losses as a percentage of total loans was 1.04%1.14% at SeptemberJune 30, 2017,2020, compared to 1.08%0.95% at December 31, 2016.2019. At June 30, 2020, the Company’s allowance for loan losses was 1.24% of total loans, excluding PPP loans. While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise. Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industries) may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in significant increases in the provision for loan losses.

Noninterest Income

Noninterest Income

 

Quarter ended June 30,

 

Six months ended June 30,

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

Service charges on deposit accounts

$

126

 

$

176

 

$

298

 

$

360

Mortgage lending income

 

683

 

 

187

 

 

913

 

 

376

Bank-owned life insurance

 

108

 

 

107

 

 

506

 

 

217

Securities gains, net

 

81

 

 

8

 

 

87

 

 

13

Other

 

365

 

 

407

 

 

794

 

 

1,079

 

Total noninterest income

$

1,363

 

$

885

 

$

2,598

 

$

2,045

            Quarter ended September 30,                Nine months ended September 30,     
(Dollars in thousands)   

 

2017

   

 

2016

    

 

2017

   

 

2016

 

 

 

Service charges on deposit accounts

 $  191   $197  $  563   $588  

Mortgage lending income

   254    246    558    740  

Bank-owned life insurance

   112    114    329    339  

Securities gains, net

   49    148    51    148  

Other

   362    358    1,096    1,075  

 

 

Total noninterest income

 $          968   $        1,063  $          2,597   $        2,890  

 

 

ServiceThe decrease in service charges on deposit accounts decreased primarily due towas driven by a decline in insufficient funds charges, reflecting changes in customer behavior andconsumer spending patterns.activity as a result of the COVID-19 pandemic.

The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are netted against the commission expense associated with these originations. The Company’s normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the associated mortgage servicing rights (“MSRs”)MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing fee income is reported net of any related amortization expense.

MSRs are also evaluated for impairment on a quarterly basis. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.

The following table presents a breakdown of the Company’s mortgage lending income.

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Table of Contents

       Quarter ended September 30,          Nine months ended September 30,     
(Dollars in thousands)  2017   2016  2017   2016 

 

 

Origination income

    $            190   $            242    $            366   $            609  

Servicing fees, net

   64    24   191    152  

(Increase) decrease in MSR valuation allowance

   —      (20  1    (21) 

 

 

Total mortgage lending income

    $254   $246    $558   $740  

 

 

Mortgage lending income decreased in the first nine months of 2017, compared to the first nine months of 2016 due to a decrease in the volume of mortgage loans originated and sold.

 

Quarter ended June 30,

 

Six months ended June 30,

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

Origination income

$

684

 

$

102

 

$

847

 

$

188

Servicing fees, net

 

(1)

 

 

85

 

 

66

 

 

188

 

Total mortgage lending income

$

683

 

$

187

 

$

913

 

$

376

The Company is evaluating plans to increase its production capabilities; however, until such plans have been implemented, management expectsin mortgage lending income was primarily due to an increase in mortgage refinance activity. The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and volume will decrease comparedis primarily attributable to prior periods.

Securities gains, net consists of realized gainsthe origination and losses on the sale of securities. Gross realized gains were $49,000 and $51,000, respectively for the third quarter and first nine months of 2017, compared to $148,000 for the third quarter and first nine months of 2016.

Noninterest Expense

       Quarter ended September 30,          Nine months ended September 30,     
(Dollars in thousands)  2017   2016  2017  2016 

 

 

Salaries and benefits

    $        2,516   $        2,471    $        7,289  $            7,322  

Net occupancy and equipment

   385    389   1,117   1,107  

Professional fees

   276    220   760   625  

FDIC and other regulatory assessments

   79    76   257   320  

Other real estate owned, net

   4    (194  (5  (217) 

Other

   965    1,018   2,940   2,953  

 

 

Total noninterest expense

    $4,225   $3,980    $12,358  $12,110  

 

 

Salaries and benefits decreasednew mortgage loans. The increase in the first nine months of 2017, compared to the first nine months of 2016. A decrease in bonus incentive accrualsmortgage lending income was partially offset by routine annual increasesa decrease in salaries and wages.

Professionalservicing fees, net of related amortization expense as prepayment speeds increased in the first ninesix months of 2017, compared2020, resulting in increased amortization expense.

Income from bank-owned life insurance increased primarily due to $0.3 million in non-taxable death benefits received in the first ninesix months of 2016.2020. The increaseassets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies and death benefits received) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings on these policies are generally not taxable.

The decrease in other noninterest income was primarily due to increasesa $0.3 million pre-tax gain from an insurance recovery received in professional fees associated with our mortgage lending division.the first quarter of 2019.

Noninterest Expense

 

Quarter ended June 30,

 

Six months ended June 30,

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

Salaries and benefits

$

2,597

 

$

2,799

 

$

5,428

 

$

5,737

Net occupancy and equipment

 

920

 

 

381

 

 

1,517

 

 

765

Professional fees

 

389

 

 

275

 

 

647

 

 

503

Other

 

1,053

 

 

1,174

 

 

2,223

 

 

2,235

 

Total noninterest expense

$

4,959

 

$

4,629

 

$

9,815

 

$

9,240

The decrease in FDICsalaries and benefits expense was primarily due to lower incentive accruals and an increase in deferred costs related to the PPP loan program.

The increase in net occupancy and equipment expense was primarily due to various expenses related to the redevelopment of the Company’s headquarters in downtown Auburn. This amount includes revised depreciation estimates and other regulatory assessmentstemporary relocation costs. The Company expects it will incur additional expense in 2020 related to the redevelopment project.

Income Tax Expense

Income tax expense was $0.8 million and $1.2 million for the first six months of 2020 and 2019 reflecting an effective tax rate of 17.86% and 19.46%, respectively. This change was primarily due to a decrease in the Bank’s initial assessment rate during the third quarterlevel of 2016. In additionearnings before taxes relative to changes in the FDIC assessment rate formula for banks with less than $10 billion in assets, the initial assessment rate for all banks decreased effective July 1, 2016 due to the Deposit Insurance Fund’s reserve ratio exceeding 1.15% at June 30, 2016.

The increase in other real estate owned expense was primarily due to gains realized on the saletax-exempt sources of OREO in the third quarter and first nine months of 2016.

Income Tax Expense

Income tax expense was $2.4 million for the first nine months of 2017 and $2.3 million for the first nine months of 2016.income. The Company’s income tax expense for the first nine months of 2017 and 2016 reflects an effective income tax rate of 28.24% and 27.50%, respectively. This increase inis principally impacted by tax-exempt earnings from the effective tax rate is primarily due to a decrease in tax preference items such as income fromCompany’s investments in municipal securities and bank-owned life insurance.

BALANCE SHEET ANALYSIS

Securities

Securities

Securities available-for-sale were $265.2$302.2 million at SeptemberJune 30, 2017, an increase of $21.6 million, or 9%,2020 compared to $243.6$235.9 million at December 31, 2016.2019. This increase reflects an increase in the amortized cost basis of securitiesavailable-for-sale of $20.3$59.2 million, and an increase of $7.1 million in the fair value of securitiesavailable-for-sale of $1.3 million. available-for-sale. The increase in the amortized cost basis of securitiesavailable-for-sale was primarily attributable to management increasingallocating more funding to the Company’s investment securities as market yields improvedportfolio following the significant increase in early 2017.customer deposits. The increase in the fair value of securities was primarily due to a decrease in long-term interest rates. The average annualizedtax-equivalent yields earned on total securities were 2.92%2.45% in 20172020 and 3.06%2.82% in 2016.2019.

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Table of Contents

Loans

Loans

 

2020

 

2019

 

Second

 

First

 

Fourth

 

Third

 

Second

(In thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Commercial and industrial

$

87,754

 

56,447

 

56,782

 

52,288

 

54,307

Construction and land development

 

32,967

 

32,302

 

32,841

 

41,599

 

45,395

Commercial real estate

 

250,588

 

256,099

 

270,318

 

267,346

 

268,500

Residential real estate

 

85,825

 

91,010

 

92,575

 

95,215

 

99,292

Consumer installment

 

8,631

 

8,424

 

8,866

 

9,148

 

9,091

 

Total loans

 

465,765

 

444,282

 

461,382

 

465,596

 

476,585

Less: unearned income

 

(1,491)

 

(414)

 

(481)

 

(488)

 

(524)

 

Loans, net of unearned income

$

464,274

 

443,868

 

460,901

 

465,108

 

476,061

      2017  2016 
      

 

Third

  

 

Second

  

 

First

  

 

Fourth

  

 

Third

 
(In thousands)     

      Quarter      

  

      Quarter      

  

      Quarter      

  

      Quarter      

  

      Quarter      

 

 

 

Commercial and industrial

  $   50,101   50,974   50,228   49,850   50,881 

Construction and land development

     47,455   46,386   45,098   41,650   44,004 

Commercial real estate

     232,380   220,863   218,739   220,439   211,558 

Residential real estate

     110,159   110,288   108,096   110,855   112,303 

Consumer installment

     9,877   9,409   9,032   8,712   8,996 

 

 

 Total loans

     449,972   437,920   431,193   431,506   427,742 

Less: unearned income

     (594  (633  (640  (560  (539

 

 

 Loans, net of unearned income

  $   449,378   437,287   430,553   430,946   427,203 

 

 

Total loans, net of unearned income, were $449.4$464.3 million at SeptemberJune 30, 2017, compared to $430.92020, a increase of $3.4 million, or 1%, from $460.9 million at December 31, 2016. The increase2019. Excluding PPP loans, total loans net of $18.5unearned income, were $428.9 million, a decrease of $32.0 million, or 4%7% from December 31, 2019. This decrease was primarily due to growtha decrease in commercial real estate loans and residential real estate loans of $19.7 million and $6.8 million, respectively, as lower rates increased refinance activity and payoffs for multi-family residential and consumer mortgage loans. Four loan categories represented the majority of the loan portfolio at SeptemberJune 30, 2017:2020: commercial real estate (53%(54%), residential real estate (25%(18%), construction and land development (11%(7%) and commercial and industrial (11%(19%). Approximately 18%20% of the Company’s commercial real estate loans were classified as owner-occupied at SeptemberJune 30, 2017.2020.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $12.5$10.6 million, or 3%2% of total loans, at SeptemberJune 30, 2017,2020, compared to $13.7$10.8 million, or 3%2% of total loans, at December 31, 2016.2019. For residential real estate mortgage loans with a consumer purpose, $2.0 millionthe company had no loans that required interest-only payments at SeptemberJune 30, 2017,2020, compared to $1.4$0.8 million at December 31, 2016.2019. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.

