UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549

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 September
June 30, 2017

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

2021

☐
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)

Delaware63-0885779

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Delaware
(State or other jurisdiction of
incorporation or organization)
63-0885779
(I.R.S. Employer
Identification No.)
100 N. Gay Street

Auburn
,
Alabama
36830

(334)

(
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 (1) has filed all reportssubmitted electronically every Interactive Data File required to be filed by Section 13 or 15(d)submitted and
posted pursuant to Rule 405 of the Securities Exchange Act of 1934Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to filesubmit such reports), and (2) has been subject to such filing requirements for the past 90 days.

files).

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, a
non-accelerated filer, a smaller
reporting
company or
an emerging
growth company.
See the
definitions of “large
“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)

Large Accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth 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.

ClassOutstanding at October 26, 2017
Common Stock, $0.01 par value per share3,643,668 shares

Class
Outstanding at July 29, 2021
Common Stock, $0.01 par value per share
3,542,505
shares
AUBURN NATIONAL BANCORPORATION, INC. AND
SUBSIDIARIES

INDEX
PARTI.FINANCIAL INFORMATIONINDEX

PART I.  FINANCIAL INFORMATION

PAGE

Item 1

Financial Statements
Consolidated Balance Sheets (Unaudited)
as of September 30, 2017 and December 31, 2016		  3
Consolidated Statements of Earnings (Unaudited)
for the quarter and nine months ended September 30, 2017 and 2016		  4
Consolidated Statements of Comprehensive Income (Unaudited)
for the quarter and nine months ended September 30, 2017 and 2016		  5
Consolidated Statements of Stockholders’ Equity (Unaudited)
for the nine months ended September 30, 2017 and 2016		  6
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 2017 and 2016		  7
Notes to Consolidated Financial Statements (Unaudited)  8

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations29
Table 1 – Explanation ofNon-GAAP Financial Measures48
Table 2 – Selected Quarterly Financial Data49
Table 3 – Selected Financial Data50
Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended September 30, 2017 and 201651
Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September 30, 2017 and 201652
Table 6 – Loan Portfolio Composition53
Table 7 – Allowance for Loan Losses and Nonperforming Assets54
Table 8 – Allocation of Allowance for Loan Losses55
Table 9 – CDs and Other Time Deposits of $100,000 or more56

Item 3

Quantitative and Qualitative Disclosures About Market Risk57

Item 4

Controls and Procedures57

PART II.  OTHER INFORMATION

Item 1Legal Proceedings57

Item 1A

Risk Factors57
Item 2Unregistered Sales of Equity Securities and Use of Proceeds57
Item 3Defaults Upon Senior Securities57
Item 4Mine Safety Disclosures57
Item 5Other Information57
Item 6Exhibits58

PAGE
Item 1
3
4
5
6
7
8
Item 2
28
49
50
51
52
53
54
55
56
57
Item 3
58
Item 4
58
Item 1
58
Item
1A
58
Item 2
59
Item 3
59
Item 4
59
Item 5
59
Item 6
60
3
PART
1.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

STATEMENTS

AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(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   

 

 

June 30,
December 31,
(Dollars in thousands, except share data)
2021
2020
Assets:
Cash and due from banks
$
18,925
$
14,868
Federal funds sold
49,466
28,557
Interest-bearing bank deposits
72,862
69,150
Cash and cash equivalents
141,253
112,575
Securities available-for-sale
384,865
335,177
Loans held for sale
1,367
3,418
Loans, net of unearned income
456,984
461,700
Allowance for loan losses
(5,107)
(5,618)
Loans, net
451,877
456,082
Premises and equipment, net
29,826
22,193
Bank-owned life insurance
19,434
19,232
Other assets
7,610
7,920
Total assets
$
1,036,232
$
956,597
Liabilities:
Deposits:
Noninterest-bearing
$
283,356
$
245,398
Interest-bearing
640,106
594,394
Total deposits
923,462
839,792
Federal funds purchased and securities sold under agreements
to repurchase
3,533
2,392
Accrued expenses and other liabilities
3,194
6,723
Total liabilities
930,189
848,907
Stockholders' equity:
Preferred stock of $
.01
par value; authorized
200,000
shares;
no shares issued
0
0
Common stock of $
.01
par value; authorized
8,500,000
shares;
issued
3,957,135
shares
39
39
Additional paid-in capital
3,792
3,789
Retained earnings
108,060
105,617
Accumulated other comprehensive income, net
4,255
7,599
Less treasury stock, at cost -
411,280
shares and
390,859
at June 30, 2021
and December 31, 2020, respectively
(10,103)
(9,354)
Total stockholders’ equity
106,043
107,690
Total liabilities and
stockholders’ equity
$
1,036,232
$
956,597
See accompanying notes to consolidated financial statements

4
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

        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  

 

 

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2021
2020
2021
2020
Interest income:
Loans, including fees
$
5,112
$
5,494
$
10,290
$
10,906
Securities:
Taxable
1,009
1,056
1,958
2,167
Tax-exempt
444
476
896
929
Federal funds sold and interest-bearing bank deposits
28
27
56
306
Total interest income
6,593
7,053
13,200
14,308
Interest expense:
Deposits
614
981
1,280
2,022
Short-term borrowings
4
2
8
4
Total interest expense
618
983
1,288
2,026
Net interest income
5,975
6,070
11,912
12,282
Provision for loan losses
(600)
450
(600)
850
Net interest income after provision for
loan losses
6,575
5,620
12,512
11,432
Noninterest income:
Service charges on deposit accounts
138
126
270
298
Mortgage lending
424
683
973
913
Bank-owned life insurance
99
108
202
506
Other
449
365
847
794
Securities gains, net
0
81
0
87
Total noninterest income
1,110
1,363
2,292
2,598
Noninterest expense:
Salaries and benefits
2,897
2,597
5,748
5,428
Net occupancy and equipment
418
920
856
1,517
Professional fees
326
389
582
647
Other
1,254
1,053
2,399
2,223
Total noninterest expense
4,895
4,959
9,585
9,815
Earnings before income taxes
2,790
2,024
5,219
4,215
Income tax expense
504
363
927
753
Net earnings
$
2,286
$
1,661
$
4,292
$
3,462
Net earnings per share:
Basic and diluted
$
0.65
$
0.47
$
1.21
$
0.97
Weighted average shares
outstanding:
Basic and diluted
3,554,871
3,566,166
3,560,554
3,566,156
See accompanying notes to consolidated financial statements

5
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

          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  

 

 

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Net earnings
$
2,286
$
1,661
$
4,292
$
3,462
Other comprehensive income (loss), net of
tax:
Unrealized net holding gain (loss) on securities
1,788
1,043
(3,344)
5,392
Reclassification adjustment for net gain on securities
recognized in net earnings
0
(60)
0
(65)
Other comprehensive income (loss)
1,788
983
(3,344)
5,327
Comprehensive income
$
4,074
$
2,644
$
948
$
8,789
See accompanying notes to consolidated financial statements

6
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’Stockholders' Equity

(Unaudited)

              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   

 

 