The average yield earned on loans and loans held for sale was 4.70% in the first nine months of 2017 and 4.75% in the first ninesix months of 2016.2020 and 4.87% in the first six months of 2019.

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including the COVID-19 pandemic’s effects, on our borrowers’ cash flows, real estate market sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values ornon-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks through itsloan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately $18.6$19.9 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $16.8$17.9 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At SeptemberJune 30, 2017,2020, the Bank had one loan relationship that exceeded our internal limit.

no relationships exceeding these limits.

We periodically analyze our commercial and industrial and commercial real estate loan portfolioportfolios to determine if a concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Bank’s total risk-based capital at SeptemberJune 30, 20172020 (and related balances at December 31, 2016)2019).

       September 30,    December 31, 
(In thousands)      2017    2016 

 

 

Multi-family residential properties

  $             47,794   $             46,998 

Lessors of 1 to 4 family residential properties

   47,103    45,291 

Shopping centers

   41,118    40,925 

Office buildings

   24,708    22,366 

Hotel/motel

   22,691    19,312 

 

 

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Table of Contents

 

 

June 30,

 

 

December 31,

(In thousands)

 

2020

 

 

2019

Lessors of 1 to 4 family residential properties

$

44,858

 

$

43,652

Hotel/motel

 

43,183

 

 

43,719

Shopping centers

 

33,872

 

 

30,407

Multi-family residential properties

 

31,974

 

 

44,839

Office buildings

 

23,931

 

 

29,548

Supplemental COVID-19 Industry Exposure

We have identified certain commercial sectors with enhanced risk resulting from the impact of COVID-19. See table below for a summary of loans outstanding for these sectors at June 30, 2020.

 

 

Portfolio Segment

 

 

 

 

(Dollars in thousands)

 

Commercial and industrial

Construction and land development

Commercial real estate

 

Total

% of Total Loans

June 30, 2020:

 

 

 

 

 

 

 

 

Hotel/motel

$

1,566

8,536

43,183

$

52,472

11

%

Shopping centers

 

19

33,872

 

33,891

7

 

Retail, excluding shopping centers

 

428

161

17,725

 

18,314

4

 

Restaurants

 

1,562

13,605

 

15,167

4

 

Total

$

3,575

8,697

108,385

$

119,844

26

%

In light of recent disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance provides that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Upon demonstrating the need for payment relief, the bank will work with qualified borrowers that were otherwise current before the pandemic to determine the most appropriate deferral option. For residential mortgage and consumer loans the borrower may elect to defer payments for up to three months. Interest continues to accrue and the amount due at maturity increases. Commercial real estate, commercial, and small business borrowers may elect to defer payments for up to three months or pay scheduled interest payments for a six-month period. The bank recognizes that a combination of the payment relief options may be prudent dependent on a borrower’s business type. As of June 30, 2020 we have granted loan payment deferrals or payments of interest only on loans totaling $112.7 million, or 24% of total loans. The table below provides information concerning the composition of these COVID-19 modifications through June 30, 2020.

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Table of Contents

COVID-19 Modifications through June 30, 2020

 

 

Modification Types

(Dollars in thousands)

 

Balance

% of Portfolio Modified

 

Interest Only Payment

 

P&I Payments Deferred

 

Commercial and industrial

$

2,741

3

%

21

%

79

%

Construction and land development

 

103

 

 

100

 

Commercial real estate

 

103,052

41

 

26

 

74

 

Residential real estate

 

6,663

8

 

2

 

98

 

Consumer installment

 

137

2

 

 

100

 

Total

$

112,696

24

%

24

%

76

%

 

 

 

 

 

 

 

 

 

COVID-19 Modifications within High Exposure Commercial Real Estate Segments

 

 

 

(Dollars in thousands)

 

 

 

 

Balance of Loans Modified

 

% of Total Segment Loans

 

Hotel/motel

 

 

 

$

42,074

 

79

%

Shopping centers

 

 

 

 

17,010

 

50

 

Retail, excluding shopping centers

 

 

 

 

5,989

 

32

 

Restaurants

 

 

 

 

10,997

 

60

 

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP. In addition, the Interagency Statement on COVID-19 Loan Modifications provides circumstances in which a loan modification is not subject to classification as a TDR if such loan is not eligible for modification under Section 4013.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $4.7$5.3 million at SeptemberJune 30, 20172020 compared to $4.6$4.4 million at December 31, 2016,2019, which management believed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.”

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the thirdsecond quarter of 20172020 and the previous four quarters is presented below.

��     2017   2016 
      

 

Third

  Second   First   Fourth   Third 
(Dollars in thousands)     

 

    Quarter    

      Quarter           Quarter           Quarter           Quarter     

 

 

Balance at beginning of period

  $   4,965    4,588     4,643     4,578     4,528  

Charge-offs:

           

Commercial and industrial

     (449)   —       —       (14)    —    

Residential real estate

     (30)   —       (78)    (20)    (7) 

Consumer installment

     (10)   (5)    (1)    (38)    (1) 

 

 

Total charge-offs

     (489)   (5)    (79)    (72)    (8) 

Recoveries

     194    282     24     22     58  

 

 

Net (charge-offs) recoveries

     (295)   277     (55)    (50)    50  

Provision for loan losses

     —      100     —       115     —    

 

 

Ending balance

  $   4,670    4,965     4,588     4,643     4,578  

 

 

as a % of loans

     1.04   1.14     1.07     1.08     1.07  

as a % of nonperforming loans

     161   220     198     196     284  

Net charge-offs (recoveries) as % of average loans (a)

     0.27   (0.25)    0.05     0.05     (0.05) 

 

 

 

 

2020

 

2019

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(Dollars in thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Balance at beginning of period

$

4,867

 

4,386

 

4,807

 

4,851

 

4,808

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

(3)

 

 

(236)

 

(128)

 

 

Residential real estate

 

 

 

(5)

 

(1)

 

 

Consumer installment

 

(28)

 

(5)

 

(20)

 

(2)

 

(1)

 

 

Total charge-offs

 

(31)

 

(5)

 

(261)

 

(131)

 

(1)

Recoveries

 

22

 

86

 

90

 

87

 

44

 

 

Net (charge-offs) recoveries

 

(9)

 

81

 

(171)

 

(44)

 

43

Provision for loan losses

 

450

 

400

 

(250)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

5,308

 

4,867

 

4,386

 

4,807

 

4,851

 

as a % of loans

 

1.14

%

1.10

 

0.95

 

1.03

 

1.02

 

as a % of nonperforming loans

 

783

%

4,196

 

2,345

 

2,763

 

3,703

Net charge-offs (recoveries) as % of average loans (a)

0.01

%

(0.07)

 

0.15

 

0.04

 

(0.04)

 

(a) Net charge-offs (recoveries) are annualized.

(a) Net charge-offs (recoveries) are annualized.

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Table of Contents

As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.04%1.14% at SeptemberJune 30, 2017,2020, compared to 1.08%0.95% at December 31, 2016.2019. At June 30, 2020, the Company’s allowance for loan losses was 1.24% of total loans, excluding PPP loans. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our quarterly allowance assessment, including COVID-19 effects, in their entirety either improve or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations.

Net charge-offs were $0.1 million, or 0.02% of average loans in the first nine months of 2017, compared to net recoveries of $0.9 million, or 0.27% of average loans in the first nine months of 2016 primarily due to a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan.

The Company’s recorded investment in loans considered impaired was $2.7 million at September 30, 2017 and $2.1 million at December 31, 2016, respectively, with corresponding valuation allowances (included in theOur allowance for loan losses)losses is expected to increase as the cumulative effects of $49 thousandthe COVID-19 pandemic affect our customers for a longer period and $31 thousand at each respective date.are more fully realized as a result.

Nonperforming Assets

The Company had $3.0$0.7 million and $0.2 million in nonperforming assets at SeptemberJune 30, 2017, compared to $2.5 million in nonperforming assets at2020 and December 31, 2016.2019, respectively.

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the thirdsecond quarter of 20172020 and the previous four quarters.

 

 

 

2020

 

2019

 

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(Dollars in thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Nonperforming assets:

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

$

678

 

116

 

187

 

174

 

131

Other real estate owned

 

 

99

 

 

 

303

Total nonperforming assets

$

678

 

215

 

187

 

174

 

434

 

as a % of loans and other real estate owned

 

0.15

%

0.05

 

0.04

 

0.04

 

0.09

 

as a % of total assets

 

0.07

%

0.03

 

0.02

 

0.02

 

0.05

Nonperforming loans as a % of total loans

 

0.15

%

0.03

 

0.04

 

0.04

 

0.03

 

 

 

 

 

 

 

 

 

 

 

 

     

2017

  

2016

(Dollars in thousands)    

 

Third

 

      Quarter      

      

Second

 

      Quarter      

  

First

 

      Quarter      

  

Fourth

 

      Quarter      

  

Third

 

      Quarter      

 

Nonperforming assets:

             

Nonaccrual loans

 $  2,902        2,255    2,318   2,370   1,614 

Other real estate owned

   103        103    152   152   37 

 

Total nonperforming assets

 $  3,005        2,358    2,470   2,522   1,651 

 

as a % of loans and other real estate owned

   0.67 %    0.54    0.57   0.59   0.39 

as a % of total assets

   0.36 %    0.28    0.29   0.30   0.19 

Nonperforming loans as a % of total loans

   0.65 %    0.52    0.54   0.55   0.38 

Accruing loans 90 days or more past due

 $  5        42    —     —     211 

 

The table below provides information concerning the composition of nonaccrual loans for the thirdsecond quarter of 20172020 and the previous four quarters.