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, 2021
Balance, March 31, 2021
3,566,326
$
39
$
3,791
$
106,696
$
2,467
$
(9,354)
$
103,639
Net earnings
—
0
0
2,286
0
0
2,286
Other comprehensive income
—
0
0
0
1,788
0
1,788
Cash dividends paid ($
.26
per share)
—
0
0
(922)
0
0
(922)
Stock repurchases
(20,511)
0
0
0
0
(750)
(750)
Sale of treasury stock
40
0
1
0
0
1
2
Balance, June 30, 2021
3,545,855
$
39
$
3,792
$
108,060
$
4,255
$
(10,103)
$
106,043
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
—
0
0
1,661
0
0
1,661
Other comprehensive income
—
0
0
0
983
0
983
Cash dividends paid ($
.255
per share)
—
0
0
(909)
0
0
(909)
Sale of treasury stock
30
0
1
0
0
0
1
Balance, June 30, 2020
3,566,176
$
39
$
3,785
$
103,444
$
7,386
$
(9,355)
$
105,299
Six months ended June 30,
2021
Balance, December 31, 2020
3,566,276
$
39
$
3,789
$
105,617
$
7,599
$
(9,354)
$
107,690
Net earnings
—
0
0
4,292
0
0
4,292
Other comprehensive loss
—
0
0
0
(3,344)
0
(3,344)
Cash dividends paid ($
.52
per share)
—
0
0
(1,849)
0
0
(1,849)
Stock repurchases
(20,511)
0
0
0
0
(750)
(750)
Sale of treasury stock
90
0
3
0
0
1
4
Balance, June 30, 2021
3,545,855
$
39
$
3,792
$
108,060
$
4,255
$
(10,103)
$
106,043
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
—
0
0
3,462
0
0
3,462
Other comprehensive income
—
0
0
0
5,327
0
5,327
Cash dividends paid ($
.51
per share)
—
0
0
(1,819)
0
0
(1,819)
Sale of treasury stock
30
0
1
0
0
0
1
Balance, June 30, 2020
3,566,176
$
39
$
3,785
$
103,444
$
7,386
$
(9,355)
$
105,299
See accompanying notes to consolidated financial statements

7
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

     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   

 

 

Six months ended June 30,
(Dollars in thousands)
2021
2020
Cash flows from operating activities:
Net earnings
$
4,292
$
3,462
Adjustments to reconcile net earnings to net cash provided
by
operating activities:
Provision for loan losses
(600)
850
Depreciation and amortization
629
989
Premium amortization and discount accretion, net
1,940
1,081
Net gain on securities available-for-sale
0
(87)
Net gain on sale of loans held for sale
(935)
(847)
Net gain on other real estate owned
0
(17)
Loans originated for sale
(32,608)
(36,385)
Proceeds from sale of loans
35,279
36,576
Increase in cash surrender value of bank-owned life insurance
(202)
(224)
Income recognized from death benefit on bank-owned life insurance
0
(282)
Net decrease (increase) in other assets
22
(1,013)
Net decrease in accrued expenses and other liabilities
(2,404)
(334)
Net cash provided by operating activities
5,413
3,769
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
0
9,062
Proceeds from prepayments and maturities of securities available
-for-sale
38,204
22,085
Purchase of securities available-for-sale
(94,297)
(91,318)
Decrease (increase) in loans, net
4,805
(3,400)
Net purchases of premises and equipment
(7,926)
(372)
Proceeds from bank-owned life insurance death benefit
0
694
Decrease (increase) in FHLB stock
267
(9)
Proceeds from sale of other real estate owned
0
116
Net cash used in investing activities
(58,947)
(63,142)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits
37,958
51,211
Net increase in interest-bearing deposits
45,712
54,447
Net increase in federal funds purchased and securities sold
under agreements to repurchase
1,141
926
Stock repurchases
(750)
0
Dividends paid
(1,849)
(1,819)
Net cash provided by financing activities
82,212
104,765
Net change in cash and cash equivalents
28,678
45,392
Cash and cash equivalents at beginning of period
112,575
92,443
Cash and cash equivalents at end of period
$
141,253
$
137,835
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
1,302
$
2,023
Income taxes
1,335
678
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure
0
99
See accompanying notes to consolidated financial statements

8
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

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
(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 Form
10-K for the year ended December 31, 2016.

2020.

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 OREO
–
A 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.
9
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, 2017.2021. 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 2017,2021, the Company adopted nodid not adopt any new
accounting guidance.

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, 20172021 and 2016, 2020,
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 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 

 

 

below

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2021
2020
2021
2020
Basic and diluted:
Net earnings
$
2,286
$
1,661
$
4,292
$
3,462
Weighted average common
shares outstanding
3,554,871
3,566,166
3,560,554
3,566,156
Net earnings per share
$
0.65
$
0.47
$
1.21
$
0.97
NOTE 3: VARIABLE INTEREST ENTITIES

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.

SECURITIES

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, 20172021 and December 31, 2016,2020, 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, 20172021 and December 31, 2016,
2020, respectively, are presented
below.

  

 

 

 
   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 

 

 

September 30, 2017

                

Agency obligations (a)

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

Agency RMBS (a)

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

State and political subdivisions

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

 

 

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   

 

 

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
June 30, 2021
Agency obligations (a)
$
10,074
34,524
61,743
5,146
111,487
2,023
999
$
110,463
Agency MBS (a)
0
894
27,601
170,354
198,849
2,166
1,283
197,966
State and political subdivisions
381
982
11,874
61,292
74,529
3,945
170
70,754
Total available-for-sale
$
10,455
36,400
101,218
236,792
384,865
8,134
2,452
$
379,183
December 31, 2020
Agency obligations (a)
$
5,048
24,834
55,367
12,199
97,448
3,156
98
$
94,390
Agency MBS (a)
0
1,154
20,502
141,814
163,470
3,245
133
160,358
State and political subdivisions
477
632
8,405
64,745
74,259
3,988
11
70,282
Total available-for-sale
$
5,525
26,620
84,274
218,758
335,177
10,389
242
$
325,030
(a) Includes securities issued by U.S. government agencies or government sponsored
government-sponsored entities.

Securities with aggregate fair values of $155.5 $
168.5
million and $137.2 $
166.9
million at SeptemberJune 30, 20172021 and December 31, 2016, 2020,
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.

10
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 
$
1.2
million and $
1.4
million at SeptemberJune 30, 20172021 and December
31, 2016,2020, respectively. Cost-method investments primarily includenon-marketable
Non-marketable equity investments such as
include 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, 2017
2021 and December 31, 2016,2020, 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 

 

 

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, 2021:
Agency obligations
$
51,045
999
0
0
$
51,045
999
Agency MBS
101,319
1,283
0
0
101,319
1,283
State and political subdivisions
8,367
170
0
0
8,367
170
Total
$
160,731
2,452
0
0
$
160,731
2,452
December 31, 2020:
Agency obligations
$
15,416
98
0
0
$
15,416
98
Agency MBS
41,488
133
0
0
41,488
133
State and political subdivisions
2,945
11
0
0
2,945
11
Total
$
59,849
242
0
0
$
59,849
242
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 security securities
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.

11
Agency obligations

The unrealized losses associated with agency obligations were
primarily driven by changesdeclines 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

mortgage-backed securities (“MBS”)

The unrealized losses associated with agency residential mortgage-backed securities (“RMBS”)MBS were primarily
driven by changes 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.

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 changes declines
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, 2017
2021 and December 31, 2016,2020, 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 nine monthsquarters ended SeptemberJune 30, 20172021 and 2016, 2020,
respectively.