 

 

 

2020

 

2019

 

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(In thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

218

 

 

 

 

Residential real estate

 

459

 

112

 

187

 

174

 

131

Consumer installment

 

1

 

4

 

 

 

 

Total nonaccrual loans

$

678

 

116

 

187

 

174

 

131

     

2017

   

2016

     

 

Third

        Second  First   Fourth  Third
(In thousands)    

 

      Quarter      

              Quarter              Quarter               Quarter              Quarter      

 

Nonaccrual loans:

               

Commercial and industrial

 

$

  33          34   35   37  38 

Construction and land development

   —            —     22   32  45 

Commercial real estate

   2,500          1,797   1,850   2,027  1,521 

Residential real estate

   353          406   391   252  10 

Consumer installment

   16          18   20   22  —   

 

Total nonaccrual loans

 $  2,902          2,255   2,318   2,370  1,614 

 

The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection. At SeptemberJune 30, 2017 and December 31, 2016, respectively,2020, the Company had $2.9 million and $2.4$0.7 million in loans on nonaccrual.nonaccrual status compared to $0.2 million at December 31, 2019.

At September 30, 2017 there were $5

The Company had $49 thousand in loans 90 days or more past due and still accruing at June 30, 2020 compared to noneno loans at December 31, 2016.

2019.

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Table of Contents

The table below provides information concerning the composition of other real estate ownedOREO for the thirdsecond quarter of 20172020 and the previous four quarters.

 

 

 

 

2020

 

2019

 

 

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(In thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

Residential

$

 

99

 

 

 

303

 

 

Total other real estate owned

$

 

99

 

 

 

303

     2017   2016 
     

 

Third

   Second   First   Fourth   Third 
(In thousands)    

 

    Quarter    

       Quarter           Quarter           Quarter           Quarter     

 

 

Other real estate owned:

           

Commercial:

           

Developed lots

 $   —      —      37    37    —    

Residential

    103    103    115    115    37  

 

 

Total other real estate owned

 $   103    103    152    152    37  

 

 

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, Bank, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential problem loans, which are not included in nonperforming assets, amounted to $5.8$3.6 million, or 1.3%0.8% of total loans at SeptemberJune 30, 2017, compared to $5.82020, and $4.4 million, or 1.4%1.0% of total loans at December 31, 2016.2019.

The table below provides information concerning the composition of potential problem loans for the thirdsecond quarter of 20172020 and the previous four quarters.

 

2020

 

2019

 

Second

 

First

 

Fourth

 

Third

 

Second

(In thousands)

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Potential problem loans:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

211

 

246

 

266

 

500

 

590

Construction and land development

 

568

 

910

 

1,043

 

660

 

681

Commercial real estate

 

165

 

170

 

99

 

102

 

105

Residential real estate

 

2,645

 

2,913

 

2,899

 

3,460

 

3,621

Consumer installment

 

55

 

63

 

64

 

45

 

51

 

Total potential problem loans

$

3,644

 

4,302

 

4,371

 

4,767

 

5,048

     2017   2016 
     

 

Third

   Second   First   Fourth   Third 
(In thousands)    

 

    Quarter    

       Quarter           Quarter           Quarter           Quarter     

 

 

Potential problem loans:

           

Commercial and industrial

 

$

   130    609    210    233    356  

Construction and land development

    273    286    298    340    352  

Commercial real estate

    767    1,528    795    854    1,184  

Residential real estate

    4,524    4,416    4,285    4,326    4,423  

Consumer installment

    96    97    99    90    89  

 

 

Total potential problem loans

 $   5,790    6,936    5,687    5,843    6,404  

 

 

At SeptemberJune 30, 2017, approximately $0.8 million, or 14% of total2020 the Company had no potential problem loans that were past due at least 30 days, but less than 90 days.

The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than 90 days, for the thirdsecond quarter of 20172020 and the previous four quarters.quarters

   2017   2016 

 

 

2020

 

2019

   

 

Third

   Second   First   Fourth   Third 

 

Second

 

First

 

Fourth

 

Third

 

Second

(In thousands)   

 

    Quarter    

       Quarter           Quarter           Quarter           Quarter     

(In thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Performing loans past due 30 to 89 days:

           

Performing loans past due 30 to 89 days:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

   64    195    1    66     

Commercial and industrial

$

83

 

4

 

24

 

53

 

109

Construction and land development

    175    2    3    395    —    

Construction and land development

 

 

8

 

456

 

449

 

351

Commercial real estate

    —      748    —      242    —    

Commercial real estate

 

168

 

 

 

 

Residential real estate

    513    496    1,186    1,301    369  

Residential real estate

 

620

 

922

 

1,608

 

94

 

214

Consumer installment

    33    25    17    38    40  

Consumer installment

 

8

 

19

 

64

 

21

 

8

 

Total

$

879

 

953

 

2,152

 

617

 

682

Total

 $   785    1,466    1,207    2,042    412  

 

Deposits

Total deposits were $732.6$829.8 million at SeptemberJune 30, 2017,2020, compared to $739.1$724.2 million at December 31, 2016. Decreases of $9.4 million in interest bearing2019. Noninterest-bearing deposits were partially offset by increases in noninterest bearing deposits of $2.9 million during the first nine months of 2017. Noninterest bearing deposits were $184.8$247.4 million, or 25.2%29.8% of total deposits, at SeptemberJune 30, 2017,2020, compared to $181.9$196.2 million, or 24.6%27.1% of total deposits at December 31, 2016.2019. These increases reflect deposits from customers who received PPP loans, the impact of government stimulus checks, delayed tax payment and less customer spending during the COVID-19 pandemic.

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The average rate paid on total interest-bearing deposits was 0.62%0.75% in the first ninesix months of 2017 and 0.69%2020 compared to 0.78% in the first ninesix months of 2016.2019.

Other Borrowings

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none outstanding at SeptemberJune 30, 2017,2020, and at December 31, 2016,2019, respectively. Securities sold under agreements to repurchase totaled $3.6 million and $3.4$2.0 million at SeptemberJune 30, 2017 and2020, compared to $1.1 million at December 31, 2016, respectively.2019.

The average rate paid on short-term borrowings was 0.52%0.50% in the first ninesix months of 20172020 compared to 0.51%0.74% in the first ninesix months of 2016.2019.

Long-term debt includes subordinated debentures related to trust preferred securities.

The Company had $3.2 million in junior subordinated debentures related to trust preferred securities outstandingno long-term debt at SeptemberJune 30, 20172020 and December 31, 2016. The junior subordinated debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.2019.

The average rate paid on long-term debt was 3.87% in the first nine months of 2017 and 3.52% in the first nine months of 2016.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’ equity was $86.5$105.3 million and $82.2$98.3 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. The increase from December 31, 20162019 was primarily driven by net earnings of $6.0$3.5 million and other comprehensive income due to the change in unrealized gains (losses) on securitiesavailable-for-sale,net-of-tax, net of $0.9tax of $5.3 million, which was partially offset by cash dividends paid of $2.5$1.8 million.

On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer iswas subject to a three yearphase-in period that began on January 1, 2016 and will bewas fullyphased-in on January 1, 2019 at 2.5%. The requiredphase-in capital conservation buffer during 2017 is 1.25%. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At SeptemberJune 30, 2017,2020, the ratiosBank’s ratio was sufficient to meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer. The new rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by making the limitations on capital distributions more gradual. The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters. The interim final rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and Bank were sufficient to meet the fullyphased-in conservation buffer.

its consolidated subsidiaries. The Company’sBank’s tier 1 leverage ratio was 10.70%10.62%, common equity tier 1 (“CET1”)CET1 risk-based capital ratio was 16.15%18.00%, tier 1 risk-based capital ratio was 16.71%18.00%, and total risk-based capital ratio was 17.62%19.04% at SeptemberJune 30, 2017.2020. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Company’sBank’s capital conservation buffer was 9.62%11.04% at SeptemberJune 30, 2017.2020.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.

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Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity (“EVE”) model.

Earnings simulation. Management believes that interest rate risk is best estimated by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, andoff-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

+/- 20% for a gradual change of 400 basis points
+/- 15% for a gradual change of 300 basis points
+/- 10% for a gradual change of 200 basis points
+/- 5% for a gradual change of 100 basis points

+/- 20% for a gradual change of 400 basis points

+/- 15% for a gradual change of 300 basis points

+/- 10% for a gradual change of 200 basis points

+/- 5% for a gradual change of 100 basis points

At SeptemberJune 30, 2017,2020, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

Economic Value of Equity. EVE measures the extent that the estimated economic values of our assets, liabilities, andoff-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, andoff-balance sheet items, which establishes a base case EVE. In contrast with our earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for there-pricing of all assets, liabilities, andoff-balance sheet items. Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

45% for an instantaneous change of +/- 400 basis points
35% for an instantaneous change of +/- 300 basis points
25% for an instantaneous change of +/- 200 basis points
15% for an instantaneous change of +/- 100 basis points

45% for an instantaneous change of +/- 400 basis points

35% for an instantaneous change of +/- 300 basis points

25% for an instantaneous change of +/- 200 basis points

15% for an instantaneous change of +/- 100 basis points

At SeptemberJune 30, 2017,2020, our EVE model indicated that we were in compliance with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Company’s established liquidity, loan, investment, borrowing, and capital policies.

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The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not designated as hedging instruments. At SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.

Liquidity Risk Management

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory restrictions.

The primary source of funding and the primary source of liquidity for the Company includehas been dividends received from the Bank, and secondarily proceeds fromBank. If needed, the possible issuance ofCompany could also issue common stock or other securities. Primary uses of funds by the Company include dividends paid to stockholders and stock repurchases, and interest payments on junior subordinated debentures issued by the Company in connection with trust preferred securities. The junior subordinated debentures are presented as long-term debt in the accompanying consolidated balance sheets and the related trust preferred securities are currently includible in Tier 1 Capital for regulatory capital purposes.repurchases.

Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities, sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At SeptemberJune 30, 2017,2020, the Bank had a remaining available line of credit with the FHLB of $246.8$256.5 million. At SeptemberJune 30, 2017,2020, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

Off-Balance Sheet Arrangements, Commitments, Contingencies and ContingenciesContractual Obligations

At SeptemberJune 30, 2017,2020, the Bank had outstanding standby letters of credit of $7.6$1.6 million and unfunded loan commitments outstanding of $71.3$70.5 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securitiesavailable-for-sale, or draw on its available credit facilities.

Mortgage lending activities

Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other matters.

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As of SeptemberJune 30, 2017,2020, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $314.7$271.4 million. Although these loans are generally sold on anon-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

In

The Company was not required to repurchase any loans during the first ninesix months of 2017,2020 as a result of the representation and warranty provisions contained in the Company’s sale agreements with Fannie Mae, the Company was required to repurchase three loans with an aggregate principal balance of $0.6 million, which were current as to principal and interest at the time of repurchase. At September 30, 2017, the Company had oneno pending repurchase request.or make-whole requests atJune 30, 2020.

We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected loan.

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of SeptemberJune 30, 2017,2020, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential mortgage loans sold to Fannie Mae to request forbearance to the servicer after affirming that such borrower is experiencing financial hardships during the COVID-19 emergency. Such forbearance will be up to 180 days, subject to up to a 180 day extension. During forbearance, no fees, penalties or interest shall be charged beyond those applicable if all contractual payments were fully and timely paid. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on similar procedures or related evictions or sales until May 17, 2020. The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

The Consolidated Financial Statementsconsolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with U.S. generally accepted accounting principlesGAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

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Table of Contents

CURRENT ACCOUNTING DEVELOPMENTS

The following Accounting Standards Updates (“Updates” or “ASUs”)ASUs have been issued by the FASB but are not yet effective.

ASU2014-09,Revenue from Contracts with Customers;

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;

ASU2015-14,Revenue from Contracts with Customers – Deferral of the Effective Date;

ASU2016-01,Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities;

ASU2016-02,Leases;

ASU2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;

ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments;and

ASU2016-18,Statement of Cash Flows (Topic 230): Restricted Cash.

Information about these pronouncements is described in more detail below.

ASU 2014-09,Revenue from Contracts with Customers (Topic 606) was developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The ASU’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issuedAccounting Standards Update 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The ASU may be adopted using either a modified retrospective method or a full retrospective method. The Company intends to adopt the ASU during the first quarter of 2018, as required, using a modified retrospective approach. The Company’s preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company’s consolidated financial statements as the majority of its revenue stream is generated from financial instruments which are not within the scope of this ASU. However, the Company is still evaluating the impact for other fee-based income. The FASB continues to release new accounting guidance related to the adoption of this ASU and the results of the Company’s materiality analysis may change based on conclusions reached as to the application of this new guidance.

ASU2016-01,Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Although the Company has not finalized its evaluation of the impact of adopting ASU No. 2016-01, adoption is not expected to have a material impact on the Company’s consolidated financial statements. Additionally, for purposes of disclosing the fair value of loans carried at amortized cost, we are evaluating our valuation methods to determine the necessary changes to conform to an “exit price” notion as required by the Standard. Accordingly, the fair value amounts disclosed for such loans may change upon adoption.

ASU2016-02,Leases, requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

ASU2016-13,Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial Instruments, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balanceoff-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, that are SEC filers, the new guidance iswas originally effective for annual and interim periods in fiscal years beginning after December 15, 2019, and early adoption2019. The Company has developed an implementation team that is permitted beginningfollowing a general timeline. The team has been working with an advisory consultant, with whom a third-party software license has been purchased. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in 2019.particular the level of the reserve for credit losses. The Company is currently evaluatingcontinuing to evaluate the extent of the potential impact thisand expects that portfolio composition and economic conditions at the time of adoption will be a factor. On October 16, 2019, the FASB approved a previously issued proposal granting smaller reporting companies a postponement of the required implementation date for ASU will have on its consolidated financial statements.

ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, provides guidance on eight specific cash flow issues where current GAAP is either unclear or does not include specific guidance on classification in the statement of cash flows. The new guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017.2016-13. The Company is currently evaluatingwill now be required to implement the impact this ASU will have on its consolidated financial statements.new standard in January 2023, with early adoption permitted in any period prior to that date.

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ASU2016-18,Statement of Cash Flows (Topic 230): Restricted cash,amends guidance on how the statement of cash flows presents the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments are applied using a retrospective transition method to each period transitioned. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

Table 1 – Explanation ofNon-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form10-Q includes certain designated net interest income amounts presented on atax-equivalent basis, anon-GAAP financial measure, including the presentation and calculation of the efficiency ratio.

The Company believes the presentation of net interest income on atax-equivalent basis provides comparability of net interest income from both taxable andtax-exempt sources and facilitates comparability within the industry. Although the Company believes thesenon-GAAP financial measures enhance investors’ understanding of its business and performance, thesenon-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of thesenon-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

 

2020

 

2019

  2017   2016 

 

Second

 

First

 

Fourth

 

Third

 

Second

  

 

Third

   Second   First   

 

Fourth

   Third 
(in thousands)  

 

      Quarter      

         Quarter               Quarter         

 

      Quarter      

         Quarter       

   

 

 

 

(In thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Net interest income (GAAP)

  $6,261    6,101    5,889    5,735    5,608 

$

6,070

 

6,212

 

6,280

 

6,567

 

6,597

Tax-equivalent adjustment

   304    301    300    316    316 

 

127

 

120

 

126

 

140

 

145

   

 

 

 

Net interest income(Tax-equivalent)

  $6,565    6,402    6,189    6,051    5,924 

$

6,197

 

6,332

 

6,406

 

6,707

 

6,742

   

 

 

 

 

 

 

 

 

 

 

 

 

 

              Nine months ended September 30, 

 

 

 

 

 

 

 

Six months ended June 30,

(In thousands)              2017   2016 

 

 

 

 

 

 

 

2020

 

2019

 

Net interest income (GAAP)

        $18,251    16,997 

 

 

 

 

 

 

$

12,282

 

13,217

Tax-equivalent adjustment

         905    960 

 

 

 

 

 

 

 

247

 

291

 

Net interest income(Tax-equivalent)

        $19,156    17,957 

 

 

 

 

 

 

$

12,529

 

13,508

 

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Table 2 - Selected Quarterly Financial Data

  2017   2016 

 

 

2020

 

2019

  Third Second   First   Fourth   Third 

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(Dollars in thousands, except per share amounts)  Quarter Quarter   Quarter   Quarter   Quarter 

(Dollars in thousands, except per share amounts)

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Results of Operations

         

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

Net interest income (a)

  $6,565  6,402    6,189    6,051    5,924 

Net interest income (a)

$

6,197

 

6,332

 

 

6,406

 

6,707

 

6,742

Less:tax-equivalent adjustment

   304  301    300    316    316 

Less: tax-equivalent adjustment

 

127

 

120

 

 

126

 

140

 

145

 

Net interest income (GAAP)

 

6,070

 

6,212

 

 

6,280

 

6,567

 

6,597

Net interest income (GAAP)

   6,261  6,101    5,889    5,735    5,608 

Noninterest income

   968  793    836    493    1,063 

Noninterest income

 

1,363

 

1,235

 

 

2,458

 

991

 

885

 

Total revenue

 

7,433

 

7,447

 

 

8,738

 

7,558

 

7,482

Total revenue

   7,229  6,894    6,725    6,228    6,671 

Provision for loan losses

   —    100    —      115    —   

Provision for loan losses

 

450

 

400

 

(250)

 

 

Noninterest expense

   4,225  4,015    4,118    3,238    3,980 

Noninterest expense

 

4,959

 

4,856

 

5,633

 

4,824

 

4,629

Income tax expense

   868  784    717    798    740 

Income tax expense

 

363

 

390

 

 

671

 

527

 

546

 

Net earnings

  $2,136  1,995    1,890    2,077    1,951 

Net earnings

$

1,661

 

1,801

 

 

2,684

 

2,207

 

2,307

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

         

Per share data:

 

 

 

 

 

 

 

 

 

 

Basic and diluted net earnings

  $0.59  0.55    0.52    0.57    0.54 

Basic and diluted net earnings

$

0.47

 

0.50

 

 

0.76

 

0.62

 

0.64

Cash dividends declared

   0.23  0.23    0.23    0.225    0.225 

Cash dividends declared

 

0.255

 

0.255

 

 

0.25

 

0.25

 

0.25

Weighted average shares outstanding:

         

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

         3,643,659        3,643,593          3,643,541          3,643,523          3,643,506 

Shares outstanding, at period end

   3,643,668  3,643,643    3,643,543    3,643,523    3,643,523 

Basic and diluted

 

3,566,166

 

3,566,146

 

 

3,566,146

 

3,568,287

 

3,577,409

Shares outstanding

Shares outstanding

 

3,566,176

 

3,566,146

 

 

3,566,146

 

3,566,146

 

3,571,828

Book value

  $23.75  23.36    22.88    22.55    23.34 

Book value

$

29.53

 

29.04

 

 

27.57

 

27.12

 

26.34

Common stock price

         

Common stock price

 

 

 

 

 

 

 

 

 

 

 

High

  $37.71  37.79    33.69    31.31    28.91 

Low

   34.82  32.65    30.75    27.45    27.45 

Period end:

   35.00  36.94    33.00    31.31    27.45 

To earnings ratio

   15.70x  16.94    15.28    13.98    12.48 

To book value

   147 158    144    139    118 

High

$

63.40

 

59.99

 

53.90

 

47.38

 

39.55

Low

 

36.81

 

24.11

 

40.00

 

32.33

 

31.06

Period end

 

57.09

 

41.98

 

53.00

 

47.38

 

33.50

 

To earnings ratio

 

24.29

x

16.66

 

19.49

 

18.08

 

13.19

 

To book value

 

193

%

145

 

192

 

175

 

127

Performance ratios:

         

Performance ratios:

 

 

 

 

 

 

 

 

 

 

Return on average equity

   9.87 9.44    9.09    9.61    9.06 

Return on average equity

 