Realized Gains and Losses

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

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

 

 

Gross realized gains

 

$

   49    148  $   51    148 

 

 

  Realized gains, net

 $   49    148  $   51    148 

 

 

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Gross realized gains
$
0
100
$
0
106
Gross realized losses
0
(19)
0
(19)
Realized gains, net
$
0
81
$
0
87
12
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,
(Dollars in thousands)
2021
2020
Commercial and industrial
$
87,933
$
82,585
Construction and land development
37,477
33,514
Commercial real estate:
Owner occupied
51,520
54,033
Hotel/motel
46,963
42,900
Multi-family
39,316
40,203
Other
105,046
118,000
Total commercial real estate
242,845
255,136
Residential real estate:
Consumer mortgage
33,140
35,027
Investment property
49,024
49,127
Total residential real estate
82,164
84,154
Consumer installment
7,762
7,099
Total loans
458,181
462,488
Less: unearned income
(1,197)
(788)
Loans, net of unearned income
$
456,984
$
461,700
Loans secured by real estate were approximately 86.7%
79.1%
of the Company’s total loan portfolio
at SeptemberJune 30, 2017. 2021.
At SeptemberJune 30, 2017,
2021,
the Company’s geographic loan distribution
was concentrated primarily in Lee County,
Alabama, and surrounding
areas.

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.
We participated
as a lender in the Paycheck Protection Program (“PPP”),
which ended May 31, 2021.
PPP loans
are forgivable in whole or in part, if the proceeds
are used for payroll and other permitted purposes in accordance
with the
requirements of the PPP.
The Company had
288
and
265
PPP loans with an aggregate outstanding principal balance of
$
22.1
million and $
19.0
million, included in this category,
as of June 30, 2021 and December 31, 2020, respectively.
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 four classes: (1) owner occupied,
(2) hotel/motel,
(3) multifamily and (4)
other.
●
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.

Constructionborrower, who owns the

property.
13
●
Hotel/motel
– includes loans for hotels 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. 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 sale or refinancereal
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.

Commercial real estate (“CRE”) —includes

The underwriting of these loans disaggregatedtakes into three classes: (1) owner occupied, (2) multifamily
consideration the occupancy 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.

•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.

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.

•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.

●
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 poli
cies 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-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.

14
The following is a summary of current, accruing past due, and nonaccrual
loans by portfolio segment and class as of September June
30, 20172021 and December 31, 2016.

(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  

 

 

2020.

Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
June 30, 2021:
Commercial and industrial
$
87,932
1
0
87,933
0
$
87,933
Construction and land development
37,273
204
0
37,477
0
37,477
Commercial real estate:
Owner occupied
51,520
0
0
51,520
0
51,520
Hotel/motel
46,963
0
0
46,963
0
46,963
Multi-family
39,316
0
0
39,316
0
39,316
Other
104,642
205
0
104,847
199
105,046
Total commercial real estate
242,441
205
0
242,646
199
242,845
Residential real estate:
Consumer mortgage
32,745
68
0
32,813
327
33,140
Investment property
48,922
0
0
48,922
102
49,024
Total residential real estate
81,667
68
0
81,735
429
82,164
Consumer installment
7,755
7
0
7,762
0
7,762
Total
$
457,068
485
0
457,553
628
$
458,181
December 31, 2020:
Commercial and industrial
$
82,355
230
0
82,585
0
$
82,585
Construction and land development
33,453
61
0
33,514
0
33,514
Commercial real estate:
Owner occupied
54,033
0
0
54,033
0
54,033
Hotel/motel
42,900
0
0
42,900
0
42,900
Multi-family
40,203
0
0
40,203
0
40,203
Other
117,759
29
0
117,788
212
118,000
Total commercial real estate
254,895
29
0
254,924
212
255,136
Residential real estate:
Consumer mortgage
33,169
1,503
140
34,812
215
35,027
Investment property
49,014
6
0
49,020
107
49,127
Total residential real estate
82,183
1,509
140
83,832
322
84,154
Consumer installment
7,069
29
1
7,099
0
7,099
Total
$
459,955
1,858
141
461,954
534
$
462,488
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.

15
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,charge-
offs, net of recoveries of amounts previouslycharged-off.

charged

-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, 20172021 and December 31, 2016,2020, 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 has increased its look-back period each quarter
to its allowance for loan losses methodology in order to better captureincorporate the effects of at least one economic
downturn in its loss history. The
Company believes the most recent economic extension of its look-back period
is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, the early
cycle onperiods in which the Company’s Company experienced significant
losses would be excluded from the determination of the allowance for
loan loss experience. First,losses and its balance would decrease.
For the
quarter ended June 30, 2021, the Company 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 20 quarter look-back period. For the quarter ended September 30, 2017, the Company increased its look-back
period to 3449 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-backlook-
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
During 2020, the Company experienced significant losses would be excluded from
adjusted certain qualitative and economic factors related to changes in
economic conditions driven by the determinationimpact of the allowance for loan losses
novel strain of coronavirus (“COVID-19 pandemic”) and its balance would decrease. Second,resulting adverse
economic conditions, including higher
unemployment in our primary market area.
During the second quarter of 2021, the Company increased the range of basis point adjustments allowed foradjusted
certain qualitative
and environmentaleconomic factors to approximately 200 basis points, an increasereflect improvements in economic conditions
in our primary market area.
16
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, 2021
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
828
551
3,302
908
93
$
5,682
Charge-offs
0
0
0
(1)
0
(1)
Recoveries
2
0
0
13
11
26
Net recoveries (charge-offs)
2
0
0
12
11
25
Provision for loan losses
(1)
88
(598)
(82)
(7)
(600)
Ending balance
$
829
639
2,704
838
97
$
5,107
Six months ended:
Beginning balance
$
807
594
3,169
944
104
$
5,618
Charge-offs
0
0
0
(1)
(5)
(6)
Recoveries
54
0
0
26
15
95
Net recoveries (charge-offs)
54
0
0
25
10
89
Provision for loan losses
(32)
45
(465)
(131)
(17)
(600)
Ending balance
$
829
639
2,704
838
97
$
5,107
June 30, 2020
(Dollars 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)
0
0
0
(27)
(31)
Recoveries
2
0
0
14
6
22
Net (charge-offs) recoveries
(2)
0
0
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)
0
0
0
(32)
(36)
Recoveries
55
0
0
45
8
108
Net recoveries (charge-offs)
51
0
0
45
(24)
72
Provision for loan losses
51
44
626
96
33
850
Ending balance
$
679
613
2,915
954
147
$
5,308
17
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, 2017 2021
and 2016.

       Collectively evaluated (1)       Individually evaluated (2)     Total 
(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 

 

 

 

September 30, 2017:

             

Commercial and industrial

 $   471    50,068     33    33    504    50,101  

Construction and land development

    851    47,455     —      —      851    47,455  

Commercial real estate

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

Residential real estate

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

Consumer installment

    177    9,877     —      —      177    9,877  

 

 

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.

2020.

Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(Dollars in thousands)
losses
in loans
losses
in loans
losses
in loans
June 30, 2021:
Commercial and industrial (3)
$
829
87,933
0
0
829
87,933
Construction and land development
639
37,477
0
0
639
37,477
Commercial real estate
2,704
242,646
0
199
2,704
242,845
Residential real estate
838
82,067
0
97
838
82,164
Consumer installment
97
7,762
0
0
97
7,762
Total
$
5,107
457,885
0
296
5,107
458,181
June 30, 2020:
Commercial and industrial (4)
$
679
87,754
0
0
679
87,754
Construction and land development
613
32,967
0
0
613
32,967
Commercial real estate
2,915
250,370
0
218
2,915
250,588
Residential real estate
954
85,714
0
111
954
85,825
Consumer installment
147
8,631
0
0
147
8,631
Total
$
5,308
465,436
0
329
5,308
465,765
(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.
(3)
Includes $22.1 million of PPP loans for which no allowance
for loan losses was allocated due to 100% SBA guarantee.
(4)
Includes $36.5 million of PPP loans for which no allowance
for loan losses was allocated due to 100% SBA guarantee.
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  

 

 

18
(Dollars in thousands)
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
June 30, 2021:
Commercial and industrial
$
86,092
1,550
291
0
$
87,933
Construction and land development
37,235
3
239
0
37,477
Commercial real estate:
Owner occupied
49,361
2,026
133
0
51,520
Hotel/motel
39,151
7,812
0
—
46,963
Multi-family
35,786
3,530
0
0
39,316
Other
103,413
1,389
45
199
105,046
Total commercial real estate
227,711
14,757
178
199
242,845
Residential real estate:
Consumer mortgage
30,631
417
1,765
327
33,140
Investment property
48,408
183
331
102
49,024
Total residential real estate
79,039
600
2,096
429
82,164
Consumer installment
7,749
6
7
0
7,762
Total
$
437,826
16,916
2,811
628
$
458,181
December 31, 2020:
Commercial and industrial
$
79,984
2,383
218
0
$
82,585
Construction and land development
33,260
0
254
0
33,514
Commercial real estate:
Owner occupied
51,265
2,627
141
0
54,033
Hotel/motel
35,084
7,816
0
0
42,900
Multi-family
36,673
3,530
0
0
40,203
Other
116,498
1,243
47
212
118,000
Total commercial real estate
239,520
15,216
188
212
255,136
Residential real estate:
Consumer mortgage
32,518
397
1,897
215
35,027
Investment property
48,501
187
332
107
49,127
Total residential real estate
81,019
584
2,229
322
84,154
Consumer installment
7,069
7
23
0
7,099
Total
$
440,852
18,190
2,912
534
$
462,488
19
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, 20172021 and December 31, 2016.

    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  

 

    

 

 

 

(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.

2020.

June 30, 2021
(Dollars 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
$
211
(12)
199
$
0
Total commercial real estate
211
(12)
199
0
Residential real estate:
Investment property
103
(6)
97
0
Total residential real estate
103
(6)
97
0
Total
impaired loans
$
314
(18)
296
$
0
(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, 2020
(Dollars 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
$
216
(4)
212
$
0
Total commercial real estate
216
(4)
212
0
Residential real estate:
Investment property
109
(2)
107
0
Total residential real estate
109
(2)
107
0
Total
impaired loans
$
325
(6)
319
$
0
(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.
20
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, 2021
Six months ended June 30, 2021
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
202
0
205
0
Total commercial real estate
202
0
205
0
Residential real estate:
Investment property
100
0
102
0
Total residential real estate
100
0
102
0
Total
$
302
0
307
0
Quarter ended June 30, 2020
Six months ended June 30, 2020
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
54
0
31
0
Total commercial real estate
54
0
31
0
Residential real estate:
Investment property
28
0
16
0
Total residential real estate
28
0
16
0
Total
$
82
0
47
0
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’s
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 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. The Interagency Statement
on COVID-19 Loan Modifications was supplemented on
June 23, 2020 by the Interagency Examiner Guidance for Assessing
Safety and Soundness Considering the Effect of the
COVID-19 Pandemic on Institutions.
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.
21
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 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 September
June 30, 20172021 and December 31, 2016.

    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 summarizes2020, respectively.

TDRs
Related
(Dollars in thousands)
Accruing
Nonaccrual
Total
Allowance
June 30, 2021
Commercial real estate:
Other
$
0
199
199
$
0
Total commercial real estate
0
199
199
0
Residential real estate:
Investment property
0
97
97
$
0
Total residential real estate
0
97
97
0
Total
$
0
296
296
$
0
TDRs
Related
(In thousands)
Accruing
Nonaccrual
Total
Allowance
December 31, 2020
Commercial real estate:
Other
$
0
212
212
$
0
Total commercial real estate
0
212
212
0
Investment property
0
107
107
0
Total residential real estate
0
107
107
0
Total
$
0
319
319
$
0
At June 30, 2021 there were no significant outstanding commitments to
advance additional funds to customers whose loans modified
had been restructured.
22
Quarter ended June 30,
Six months ended June 30,
Pre-
Post -
Pre-
Post -
modification
modification
modification
modification
Number
outstanding
outstanding
Number
outstanding
outstanding
of
recorded
recorded
of
recorded
recorded
(Dollars in a TDR during the respective periods both before and after their modification.

   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 thethousands)

contracts
investment
investment
contracts
investment
investment
2020:
Commercial
real estate:
Other
—
$
—
—
1
$
216
216
Total commercial real estate
—
—
—
1
216
216
Residential real estate:
Investment property
—
—
—
3
111
111
Total residential real estate
—
—
—
3
111
111
Total
—
$
—
—
4
$
327
327
There were no loans modified in a TDR during the quarter and nine
six months ended SeptemberJune 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.

2021.

During the threequarter and ninesix months ended Septemberended June 30, 2017 2021
and 2016,2020, respectively, there
were no loans modified in a
TDR within the previous 12 months for which there was a payment default (defined
(defined as 90 days or more past due).

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.

23
The following table details the changes in amortized MSRs and
the related valuation allowance for the respective periods.

          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

Quarter ended June 30,
Six months ended June 30,
(Dollars in other assets or other liabilities on the accompanying consolidatedthousands)
2021
2020
2021
2020
MSRs, net:
Beginning balance sheets. The accounting for changes
$
1,322
$
1,249
$
1,330
$
1,299
Additions, net
172
188
315
237
Amortization expense
(134)
(166)
(285)
(265)
Ending balance
$
1,360
$
1,271
$
1,360
$
1,271
Valuation
allowance included in the fairMSRs, net:
Beginning of period
$
0
$
0
$
0
$
0
End of period
0
0
0
0
Fair value of a derivative depends on whether it has been designated and qualifies as partamortized MSRs:
Beginning of a hedging relationship. For derivatives not designated as partperiod
$
1,774
$
1,917
$
1,489
$
2,111
End 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  

 

 

period

1,833
1,690
1,833
1,690
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, 2017,2021, there were no
transfers between levels and no changes in valuation techniques for
the Company’s financial
assets and liabilities.

24
Assets and liabilities measured at fair value
on a recurring basis

Securitiesavailable-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 September June
30, 20172021 and December 31, 2016,2020, respectively,
by caption, on the accompanying consolidated balance
sheets by ASC 820
valuation hierarchy (as described above).

       

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    —   

 

 

(1)Represents the

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, 2021:
Securities available-for-sale:
Agency obligations
$
111,487
0
111,487
0
Agency RMBS
198,849
0
198,849
0
State and political subdivisions
74,529
0
74,529
0
Total securities available
-for-sale
384,865
0
384,865
0
Total
assets at fair value of interest rate swap agreements.

$
384,865
0
384,865
0
December 31, 2020:
Securities available-for-sale:
Agency obligations
$
97,448
0
97,448
0
Agency RMBS
163,470
0
163,470
0
State and political subdivisions
74,259
0
74,259
0
Total securities available
-for-sale
335,177
0
335,177
0
Total
assets at fair value
$
335,177
0
335,177
0
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.

25
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.

Other real estate owned

Other real estate owned, 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 estate 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 CompanyCompa
ny 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 September
June 30, 20172021 and December 31, 2016,2020, 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, 2021:
Loans held for sale
$
1,367
0
1,367
0
Loans, net
(1)
296
0
0
296
Other assets
(2)
1,360
0
0
1,360
Total assets at fair value
$
3,023
0
1,367
1,656
December 31, 2020:
Loans held for sale
$
3,418
0
3,418
0
Loans, net
(1)
319
0
0
319
Other assets
(2)
1,330
0
0
1,330
Total assets at fair value
$
5,067
0
3,418
1,649
(1)
Loans considered impaired under ASC310-10-35Receivables. Receivables.
This amount reflects the recorded investment in impaired loans,
net
of any related allowance for loan losses.

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

26
Quantitative Disclosures for Level 3 Fair
Value Measurements

At SeptemberJune 30, 2017, 2021 and December 31, 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, 2021 and December 31, 2021,
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%   

 

Weighted
Carrying
Significant
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Range
of Input
June 30, 2021:
Impaired loans
$
296
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,360
Discounted cash flow
Prepayment Speed or CPR
7.7
-
15.7
15.1
Discount rate
9.5
-
11.5
9.5
December 31, 2020:
Impaired loans
$
319
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,330
Discounted cash flow
Prepayment Speed or CPR
18.2
-
36.4
20.7
Discount rate
10.0
-
12.0
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 the
The 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, 20172021 and December 31, 2016 2020
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.

             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     —    

 

 

27
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
June 30, 2021:
Financial Assets:
Loans, net (1)
$
451,877
$
448,540
$
0
$
0
$
448,540
Loans held for sale
1,367
1,415
0
1,415
0
Financial Liabilities:
Time Deposits
$
159,011
$
160,247
$
0
$
160,247
$
0
December 31, 2020:
Financial Assets:
Loans, net (1)
$
456,082
$
451,816
$
0
$
0
$
451,816
Loans held for sale
3,418
3,509
0
3,509
0
Financial Liabilities:
Time Deposits
$
160,401
$
162,025
$
0
$
162,025
$
0
(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.
28
ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS

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, 2017 2021
and 2016,2020, as well as the information contained in our annual reportAnnual
Report on Form10-K for the year ended December 31, 2016
2020 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

Various
of the statements made in this discussionherein under the captions “Management’s
Discussion and analysisAnalysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures
about Market Risk”, “Risk Factors” 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
(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,
“assume,” “should,
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,“expec
t,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,
“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, foreign, domestic and foreign, locally,
including seasonality;seasonality, natural

disasters or climate change, such as rising sea and water levels,
hurricanes and
tornados, coronavirus or other epidemics or pandemics;
●
the effects of war or other conflicts, acts of terrorism, or
other events that may affect general economic conditions;
●
governmental monetary and fiscal policies;

●
legislative and regulatory changes, including 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;

●
the failure of assumptions and estimates, as well as differences
in, and changes to, economic, market and credit
conditions, including changes in accounting policies, rules,borrowers’ credit risks and practices;

payment behaviors from those used in our loan
portfolio reviews;
●
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 sensitiveinterest-sensitive assets
and liabilities, and the risks and uncertainty
of the amounts realizable;

●
changes in borrower credit risks and payment behaviors;

●
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;

29
●
the effects of competition from a wide variety of local,
regional, national and other providers of financial,
investment and insurance services, including the disruptivedisruption 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 losses and
other asset impairments, losses valuations of assets and liabilities and
other estimates;

●
the costs of redeveloping our headquarters and the timing and
amount of rental income upon completion of the
project;
●
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;

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

cyber attacks●
cyber-attacks and data breaches that may compromise our
systems, our vendor systems
or customers’
information;

●
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;

the risk that our deferred tax assets (“DTAs”),
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, 20162020 and subsequent quarterly and
current reports. See Part II, Item 1A. “RISK FACTORS”.

All written or oral forward-looking statements that are made by us or
are 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

ITEM 1.
BUSINESS
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding
company registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under
the Bank Holding Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in
1990, underand in 1994 it succeeded its Alabama predecessor as the laws of
bank holding company controlling AuburnBank, an Alabama
state member bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled
the State of Delaware and becameBank since 1984.
As a bank holding
company, after it acquired its Alabama predecessor, which wasthe Company may diversify
into a bankbroader range of financial services and other business activities
than currently
are permitted to the Bank under applicable laws and regulations.
The holding company established in 1984. structure also provides greater
financial and operating flexibility than is presently permitted
to the Bank.
The Bank the Company’s principal subsidiary, is anhas operated continuously since 1907 and currently conducts
its business primarily in East Alabama, state-chartered bank that isincluding
Lee County and surrounding areas.
The Bank has been a member of the Federal Reserve System and has operated continuously since 1907. Both April
1995.
The
Bank’s primary regulators are
the CompanyFederal Reserve and the Bank are headquartered in Auburn, Alabama. Alabama Superintendent of Banks (the
“Alabama
Superintendent”).
The Bank conducts its business primarilyhas been a member of the Federal Home Loan Bank of
Atlanta (the “FHLB”) since 1991.
Certain of the statements made in East Alabama,this discussion and analysis and
elsewhere, including Lee Countyinformation incorporated
herein by
reference to other documents, are “forward-looking statements”
within the meaning of, and surrounding areas. The Bank operates 8 full-service branches in Auburn, Opelika, Notasulga,subject to, the protections of
Section 27A of the Securities
Act of 1933, as amended, (the “Securities Act”) and Valley, Alabama. The Bank also operates a loan production office in Phenix City, Alabama.

Section 21E

of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”).
30
Summary of Results of Operations

         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  

 

 

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2021
2020
2021
2020
Net interest income (a)
$
6,093
$
6,197
$
12,150
$
12,529
Less: tax-equivalent adjustment
118
127
238
247
Net interest income (GAAP)
5,975
6,070
11,912
12,282
Noninterest income
1,110
1,363
2,292
2,598
Total revenue
7,085
7,433
14,204
14,880
Provision for loan losses
(600)
450
(600)
850
Noninterest expense
4,895
4,959
9,585
9,815
Income tax expense
504
363
927
753
Net earnings
$
2,286
$
1,661
$
4,292
$
3,462
Basic and diluted earnings per share
$
0.65
$
0.47
$
1.21
$
0.97
(a) Tax-equivalent.
See “Table"Table 1 - Explanation ofNon-GAAP Financial Measures.”

"

Financial Summary

The Company’s net earnings were $6.0 $4.3
million for the first ninesix months of 2017,2021, compared to $6.1 $3.5
million for the first nine six
months of 2016. 2020.
Basic and diluted earnings per share were $1.65$1.21 per
share for the first six months of 2021, compared to
$0.97 per share for the first ninesix months of 2017,2020.
Total revenue declined
approximately 5% due to reduced net interest margin,
reduced mortgage lending income and
approximately 1% lower outstanding loans compared to $1.67 per share for the first nine months of 2016.