6.34

%

7.24

 

10.86

 

9.25

 

10.00

Return on average assets

   1.03 0.96    0.90    1.00    0.92 

Return on average assets

 

0.74

%

0.86

 

1.30

 

1.06

 

1.12

Dividend payout ratio

   38.98 41.82    44.23    39.47    41.67 

Dividend payout ratio

 

54.26

%

51.00

 

32.89

 

40.32

 

39.06

Asset Quality:

         

Asset Quality:

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a % of:

         

Allowance for loan losses as a % of:

 

 

 

 

 

 

 

 

 

 

 

Loans

   1.04 1.14    1.07    1.08    1.07 

Nonperforming loans

   161 220    198    196    284 

Loans

 

1.14

%

1.10

 

 

0.95

 

1.03

 

1.02

Nonperforming loans

 

783

%

4,196

 

 

2,345

 

2,763

 

3,703

Nonperforming assets as a % of:

         

Nonperforming assets as a % of:

 

 

 

 

 

 

 

 

 

 

Loans and foreclosed properties

   0.67 0.54    0.57    0.59    0.39 

Total assets

   0.36 0.28    0.29    0.30    0.19 

Loans and other real estate owned

 

0.15

%

0.05

 

 

0.04

 

0.04

 

0.09

Total assets

 

0.07

%

0.03

 

 

0.02

 

0.02

 

0.05

Nonperforming loans as a % of total loans

   0.65 0.52    0.54    0.55    0.38 

Nonperforming loans as a % of total loans

 

0.15

%

0.03

 

 

0.04

 

0.04

 

0.03

Annualized net charge-offs (recoveries) as a % of average loans

   0.27 (0.25)    0.05    0.05    (0.05) 

Capital Adequacy:

         

Annualized net chargeoffs (recoveries) as a % of average loans

Annualized net chargeoffs (recoveries) as a % of average loans

 

0.01

%

(0.07)

 

 

0.15

 

0.04

 

(0.04)

Capital Adequacy: (c)

Capital Adequacy: (c)

 

 

 

 

 

 

 

 

 

 

 

CET 1 risk-based capital ratio

   16.15 16.22    16.24    16.44    15.74 

CET 1 risk-based capital ratio

 

18.00

%

17.77

 

 

17.28

 

17.06

 

16.26

Tier 1 risk-based capital ratio

   16.71 16.79    16.83    17.00    17.07 

Tier 1 risk-based capital ratio

 

18.00

%

17.77

 

 

17.28

 

17.06

 

16.26

Total risk-based capital ratio

   17.62 17.77    17.75    17.95    17.97 

Total risk-based capital ratio

 

19.04

%

18.72

 

 

18.12

 

17.96

 

17.14

Tier 1 leverage ratio

   10.70 10.56    10.40    10.27    10.36 

Tier 1 leverage ratio

 

10.62

%

11.17

 

 

11.23

 

11.22

 

11.14

Other financial data:

         

Other financial data:

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (a)

   3.32 3.28    3.19    3.05    2.94 

Net interest margin (a)

 

2.95

%

3.23

 

 

3.27

 

3.41

 

3.50

Effective income tax rate

   28.89 28.21    27.50    27.76    27.50 

Effective income tax rate

 

17.93

%

17.80

 

 

20.00

 

19.28

 

19.14

Efficiency ratio (b)

   56.09 55.80    58.62    49.48    56.96 

Efficiency ratio (b)

 

65.60

%

64.17

 

 

63.55

 

62.67

 

60.69

Selected average balances:

         

Selected average balances:

 

 

 

 

 

 

 

 

 

 

Securities

  $273,280  274,493    257,894    253,820    227,076 

Securities

$

291,333

 

257,317

 

249,106

 

247,114

 

243,784

Loans, net of unearned income

   443,639  436,645    429,784    429,451    429,201 

Loans, net of unearned income

 

466,971

 

451,210

 

469,579

 

472,747

 

473,281

Total assets

   831,097  831,187    835,679    834,291    851,409 

Total assets

 

893,720

 

838,725

 

827,684

 

829,761

 

821,706

Total deposits

   735,372  737,464    742,002    735,991    748,229 

Total deposits

 

782,381

 

734,047

 

723,557

 

729,608

 

725,263

Long-term debt

   3,217  3,217    3,217    4,260    7,217 

Total stockholders’ equity

   86,543  84,569    83,191    86,493    86,103 

Total stockholders’ equity

 

104,820

 

99,560

 

98,887

 

95,400

 

92,272

Selected period end balances:

         

Selected period end balances:

 

 

 

 

 

 

 

 

 

 

Securities

  $265,171  277,363    273,853    243,572    249,556 

Securities

$

302,193

 

280,435

 

235,902

 

251,152

 

248,813

Loans, net of unearned income

   449,378  437,287    430,553    430,946    427,203 

Loans, net of unearned income

 

464,274

 

443,868

 

460,901

 

465,108

 

476,061

Allowance for loan losses

   4,670  4,965    4,588    4,643    4,578 

Allowance for loan losses

 

5,308

 

4,867

 

4,386

 

4,807

 

4,851

Total assets

   828,546  836,311    842,781    831,943    851,672 

Total assets

 

942,887

 

856,475

 

828,570

 

824,963

 

839,178

Total deposits

   732,648  742,456    750,302    739,143    751,915 

Total deposits

 

829,810

 

746,785

 

724,152

 

723,071

 

740,501

Long-term debt

   3,217  3,217    3,217    3,217    7,217 

Total stockholders’ equity

   86,538  85,099    83,366    82,177    85,055 

Total stockholders’ equity

 

105,299

 

103,563

 

98,328

 

96,720

 

94,065

 

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

(a)Tax-equivalent. See “Table 1 - Explanation48


Table ofNon-GAAP Financial Measures.” Contents

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income andtax-equivalent net interest income.

Table 3 - Selected Financial Data

  

Nine months ended September 30,

 

 

 

 

Six months ended June 30,

(Dollars in thousands, except per share amounts)  2017 2016 

(Dollars in thousands, except per share amounts)

 

2020

 

2019

 

Results of Operations

   

Results of Operations

 

 

 

 

Net interest income (a)

  $19,156  17,957 

Net interest income (a)

$

12,529

 

13,508

Less:tax-equivalent adjustment

   905  960 

Less: tax-equivalent adjustment

 

247

 

291

 

Net interest income (GAAP)

 

12,282

 

13,217

Net interest income (GAAP)

   18,251  16,997 

Noninterest income

   2,597  2,890 

Noninterest income

 

2,598

 

2,045

 

Total revenue

 

14,880

 

15,262

Total revenue

   20,848  19,887 

Provision for loan losses

   100  (600

Provision for loan losses

 

850

 

Noninterest expense

   12,358  12,110 

Noninterest expense

 

9,815

 

9,240

Income tax expense

   2,369  2,304 

Income tax expense

 

753

 

1,172

 

Net earnings

  $6,021  6,073 

Net earnings

$

3,462

 

4,850

 

 

 

 

 

 

 

Per share data:

   

Per share data:

 

 

 

 

Basic and diluted net earnings

  $1.65  1.67 

Basic and diluted net earnings

$

0.97

 

1.35

Cash dividends declared

   0.69  0.675 

Cash dividends declared

 

0.51

 

0.50

Weighted average shares outstanding:

   

Weighted average shares outstanding:

 

 

 

 

Basic and diluted

         3,643,598        3,643,498 

Basic and diluted

 

3,566,156

 

3,595,972

Shares outstanding, at period end

   3,643,668  3,643,523 

Shares outstanding, at period end

 

3,566,176

 

3,571,828

Book value

  $23.75  23.34 

Book value

$

29.53

 

26.34

Common stock price

   

Common stock price

 

 

 

 

High

  $37.79  30.49 

Low

   30.75  24.56 

Period end

   35.00  27.45 

To earnings ratio

   15.70x  12.48 

To book value

   147 118 

High

$

63.40

 

39.55

Low

 

24.11

 

30.61

Period end

 

57.09

 

33.50

 

To earnings ratio

 

24.29

x

 

13.19

 

To book value

 

193

%

 

127

Performance ratios:

   

Performance ratios:

 

 

 

 

Return on average equity

   9.47 9.67 

Return on average equity

 

6.78

%

 

10.65

Return on average assets

   0.96 0.97 

Return on average assets

 

0.80

%

 

1.18

Dividend payout ratio

   41.82 40.42 

Dividend payout ratio

 

52.58

%

 

37.04

Asset Quality:

   

Asset Quality:

 

 

 

 

Allowance for loan losses as a % of:

   

Allowance for loan losses as a % of:

 

 

 

 

Loans

   1.04 1.07 

Nonperforming loans

   161 284 

Loans

 

1.14

%

 

1.02

Nonperforming loans

 

782.89

%

 

3,703.05

Nonperforming assets as a % of:

   

Nonperforming assets as a % of:

 

 

 

 

Loans and other real estate owned

   0.67 0.39 

Total assets

   0.36 0.19 

Loans and other real estate owned

 

0.15

%

 

0.09

Total assets

 

0.07

%

 

0.05

Nonperforming loans as a % of total loans

   0.65 0.38 

Nonperforming loans as a % of total loans

 

0.15

%

 

0.03

Annualized net charge-offs (recoveries) as a % of average loans

   0.02 (0.27) 

Capital Adequacy:

   

Annualized net recoveries as a % of average loans

Annualized net recoveries as a % of average loans

 

(0.03)

%

 

(0.03)

Capital Adequacy: (c)

Capital Adequacy: (c)

 

 

 

 

CET 1 risk-based capital ratio

   16.15 15.74 

CET 1 risk-based capital ratio

 

18.00

%

 

16.26

Tier 1 risk-based capital ratio

   16.71 17.07 

Tier 1 risk-based capital ratio

 

18.00

%

 

16.26

Total risk-based capital ratio

   17.62 17.97 

Total risk-based capital ratio

 

19.04

%

 

17.14

Tier 1 leverage ratio

   10.70 10.36 

Tier 1 leverage ratio

 

10.62

%

 

11.14

Other financial data:

   