June 30, 2020.
Net interest income(tax-equivalent) was $19.2 $12.2 million for the
first six months of 2021, a 3% decrease compared to $12.5
million for the first ninesix months of 20172020.
This decrease was primarily due to net interest margin
compression resulting from
the Federal Reserve’s interest rate
reductions and bond purchases in response to COVID-19.
Our securities holdings,
which generally yield less than loans, increased as a percentage
of our total assets reflecting deployment of increased
deposits. Net interest margin (tax-equivalent) decreased
to 2.63% in the first six months of 2021, compared to $18.0
3.09% for
the first six months of 2020,
primarily due to the lower interest rate environment and changes in
our asset mix resulting
from the significant increase in deposits from government stimulus
and relief programs and customers’ increased savings.
Net interest income (tax-equivalent) included $0.5 million in PPP
loan fees, net of related costs for the six months of 2021,
compared to $0.2 million for the first ninesix months of 2016. This increase2020.
At June 30, 2021, the Company’s allowance
for loan losses was primarily due an increase in interest income from securitiesavailable-for-sale as management reduced its investment in federal funds sold$5.1 million, or 1.12%
of total loans, compared to $5.6
million, or 1.22%
of total loans, at December 31, 2020, and interest-bearing bank deposits and increased its investment securities as market yields improved. $5.3 million, or 1.1
4% of total loans, at June 30, 2020.
Excluding PPP loans, which are guaranteed by the SBA, the Company’s
allowance for loan losses was 1.17%
of total loans
at June 30, 2021.
The Company also lowered its deposit costs and repaid higher-cost wholesale funding sources. Average loans were $436.7 million in the first nine months of 2017, compared to $431.2 million in the first nine months of 2016. Average deposits were $738.3 million in the first nine months of 2017, an increase of $4.0 million or 1%, from the first nine months of 2016.

The Company recordedhad a $0.1 millionnegative provision for loan losses forof $0.6

million during the first ninesix months of 2017,
2021,
compared to a negative provision for loan losses of $0.6 $0.9
million for the first nine months of 2016. 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 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 ninesix months of 2016. 2020.
The negative provision
for loan losses was primarily related to improvements in economic conditions
in our primary market area,
and related
improvements in our asset quality.
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$2.3 million for the first ninesix months
of 2021 compared to $2.6 million for the first six months of 2016.
2020.
The decrease was primarily due to a $0.2$0.3 million decrease non-taxable
death benefit from bank-owned life insurance received
in mortgage lending income as mortgage loan production declined.

2020.

Noninterest expense was $12.4$9.6 million for the first ninesix months
of 20172021 compared to $12.1$9.8 million for the first ninesix months of 2016. This increase was primarily due to $0.2 million in gains from the sale of OREO, which reduced noninterest expense in the first nine months of 2016.
2020.
The Company had an improved efficiency ratio of 56.81% for the first nine months of 2017, compared to 58.09% in the first nine months of 2016.

Income tax expense and the effective tax rate were $2.4 million and 28.24%, 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 ratedecrease was primarily due to a reduction of $0.7 million in various

expenses related to the redevelopment of
the Company’s headquarters in downtown
Auburn.
This decrease was mostly offset by increases in salaries
and benefits
expense of $0.3 million and other noninterest expense of $0.2
million during the first six months of 2021.
Income tax preference items such as income from investmentsexpense was $0.9 million for the first six months
of 2021 compared to $0.8 million during the first six months
of 2020,
reflecting an increase in municipal securitiesearnings before tax and bank owned life insurance.

effective

tax rate of 17.76% and 17.86%, respectively.
31
The Company paid cash dividends of $0.69$0.52 per share in the first ninesix months
of 2017,2021, an increase of 2.2%2% from the same
period of 2016. 2020.
Our $0.8 million of share repurchases since June 30, 2020
resulted in 20,511 fewer outstanding common
shares at June 30, 2021.
At SeptemberJune 30, 2017,2021, the Bank’s regulatory capital
ratios were well above the minimum amounts
required to be “well capitalized” under current regulatory standards.

Instanda

rds with a total risk-based capital ratio of 17.94%, a tier
1
leverage ratio of 9.81%
and a common equity
tier 1 (“CET1”) ratio of 17.03%
at June 30, 2021.
For the thirdsecond quarter of 2017,2021, net earnings were $2.1 $2.3
million, or $0.59$0.65 per share, compared to $2.0$1.7 million, or $0.54 $0.47
per
share, for the thirdsecond quarter of 2016. 2020.
Net interest income(tax-equivalent) was $6.6$6.1 million for the thirdsecond quarter
of 2017,2021,
a 2% decrease compared to $5.9$6.2 million for the thirdsecond quarter
of 2020.
This decrease was primarily due to net interest
margin compression resulting from the Federal Reserve’s
interest rate reductions and bond purchases in response
to
COVID-19.
Our securities holdings, which generally yield less than loans, increased
as a percentage of our total assets
reflecting deployment of increased deposits.
The Company’s net interest margin
(tax-equivalent) decreased to 2.60% in the
second quarter of 2016. This increase was2021, compared to 2.95% for the second
quarter of 2020 primarily due to the same factors as described above. lower rate environment and
changes in our asset mix resulting from the significant increase in deposits
from government stimulus and relief programs
and customers’ increased savings. Net interest income (tax-equivalent)
included $0.2 million in PPP loan fees, net of
related costs for both the second quarter of 2021 and
2020.
The Company recorded noa negative provision for loan losses inof
$0.6 million during the thirdsecond quarter of 20172021 compared
to $0.5 million in provision for loan losses during the second
quarter 2020.
The negative provision for loan losses was primarily related to
improvements in economic conditions in our
primary market areas, and 2016. related improvements in our asset quality.
Noninterest income was $1.0 million in the third quarter of 2017, compared to $1.1 million in the third second
quarter of 2016. 2021, compared to $1.4 million in the second quarter
of 2020.
The decrease in noninterest income was primarily
due to a $0.1decrease in mortgage lending income of $0.3 million decline
as refinance activity slowed in securities gains, net. our primary market area.
Noninterest expense was $4.2$4.9 million in the thirdsecond quarter of 2017
2021 compared to $4.0$5.0 million induring the thirdsecond quarter of 2016. This increase was primarily due to $0.2 million in gains from the sale of OREO, which reduced noninterest expense in the first nine months of 2016.
2020.
Income tax expense was $0.9 $0.5
million for the thirdsecond quarter of 2017,2021 compared to $0.7$0.4 million during second
quarter
of 2020 reflecting an increase in the third quarter of 2016. earnings before taxes.
The Company’sCompany's effective tax rate for the third second
quarter of 2017 2021
was 28.89%18.06%, compared to 27.50%17.93% in the thirdsecond quarter of 2016.

2020.

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,
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
remainder of the 2021 school year, which involves
resumption of full on-site operations as well as other measures.
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 continuing 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.
See “Balance Sheet Analysis – Loans” for supplemental COVID
-19
disclosures.
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.
32
• 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 and the Governor
of the State of Alabama, starting March 23, 2020, we
limited branch lobby service to appointment only while continuing to
operate our branch drive-thru facilities and ATMs.
As permitted by state public health guidelines, on June 1, 2020,
we re-opened some of our branch lobbies.
During 2021,
we opened our remaining branch lobbies. 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.
• 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
• We
were a participating lender in the 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 requirements 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 Small
Business Administration
(“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
within 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 PPP loans extended during 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
23
5
14,691
40
Up to $350,000
400
95
21,784
60
Total
423
100
%
$
36,475
100
%
We collected
approximately $1.5 million in fees related to our PPP loans during 2020.
Through June 30, 2021, we have
recognized all but $16 thousand of these fees, net of related costs.
On December 27, 2020, the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues
Act (the “Economic Aid
Act”) was signed into law.
The Economic Aid Act provides a second $900
billion stimulus package, including $325 billion
in additional PPP loans.
The Economic Aid Act also permits the collection of a higher amount of PPP
loan fees by
participating banks.
A summary of PPP loans extended during the six months ended
June 30, 2021 under the Economic Aid Act 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
12
5
6,494
32
Up to $350,000
242
95
13,757
68
Total
254
100
%
$
20,251
100
%
As of June 30, 2021, we collected approximately $1.0
million in fees related to PPP loans under the Economic Aid Act.
Through June 30, 2021, we have recognized $0.2 million of these fees, net
of related costs.
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,
2021,
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, including possible additional monetary or fiscal stimulus,
and the possible effects of the expiration or extension
of temporary accounting and bank regulatory relief measures
in response to the COVID-19 pandemic.
33
As of June 30, 2021,
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 and
the valuation of other real estate owned,OREO and the valuation of 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
Determining
the amount of the allowance for loan losses is considered
a critical accounting estimate because 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
“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.

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,dependen
t, 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,charge-
offs, net of recoveries of amounts previouslycharged-off.

charged

-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.

34
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, 20172021 and December 31, 2016,2020, 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 fact
ors
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 refinementshas increased
its look-back period each quarter 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 methodology in order to better captureand its balance would decrease.
For the effects of the most recent economic cycle on the Company’s loan loss experience. First,
quarter ended June 30, 2021, the Company 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 20 quarter look-back period. For the quarter ended September 30, 2017, the Company increased its look-back
period to 3449 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-backlook-
back period to incorporate the effects of at least one
economic downturn in its loss history. The
During 2020, the Company believes
adjusted certain qualitative and economic factors related to changes in
economic conditions driven by the extensionimpact of its look-back period is appropriate duethe
novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse
economic conditions, including higher
unemployment in our primary market area.
During the second quarter of 2021,
the Company adjusted certain qualitative
and economic factors to the risks inherentreflect improvements in economic conditions
in our primary market area.
Further adjustments may
be made in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determinationfuture as a result of the allowance for loan losses and its balance would decrease. Second, 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. If the Company did not make the changes described above, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $0.9 million, or 0.21% of total loans, at December 31, 2016. Other than the changes discussed above, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

continuing COVID-19

pandemic.
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-temporaryother-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-temporaryother
-than-temporary impairment write-downwrite-
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.

The Company is required to own certain stock as a condition of
membership, such as Federal Home Loan Bank (“FHLB”)
and Federal Reserve Bank (“FRB”).
These non-marketable equity securities are accounted for at
cost which equals par or
redemption value.
These securities do not have a readily determinable fair value as their
ownership is restricted and there is
no market for these securities.
The Company records these non-marketable equity securities
as a component of other
assets, which are periodically evaluated for impairment. Management
considers these non-marketable equity securities to
be long-term investments. Accordingly,
when evaluating these securities for impairment, management considers
the
ultimate recoverability of the par value rather than by recognizing temporary
declines in value.
35
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, 2021 and December 31, 2020 the Company had no OREO properties.
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 more-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. 2021.
The amount of
the deferred tax assets considered realizable, however,
could be reduced if estimates of future taxable income are reduced.

36
RESULTS
OF OPERATIONS

Average Balance
Sheet and Interest Rates

   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% 

 

  

 

 

   

 

 

 

Six months ended June 30,
2021
2020
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
464,332
4.47%
$
461,245
4.75%
Securities - taxable
299,011
1.32%
211,503
2.06%
Securities - tax-exempt
62,844
3.64%
62,822
3.76%
Total securities
361,855
1.72%
274,325
2.45%
Federal funds sold
34,700
0.13%
30,716
0.71%
Interest bearing bank deposits
71,252
0.09%
50,365
0.79%
Total interest-earning assets
932,139
2.91%
816,651
3.58%
Deposits:
NOW
173,102
0.13%
151,785
0.43%
Savings and money market
284,174
0.23%
226,240
0.46%
Time Deposits
159,406
1.07%
166,685
1.42%
Total interest-bearing deposits
616,682
0.42%
544,710
0.75%
Short-term borrowings
3,266
0.50%
1,394
0.50%
Total interest-bearing liabilities
619,948
0.42%
546,104
0.75%
Net interest income and margin (tax-equivalent)
$
12,150
2.63%
$
12,529
3.09%
Net Interest Income and Margin

Net interest income(tax-equivalent) was $19.2$12.2 million for the
first ninesix months of 20172021 compared to $18.0$12.5 million for the
first ninesix months of 2016. 2020.
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 increased decreased

by 1467 basis points to 2.91% in the first ninesix months of 2017
2021 compared to 3.58% in the first six months of 2020.
This decrease was primarily due to the lower interest rate
environment and changes in our asset mix resulting from the first nine months of 2016. Increases
significant increase in yields on short-term assets, including federal funds solddeposits from government stimulus 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
relief programs and declining securities yields due to lower reinvestment rates for municipal bonds.

customers’ increased savings.

The cost of total interest-bearing liabilities decreased 8by 33 basis
points to 0.42% in the first ninesix months of 2017 from2021 compared
to 0.75% in the first ninesix months of 2016 to 0.64%. 2020.
The net decrease was largely a result of the continued shift in our funding mix, as we increasedcosts was primarily due to lower prevail
ing
market interest rates.
Our funding costs declined less than the rates earned on our lower-cost interest-bearing demand deposits (NOW accounts) and concurrently reduced our balances of higher-cost certificates of deposits and long-term debt.

interest

earning assets.
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, if the Federal Reserve continues its gradual increase in interest rates. Despite this challenging environment, we believe our net interest income should continue to increase in 2017 compared to 2016 due to shifts in our asset mix, and our belief that interest rates should, depending on competitive pressures, rise faster in our assets than our liabilities.

opportunities.

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 negative provision for loan losses of $0.1 $0.6
million for the first ninesix months of 2017,
2021, compared to a negative $0.6$0.9 million in provision for loan losses for
the first ninesix months of 2016 due2020.
The negative provision for
loan losses was primarily related to the payoff 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. improvements in economic conditions
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.

37
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% 1.12%
at SeptemberJune 30, 2017,2021, compared to 1.08%1.22% at December 31, 2016. 2020.
At
June 30, 2021,
the Company’s allowance for loan losses
was 1.17% of total loans, excluding PPP loans, which are
guaranteed by the SBA.
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

            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  

 

 

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Service charges on deposit accounts decreased primarily due to a decline in insufficient funds charges, reflecting changes in customer behavior and spending patterns.

$
138
$
126
$
270
$
298
Mortgage lending income
424
683
973
913
Bank-owned life insurance
99
108
202
506
Securities gains, net
—
81
—
87
Other
449
365
847
794
Total noninterest income
$
1,110
$
1,363
$
2,292
$
2,598
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.

The Company evaluates 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.

       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

Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Origination income
$
398
$
684
$
935
$
847
Servicing fees, net
26
(1)
38
66
Total mortgage lending income
$
424
$
683
$
973
$
913
The Company’s income from mortgage
lending typically fluctuates as mortgage interest rates change and
is primarily
attributable to the origination and sale of new mortgage loans.
Origination income decreased in the first nine monthssecond quarter of 2017, 2021
compared to the first nine monthssecond quarter of 20162020 due to a decrease in therefinance
activity in our primary market area.
Mortgage loan
origination volume of mortgage loans originated and sold. The Company is evaluating plans to increase its production capabilities; however, until such plans have been implemented, management expects mortgage lending income and volume will decrease compared to prior periods.