Other financial data:

 

 

 

 

Net interest margin (a)

   3.26 3.05 

Net interest margin (a)

 

3.09

%

 

3.52

Effective income tax rate

   28.24 27.50 

Effective income tax rate

 

17.86

%

 

19.46

Efficiency ratio (b)

   56.81 58.09 

Efficiency ratio (b)

 

64.88

%

 

59.41

Selected average balances:

   

Selected average balances:

 

 

 

 

Securities

  $268,612  229,185 

Securities

$

274,325

 

241,914

Loans, net of unearned income

   436,740  431,213 

Loans, net of unearned income

 

459,091

 

475,297

Total assets

   832,637  834,721 

Total assets

 

866,222

 

824,409

Total deposits

   738,255  734,241 

Total deposits

 

646,899

 

728,881

Long-term debt

   3,217  7,217 

Total stockholders’ equity

   84,780  83,740 

Total stockholders’ equity

 

102,190

 

91,110

Selected period end balances:

   

Selected period end balances:

 

 

 

 

Securities

  $265,171  249,556 

Securities

$

302,193

 

248,813

Loans, net of unearned income

   449,378  427,203 

Loans, net of unearned income

 

464,274

 

476,061

Allowance for loan losses

   4,670  4,578 

Allowance for loan losses

 

5,308

 

4,851

Total assets

   828,546  851,672 

Total assets

 

942,887

 

839,178

Total deposits

   732,648  751,915 

Total deposits

 

829,810

 

740,501

Long-term debt

   3,217  7,217 

Total stockholders’ equity

   86,538  85,055 

Total stockholders’ equity

 

105,299

 

94,065

 

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.

(a)Tax-equivalent. See “Table 1 - Explanation49


Table ofNon-GAAP Financial Measures.” Contents

(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income andtax-equivalent net interest income.

Table 4 - Average Balances and Net Interest Income Analysis

 

Quarter ended June 30,

 

 

 

2020

 

 

 

 

 

2019

 

 

   Quarter ended September 30, 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

   

 

2017

   

 

2016

 

 

Average

 

Income/

 

Yield/

 

 

Average

 

Income/

 

Yield/

(Dollars in thousands)   

Average

 

Balance

   

Interest

 

Income/

 

Expense

   

Yield/

 

Rate

   

Average

 

Balance

   

Interest

 

Income/

 

Expense

   

Yield/

 

Rate

 

(Dollars in thousands)

 

Balance

 

Expense

 

Rate

 

 

Balance

 

Expense

 

Rate

   

 

 

    

 

 

 

Interest-earning assets:

              

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans and loans held for sale (1)

 $   444,893    $5,296    4.72%  $   430,896    $5,105    4.71% 

Loans and loans held for sale (1)

 

$

470,335

 

$

5,494

 

4.70%

 

$

474,089

 

$

5,763

 

4.88%

Securities - taxable

    202,690     1,071    2.10%     158,525     747    1.87% 

Securities - taxable

 

226,585

 

1,056

 

1.87%

 

175,492

 

985

 

2.25%

Securities -tax-exempt (2)

    70,590     894    5.02%     68,551     932    5.41% 

Securities - tax-exempt (2)

 

64,748

 

603

 

3.75%

 

68,292

 

689

 

4.05%

   

 

 

    

 

 

 

Total securities

 

291,333

 

1,659

 

2.29%

 

243,784

 

1,674

 

2.75%

Total securities

    273,280     1,965    2.85%     227,076     1,679    2.94% 

Federal funds sold

    29,937     94    1.25%     44,949     56    0.50% 

Federal funds sold

 

31,673

 

16

 

0.20%

 

17,016

 

99

 

2.33%

Interest bearing bank deposits

    35,615     121    1.35%     99,794     135    0.54% 

Interest bearing bank deposits

 

51,352

 

11

 

 

0.09%

 

36,691

 

212

 

2.32%

   

 

 

    

 

 

 

Total interest-earning assets

 

844,693

 

$

7,180

 

3.42%

 

771,580

 

$

7,748

 

4.03%

Total interest-earning assets

    783,725    $    7,476    3.78%     802,715    $    6,975    3.46% 

Cash and due from banks

    13,131          13,515      

Cash and due from banks

 

13,361

 

 

 

 

 

13,822

 

 

 

 

Other assets

    34,241          35,179      

Other assets

 

35,666

 

 

 

 

 

36,304

 

 

 

 

   

 

        

 

     

Total assets

 

$

893,720

 

 

 

 

 

$

821,706

 

 

 

 

Total assets

 $   831,097       $   851,409      

   

 

        

 

     

Interest-bearing liabilities:

              

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

              

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 $   125,512    $62    0.20%  $   121,501    $91    0.30% 

Savings and money market

    233,944     223    0.38%     243,024     240    0.39% 

Time deposits

    195,773     587    1.19%     210,751     653    1.23% 

   

 

 

    

 

 

 

NOW

 

$

154,225

 

$

138

 

0.36%

 

$

136,105

 

$

184

 

0.54%

Total interest-bearing deposits

    555,229     872    0.62%     575,276     984    0.68% 

Savings and money market

 

231,571

 

263

 

0.46%

 

211,521

 

217

 

0.41%

Time deposits

 

165,922

 

580

 

1.41%

 

169,702

 

603

 

1.43%

Total interest-bearing deposits

 

551,718

 

981

 

0.72%

 

517,328

 

1,004

 

0.78%

Short-term borrowings

    3,582     5    0.55%     2,943     4    0.54% 

Short-term borrowings

 

1,428

 

2

 

0.50%

 

1,260

 

2

 

0.64%

Long-term debt

    3,217     34    4.19%     7,217     63    3.47% 

   

 

 

    

 

 

 

Total interest-bearing liabilities

 

553,146

 

$

983

 

0.71%

 

518,588

 

$

1,006

 

0.78%

Total interest-bearing liabilities

    562,028    $911    0.64%     585,436    $1,051    0.71% 

Noninterest-bearing deposits

    180,144          172,953      

Noninterest-bearing deposits

 

230,663

 

 

 

 

 

207,935

 

 

 

 

Other liabilities

    2,382          6,917      

Other liabilities

 

5,091

 

 

 

 

 

2,911

 

 

 

 

Stockholders’ equity

    86,543          86,103      

   

 

        

 

     

Total liabilities and stockholders’ equity

 $   831,097       $   851,409      

Stockholders' equity

Stockholders' equity

 

104,820

 

 

 

 

 

92,272

 

 

 

 

   

 

        

 

     

Total liabilities and stockholders' equity

 

$

893,720

 

 

 

 

 

$

821,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin(tax-equivalent)

     $6,565    3.32%      $5,924    2.94% 

Net interest income and margin (tax-equivalent)

 

 

 

$

6,197

 

2.95%

 

 

 

$

6,742

 

3.50%

     

 

 

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income

tax rate of 21%.

(1) Average loan balances are shown net50


Table of unearned income and loans on nonaccrual status have been included in the computation of average balances.Contents

(2) Yields ontax-exempt securities have been computed on atax-equivalent basis using an income tax rate of 34%.

Table 5 - Average Balances and Net Interest Income Analysis

   Nine months ended September 30, 

 

 

 

Six months ended June 30,

   

 

2017

   

 

2016

 

 

 

 

 

 

 

2020

 

 

 

 

 

2019

 

 

       

 

Interest

           Interest     

 

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

   Average   

 

Income/

   Yield/   Average   Income/   Yield/ 

 

 

 

 

Average

 

Income/

 

Yield/

 

 

Average

 

Income/

 

Yield/

(Dollars in thousands)   Balance   

 

Expense

   Rate   Balance   Expense   Rate 

(Dollars in thousands)

 

 

Balance

 

Expense

 

Rate

 

 

Balance

 

Expense

 

Rate

   

 

 

    

 

 

 

Interest-earning assets:

              

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans and loans held for sale (1)

 $   437,707   $15,398     4.70%  $   432,628   $15,373     4.75% 

Loans and loans held for sale (1)

 

$

461,245

 

$

10,906

 

4.75%

 

$

476,063

 

$

11,490

 

4.87%

Securities - taxable

    198,842        3,204     2.15%     161,484        2,420     2.00% 

Securities - taxable

 

211,503

 

2,167

 

2.06%

 

173,528

 

2,000

 

2.32%

Securities -tax-exempt (2)

    69,770    2,663     5.10%     67,701    2,824     5.57% 

Securities - tax-exempt (2)

 

62,822

 

1,176

 

3.76%

 

68,386

 

1,384

 

4.08%

   

 

 

    

 

 

 

Total securities

 

274,325

 

3,343

 

2.45%

 

241,914

 

3,384

 

2.82%

Total securities

    268,612    5,867     2.92%     229,185    5,244     3.06% 

Federal funds sold

    33,430    250     1.00%     53,420    199     0.50% 

Federal funds sold

 

30,716

 

109

 

0.71%

 

19,198

 

225

 

2.36%

Interest bearing bank deposits

    45,310    348     1.03%     71,384    274     0.51% 

Interest bearing bank deposits

 

50,365

 

197

 

0.79%

 

36,683

 

438

 

2.41%

   

 

 

    

 

 

 

Total interest-earning assets

 

816,651

 

$

14,555

 

3.58%

 

773,858

 

$

15,537

 

4.05%

Total interest-earning assets

    785,059   $21,863     3.72%     786,617   $21,090    3.58% 

Cash and due from banks

    13,399         13,085     

Cash and due from banks

 

13,773

 

 

 

 

 

14,220

 

 

 

 

Other assets

    34,179         35,019     

Other assets

 

35,798

 

 

 

 

 

36,331

 

 

 

 

   

 

        

 

     

Total assets

 

$

866,222

 

 

 

 

 

$

824,409

 

 

 

 

Total assets

 $   832,637      $   834,721     

   

 

        

 

     

Interest-bearing liabilities:

              

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

              

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 $   125,968   $179     0.19%  $   123,049   $282     0.31% 

Savings and money market

    232,076    644     0.37%     232,893    671     0.38% 

Time deposits

    200,690    1,777     1.18%     213,659    1,979     1.24% 

    

 

 

 

NOW

 

$

151,785

 

$

326

 

0.43%

 

$

134,242

 

$

359

 

0.54%

Total interest-bearing deposits

    558,734    2,600     0.62%     569,601    2,932     0.69% 

Savings and money market

 

226,240

 

516

 

0.46%

 

215,892

 

440

 

0.41%

Time deposits

 

166,685

 

1,180

 

1.42%

 

173,423

 

1,226

 

1.43%

Total interest-bearing deposits

 

544,710

 

2,022

 

0.75%

 

523,557

 

2,025

 

0.78%

Short-term borrowings

    3,626    14     0.52%     2,872    11     0.51% 

Short-term borrowings

 

1,394

 

4

 

0.50%

 

1,615

 

4

 

0.74%

Long-term debt

    3,217    93     3.87%     7,217    190     3.52% 

   

 

 

    

 

 

 

Total interest-bearing liabilities

 

546,104

 

$

2,026

 

0.75%

 

525,172

 

$

2,029

 

0.78%

Total interest-bearing liabilities

    565,577   $2,707     0.64%     579,690   $    3,133     0.72% 

Noninterest-bearing deposits

    179,521         164,640     

Noninterest-bearing deposits

 

213,505

 

 

 

 

 

205,324

 

 

 

 

Other liabilities

    2,759         6,651     

Other liabilities

 

4,423

 

 

 

 

 

2,803

 

 

 

 

Stockholders’ equity

    84,780         83,740     

   

 

        

 

     

Total liabilities and stockholders’ equity

 $   832,637      $   834,721     

Stockholders' equity

Stockholders' equity

 

102,190

 

 

 

 

 

91,110

 

 

 

 

   

 

        

 

     

Total liabilities and stockholders' equity

 

$

866,222

 

 

 

 

 

$

824,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin(tax-equivalent)

     $19,156     3.26%      $17,957     3.05% 

Net interest income and margin (tax-equivalent)

 

 

 

$

12,529

 

3.09%

 

 

 

$

13,508

 

3.52%

     

 

 

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income

tax rate of 21%.

(1) Average loan balances are shown net51


Table of unearned income and loans on nonaccrual status have been included in the computation of average balances.Contents

(2) Yields ontax-exempt securities have been computed on atax-equivalent basis using an income tax rate of 34%.

Table 6 - Loan Portfolio Composition

      2017   2016 

 

 

2020

 

2019

      

 

Third

   Second   First   Fourth   Third 

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(In thousands)      

 

Quarter

   Quarter   Quarter   Quarter   Quarter 

(In thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Commercial and industrial

  $    50,101     50,974     50,228     49,850     50,881  

Commercial and industrial

$

87,754

 

56,447

 

56,782

 

52,288

 

54,307

Construction and land development

     47,455     46,386     45,098     41,650     44,004  

Construction and land development

 

32,967

 

32,302

 

32,841

 

41,599

 

45,395

Commercial real estate

     232,380     220,863     218,739     220,439     211,558  

Commercial real estate

 

250,588

 

256,099

 

270,318

 

267,346

 

268,500

Residential real estate

     110,159     110,288     108,096     110,855     112,303  

Residential real estate

 

85,825

 

91,010

 

92,575

 

95,215

 

99,292

Consumer installment

     9,877     9,409     9,032     8,712     8,996  

Consumer installment

 

8,631

 

8,424

 

8,866

 

9,148

 

9,091

 

Total loans

 

465,765

 

444,282

 

461,382

 

465,596

 

476,585

Total loans

     449,972     437,920     431,193     431,506     427,742  

Less: unearned income

     (594)    (633)    (640)    (560)    (539) 

Less: unearned income

 

(1,491)

 

(414)

 

(481)

 

(488)

 

(524)

 

Loans, net of unearned income

 

464,274

 

443,868

 

460,901

 

465,108

 

476,061

Loans, net of unearned income

     449,378     437,287     430,553     430,946     427,203  

Less: allowance for loan losses

     (4,670)    (4,965)    (4,523)    (4,643)    (4,578) 

Less: allowance for loan losses

 

(5,308)

 

(4,867)

 

(4,386)

 

(4,807)

 

(4,851)

 

Loans, net

$

458,966

 

439,001

 

456,515

 

460,301

 

471,210

Loans, net

  $          444,708         432,322         426,030         426,303         422,625  

 

52


Table of Contents

Table 7 - Allowance for Loan Losses and Nonperforming Assets

 

 

 

2020

 

2019

 

 

 

Second

 

First

 

Fourth

 

Third

 

Second

(Dollars in thousands)

(Dollars in thousands)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

Allowance for loan losses:

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

Balance at beginning of period

$

4,867

 

4,386

 

4,807

 

4,851

 

4,808

Charge-offs:

Charge-offs:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

(3)

 

 

(236)

 

(128)

 

   2017      2016 

Residential real estate

 

 

 

(5)

 

(1)

 

                      

Consumer installment

 

(28)

 

(5)

 

(20)

 

(2)

 

(1)

   Third Second   First      Fourth   Third 

Total charge-offs

 

(31)

 

(5)

 

(261)

 

(131)

 

(1)

(Dollars in thousands)   

 

    Quarter    

     Quarter           Quarter              Quarter           Quarter     

 

Allowance for loan losses:

            

Balance at beginning of period

  $ 4,965   4,588     4,643       4,578     4,528  

Charge-offs:

            

Commercial and industrial

   (449)   —      —        (14)    —   

Residential real estate

   (30)   —      (78)      (20)    (7) 

Consumer installment

   (10)  (5)    (1)      (38)    (1) 

 

Total charge-offs

   (489)  (5)    (79)      (72)    (8) 

Recoveries

   194   282     24       22     58  

Recoveries

 

22

 

86

 

90

 

87

 

44

 

Net (charge-offs) recoveries

 

(9)

 

81

 

(171)

 

(44)

 

43

Net (charge-offs) recoveries

   (295)  277     (55)      (50)    50  

Provision for loan losses

    —    100     —        115    —   

Provision for loan losses

 

450

 

400

 

(250)

 

 

 

Ending balance

  $ 4,670           4,965     4,588               4,643             4,578  

Ending balance

$

5,308

 

4,867

 

4,386

 

4,807

 

4,851

 

as a % of loans

 

1.14

%

1.10

 

0.95

 

1.03

 

1.02

as a % of loans

   1.04  1.14     1.07       1.08     1.07  

as a % of nonperforming loans

   161  220     198       196     284  

as a % of nonperforming loans

 

1.24

%

n/a

 

n/a

 

n/a

 

n/a

as a % of nonperforming loans

 

783

%

4,196

 

2,345

 

2,763

 

3,703

Net charge-offs (recoveries) as % of avg. loans (a)

   0.27  (0.25)     0.05       0.05     (0.05) 

Net charge-offs (recoveries) as % of avg. loans (a)

0.01

%

(0.07)

 

0.15

 

0.04

 

(0.04)

 

Nonperforming assets:

            

Nonperforming assets:

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

  

$

 2,902   2,255     2,318       2,370     1,614  

Nonaccrual loans

$

678

 

116

 

187

 

174

 

131

Other real estate owned

   103   103     152       152     37  

Other real estate owned

 

 

99

 

 

 

303

 

Total nonperforming assets

  

$

 3,005   2,358     2,470       2,522     1,651  

Total nonperforming assets

$

678

 

215

 

187

 

174

 

434

 

as a % of loans and other real estate owned

 

0.15

%

0.05

 

0.04

 

0.04

 

0.09

as a % of loans and foreclosed properties

   0.67  0.54     0.57       0.59     0.39  

as a % of total assets

   0.36  0.28     0.29       0.30     0.19  

as a % of total assets

 

0.07

%

0.03

 

0.02

 

0.02

 

0.05

Nonperforming loans as a % of total loans

   0.65  0.52     0.54       0.55     0.38  

Nonperforming loans as a % of total loans

 

0.15

%

0.03

 

0.04

 

0.04

 

0.03

Accruing loans 90 days or more past due

  

$

   42     —         —       211  

Accruing loans 90 days or more past due

$

49

 

 

 

94

 

 

(a) Net (charge-offs) recoveries are annualized.

(a) Net (charge-offs) recoveries are annualized.

(a) Net charge-offs (recoveries) are annualized.53


Table of Contents

Table 8 - Allocation of Allowance for Loan Losses

 2017 2016 

 

 

 

 

2020

 

 

2019

 Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter 

 

 

 

 

Second Quarter

 

 

First Quarter

 

 

Fourth Quarter

 

 

Third Quarter

 

 

Second Quarter

(Dollars in thousands) Amount   %* Amount   %* Amount   %* Amount %* Amount   %* 

(Dollars in thousands)

 

 

Amount

%*

 

Amount

%*

 

Amount

%*

 

Amount

%*

 

Amount

%*

Commercial and industrial

Commercial and industrial

 

$

679

18.8

 

$

675

12.7

 

$

577

12.3

 

$

685

11.2

 

$

726

11.4

Construction and land

Construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

development

 

 

613

7.1

 

582

7.3

 

569

7.1

 

730

8.9

 

781

9.5

Commercial and industrial

 $ 504    11.1   $ 677    11.6   $ 524    11.6   $ 540  11.6   $ 515    11.9  

Construction and land development

  851    10.5    874    10.6    845    10.5    812  9.7    673    10.3  

Commercial real estate

  2,061    51.7    2,121    50.5    2,004    50.7    2,071  51.0    2,232    49.4  

Commercial real estate

 

 

2,915

53.8

 

2,596

57.6

 

2,289

58.6

 

2,354

57.4

 

2,287

56.4

Residential real estate

  1,077    24.5    1,119    25.2    1,064    25.1    1,107  25.7    1,020    26.3  

Residential real estate

 

 

954

18.4

 

877

20.5

 

813

20.1

 

890

20.5

 

904

20.8

Consumer installment

  177    2.2    174    2.1    151    2.1    113  2.0    138    2.1  

Consumer installment

 

 

147

1.9

 

137

1.9

 

138

1.9

 

148

2.0

 

153

1.9

 

Total allowance for loan losses

 $   4,670    $   4,965    $   4,588    $ 4,643   $   4,578   

Total allowance for loan losses

 

$

5,308

 

 

$

4,867

 

 

$

4,386

 

 

$

4,807

 

 

$

4,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Loan balance in each category expressed as a percentage of total loans.

* Loan balance in each category expressed as a percentage of total loans.

* Loan balance in each category expressed as a percentage54


Table of total loans.

Contents

Table 9 - CDs and Other Time Deposits of $100,000 or More

(Dollars in thousands)September 30, 2017

Maturity of:

3 months or less

$              22,063 

Over 3 months through 6 months

7,205 

Over 6 months through 12 months

25,002 

Over 12 months

69,330 

Total CDs and other time deposits of $100,000 or more

$123,600 

(Dollars in thousands)

June 30, 2020

Maturity of:

 

 

 

3 months or less

 

$

21,602

Over 3 months through 6 months

 

 

23,998

Over 6 months through 12 months

 

 

10,308

Over 12 months

 

 

51,463

 

Total CDs and other time deposits of $100,000 or more

 

$

107,371

55


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK MANAGEMENT” and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the Company files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form10-K for the year ended December 31, 2016.2019.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report and the risk factors discussed below, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2019, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form10-K and below are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.

The COVID-19 pandemic is expected to continue to adversely affect our business, financial condition and results of operations. The ultimate effects of the pandemic on our business, financial condition and results of operations will depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of governmental actions in response to the pandemic.

The ongoing COVID-19 national health emergency has significantly disrupted the United States and international economies and financial markets. We expect that the COVID-19 pandemic and its effects will continue to adversely affect our business, financial condition and results of operations in future periods. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. The State of Alabama and many other states have taken preventative and protective actions, such as imposing a statewide mask mandate, restrictions on travel, business operations, public gatherings, social distancing, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of non-essential businesses. Though certain of these measures have been relaxed or eliminated, recent increases in reported cases could cause these measures to be re-established.

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The travel, hospitality and food and beverage industries, restaurants and auto manufacturers, and their suppliers have been severely affected. A significant number of layoffs, furloughs of employees, as well as mandated remote work have occurred in these and other industries, including government offices, schools and universities. Auburn University is holding virtual classes only from March 16, 2020 through the summer session. Auburn University announced its guidelines for the fall semester of 2020, which will involve both remote and in person instructions as well as social distancing measures. The economic impact of these measures is not presently known. Hyundai’s Montgomery and Kia’s West Point, Georgia plants were closed for a portion of the first quarter of 2020, but began a phased reopen in the second quarter of 2020 in response to COVID-19.

The ultimate effects of the COVID-19 pandemic on the economy, generally, our markets, and on us cannot be predicted. The timing and effects of the COVID-19 pandemic on our business, results of operations and financial condition may include, among various other consequences, the following. These effects depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of healthcare; business and governmental actions addressing to the pandemic’s effects.

Employees’ health could be adversely affected, necessitating their recovery away from work;

Unavailability of key personnel necessary to conduct our business activities;

Our operating effectiveness may be reduced as our employees work from home or suffer from the COVID-19 virus;

Shelter in place, or other restrictions and interruptions of our business and contact with our customers;

Sustained closures of our branch lobbies or the offices of our customers;

Declines in demand for loans and other banking services and products, and reduced interchange fees on payment cards;

Reduced consumer spending due to both job losses, health concerns and required practices, such as social distancing and shelter in place, attributable to the COVID-19 pandemic;

Reduced interchange revenue from reduced retail sales, travel and payment card usage, generally;

Significant volatility in United States financial markets and our investment securities portfolio, including credit concerns over state, county and municipal securities;

Our growth has been slowed, and may slow further, or our asset size may decline;

Reduced economic activity and reduced customer income and cash flows from normal business and employment could reduce the amounts of our deposits, increase deposit costs, and adversely affect our liquidity, financial condition and results of operations;

Declines in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to increased provisions for loan losses and increases in our allowance for possible credit losses;

Declines in the value of collateral for loans, including real estate collateral, especially in industries such as travel and hospitality;

Declines in the net worth and liquidity of borrowers, impairing their ability to pay timely their loan obligations to us;

Decreases in market interest rates that are expected to reduce our net interest income and our profitability;

Loan deferrals and loan modifications, including those mandated by law, or which are encouraged by our regulators, may increase our expense and risks of collectability, reduce our cash flows and liquidity and adversely affect our results of operations and financial condition;

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Our waiver of various fees and service charges to support our customers and communities will adversely affect our results of operation and our liquidity and financial position;

The COVID-19 pandemic may change customer financial behaviors and payment practices. Electronic banking could become more popular with less customers doing business at our offices;

Certain of our assets, including loans and securities, may become impaired, which would adversely affect our results of operation and financial condition;

Reductions in income or losses will adversely affect our capital and growth of capital, including our capital for bank regulatory purposes;

Losses or reductions in net income may adversely affect the growth or amount of dividends we can pay on our common stock;

The effects of government fiscal and monetary policies on the economy and financial stability, generally, and on our business, results of operations and financial condition cannot be predicted;

The restoration of financial stability and economic growth may depend on the health care system developing and deploying COVID-19 testing and contact tracing, and drugs that better address COVID-19, and vaccines to prevent COVID-19, which promote consumer and employee health and confidence in the economy.

These factors, together or in combination with other events or occurrences that are unknown or anticipated, may materially and adversely affect our business, financial condition and results of operations.

Our stock price may reflect securities market conditions

The ongoing COVID-19pandemic has resulted in substantial securities market losses, especially for bank stocks and has, and may continue to, adversely affect the market of our common stock. The spread, intensification and duration of COVID-19 pandemic, as well as the effectiveness of governmental, fiscal and monetary policies, and regulatory responses to the pandemic, further affect the financial markets and the market prices for securities generally, and the market prices for bank stocks, including our common stock.

The COVID-19 global pandemic could result in deterioration of asset quality and an increase in credit losses.

Many businesses have or will have lower revenues and cash flows and many consumers will have lower income. These could result in an inability to repay loans timely in full, reduce our asset quality and reduce our deposits. Loan modifications and payment deferrals may also increase our credit risks. Our business, results of operations, liquidity and financial condition could be adversely affected.

The COVID-19pandemic has resulted in increased operational risks.

The COVID-19pandemic has resulted in heightened operational risks. Much of our workforce has been working remotely, and increased levels of remote access create additional cybersecurity risk and opportunities for cybercriminals to exploit vulnerabilities. Cybercriminals may increase their attempts to compromise business and consumer emails, including an increase in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey upon consumers and businesses during this time. This could result in increased fraud losses to us or our clients. The increase in online and remote banking activities may also increase the risk of fraud against our customers. State and local orders and regulations regarding the conduct of in-person business operations have affected and may continue to affect our ability to operate at normal levels and to restore operations to their pre-pandemic level for an unknown period of time. Separately, our third-party service providers have also been affected by the pandemic. To date, these disruptions have not been material and we have developed solutions to these disruptions, but we may experience additional disruption in the future, which could adversely affect our business, results of operations and financial condition.

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The COVID-19 global pandemic may continue to cause uncertainty in markets and may result in an increase in our cost of funds.

The COVID-19 global pandemic has caused a great amount of uncertainty in markets, causing credit markets to seize and forcing companies, including our clients, to seek liquidity in the face of uncertain future cash flows. To the extent the clients’ funds are not used as working capital and not placed on deposit with us, we could be faced with funding draws of committed lending facilities, along with requests for new credit facilities from our clients. As clients use deposit balances to fund their businesses, this may put funding pressure on us, which may cause us to pay higher rates than normal for deposits and other funding.

As a participating lender in the Small Business Administration (“SBA”)Paycheck Protection Program (“PPP”), the Bank is subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

The CARES Act and the PPP and Healthcare Enhancement Act included an approximately $659 billion loan for the PPP administered through by the SBA and the U.S. Department of the Treasury. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved PPP lenders, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. As of June 30, 2020, we have secured funding of approximately 422 loans totaling approximately $36.5 million through the PPP program. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved approximately $310 billion of additional funding for the PPP on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its procedures used in processing applications for the PPP. If any such litigation is filed against the Bank and is not resolved favorably to the Bank, it may result in financial liability or adversely affect our reputation. Litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans, if the SBA determines deficiencies in the manner in which PPP loans were originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, including those related to the ambiguity in the laws, rules and guidance regarding the PPP’s operation. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there were one or more deficiencies in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the PPP loan guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company. Similar issues may also result in the denial of forgiveness of PPP loans, which would adversely affect and could result in losses, including possible bankruptcies, which may expose us to further costs and potential losses.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

The Company’s repurchases of its common stock during the second quarter of 2020 were as follows:

 

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)

April 1 - April 30, 2020

 

 

$

 

$

5,000,000

May 1 - May 31, 2020

 

 

 

 

 

5,000,000

June 1 - June 30, 2020

 

 

 

 

 

5,000,000

Total

 

 

 

 

 

5,000,000

 

 

 

 

 

 

 

 

 

 

(1) On March 10, 2020 the Company adopted a $5 million stock repurchase program that become effective April 1, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit

NumberDescription

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Exhibit    

Number3.1

Description
3.1

Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*

3.2

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **

31.1

Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive Officer.

31.2

Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive Officer.***

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.***

101.INS

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

*

Incorporated by reference from Registrant’s Form10-Q dated SeptemberJune 30, 2002.

**

Incorporated by reference from Registrant’s Form10-K dated March 31, 2008.

***

The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form10-Q are “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AUBURN NATIONAL BANCORPORATION, INC.

(Registrant)

AUBURN NATIONAL BANCORPORATION, INC.

Date:            August 6, 2020        

(Registrant)

Date:            October 27, 2017                            

By: /s/ Robert W. Dumas

Robert W. Dumas

Chairman, President and Chief Executive Officer

CEO

Date:            October 27, 2017                                        August 6, 2020        

By: /s/ David A. Hedges

David A. Hedges

EVP,

Executrive Vice President and Chief Financial Officer