Securities gains, net consists of realized gains and losses on the sale of securities. Gross realized gains were $49,000 and $51,000, respectivelyalso declined for the third quarter and first ninesix 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 decreased in the first nine months of 2017, 2021

compared to the first ninesix months of 2016. A decrease2020, but origination
income increased due to improved pricing margins.
38
Income from bank-owned life insurance decreased primarily due to
$0.3 million in bonus incentive accruals was partially offsetnon-taxable death benefits received in
2020.
The assets that support these policies are administered by routine annual 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.
Noninterest Expense
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Salaries and benefits
$
2,897
$
2,597
$
5,748
$
5,428
Net occupancy and equipment
418
920
856
1,517
Professional fees
326
389
582
647
Other
1,254
1,053
2,399
2,223
Total noninterest expense
$
4,895
$
4,959
$
9,585
$
9,815
The increase in salaries and wages.

Professional fees increased in the first nine months of 2017, compared to the first nine months of 2016. The increase was primarily due to increases in professional fees associated with our mortgage lending division.

The decrease in FDIC and other regulatory assessments expensebenefits was primarily due to a decrease

in the Bank’s initial assessment rate during the third quarter of 2016. In addition 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 duedeferred costs related to the Deposit Insurance Fund’s reserve ratio exceeding 1.15% at June 30, 2016.

PPP loan program,

routine annual wage and benefit increases, and management increasing
the minimum hourly wage for banking positions to
$15.
The increasedecrease in other real estate ownednet occupancy and equipment expense was primarily
due to gains realized ona reduction of various expenses related to the sale
redevelopment of OREO the Company’s headquarters
in the third quarter downtown Auburn.
This amount includes revised depreciation estimates
and first nine months of 2016.

other temporary relocation costs.

Income Tax
Expense

Income tax expense was $2.4 $0.9
million for the first ninesix months of 2017 and $2.3 2021 compared to $0.8
million for the first ninesix months of 2016. The Company’s income
2020,
reflecting an increase in earnings before taxes and effective tax expense for the first nine months of 2017 and 2016 reflects an effective income tax
rate of 28.24%17.76% and 27.50%17.86%, respectively. This increase in the effective tax rate is primarily due to a decrease in tax preference items such as income from investments in municipal securities and bank-owned life insurance.

BALANCE SHEET ANALYSIS

ANALYSI

S
Securities

Securitiesavailable-for-sale were $265.2$3
84.9 million at SeptemberJune 30, 2017, an increase of $21.6 million, or 9%,2021 compared to $243.6$335.2 million at December
31, 2016. 2020.
This
increase reflects an increase in the amortized cost basis of securities
available-for-sale of $20.3$54.2 million, and an increasea decrease
of
$4.5 million in the fair value of securitiesavailable-for-sale of $1.3 million. available-for
-sale.
The increase in the amortized cost basis of securities
available-for-sale was primarily attributable to management increasing
allocating more funding to the Company’s investment securities as market yields improvedportfolio following
the significant increase in early 2017. customer deposits.
The increasedecrease in the fair value of securities was primarily due
to a decreasean increase in
long-term interest rates.
The average annualizedtax-equivalent yields earned on total
securities were 2.92% 1.72%
in 2017the first six
months of 2021 and 3.06% 2.45%
in 2016.

the first six months of 2020.

Loans

      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 

 

 

2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
87,933
88,687
82,585
98,244
87,754
Construction and land development
37,477
30,332
33,514
31,651
32,967
Commercial real estate
242,845
254,731
255,136
250,992
250,588
Residential real estate
82,164
82,848
84,154
85,054
85,825
Consumer installment
7,762
6,524
7,099
7,731
8,631
Total loans
458,181
463,122
462,488
473,672
465,765
Less:
unearned income
(1,197)
(1,243)
(788)
(1,219)
(1,491)
Loans, net of unearned income
$
456,984
461,879
461,700
472,453
464,274
39
Total loans, net of unearned
income, were $457.0 million at June 30, 2021, a
decrease of $4.7 million from $461.7 million
at December 31, 2020.
Excluding PPP loans, total loans net of unearned income, were $449.4$4
35.7 million, at September 30, 2017, compared to $430.9a decrease of $6.5
million, or 1% from $442.3 million at December 31, 2016. The increase of $18.5 million, or 4% was primarily due to growth in commercial real estate loans. 2020
.
Four loan categories represented the majority of the loan
portfolio at SeptemberJune 30, 2017:2021: commercial real estate (53%), residential real
estate (25%(18%), commercial and industrial (19%) and
construction and land development (11%) and commercial and industrial (11%(8%).
Approximately 18% 21%
of the Company’s commercial
real estate loans were
classified as owner-occupied at SeptemberJune 30, 2017.

2021.

Within the residential real estate portfolio
segment, the Company had junior lien mortgages of approximately $12.5 $8.1
million,
or 3%2% of total loans, at SeptemberJune 30, 2017,2021, compared to $13.7$8.7 million,
or 3%2% of total loans, at December 31, 2016. 2020.
For
residential real estate mortgage loans with a consumer purpose, $2.0 million
the Company had no loans that required interest-only
payments at SeptemberJune 30, 2017, compared to $1.4 million at2021 and December 31, 2016.2020. 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% 4.47
%
in the first ninesix months of 20172021 and 4.75% in the first nine
six months of 2016.

2020.

The specific economic and credit risks associated with our loan portfoliopo
rtfolio 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$20.7 million.
Furthermore, we have an internal limit for aggregate credit
exposure (loans outstanding plus
unfunded commitments) to a single borrower of $16.8 $18.6
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, 2017,2021, 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, 20172021 (and related
balances at December
31, 2016)2020).

       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 

 

 

June 30,
December 31,
(Dollars in thousands)
2021
2020
Hotel/motel
$
46,963
$
42,900
Lessors of 1-4 family residential properties
49,024
49,127
Multi-family residential properties
39,316
40,203
Shopping centers
29,834
30,000
40
COVID-19 Modifications
In light of 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, including
the Interagency Statement on COVID-19 Loan Modifications and
the Interagency Examiner Guidance for Assessing Safety
and Soundness Considering the Effect of the COVID
-19 Pandemic on Institutions, provides that the agencies will not
criticize financial institutions that mitigate credit risk through
prudent actions consistent with safe and sound practices.
Specifically, examiners will
not criticize institutions for working with borrowers as part
of a risk mitigation strategy
intended to improve existing loans, even if the restructured
loans have or develop weaknesses that ultimately result in
adverse credit classification.
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, 2021 and December 31, 2020, we have granted loan
payment deferrals or payments of interest-only primarily
on commercial and industrial and commercial real estate loans totaling
$32.3 million, or 7% of total loans, compared to
$112.7 million, or 24% of total loans at
June 30, 2020, the end of the first quarterly period we began loan
modifications to
assist customers through the COVID-19 pandemic.
Based on discussions with our borrowers, we expect
these to further
decline over the second half of 2021.
The tables below provide information concerning the composition
of these COVID-19 modifications as of June 30, 2021
and December 31, 2020.
Modification Types
(Dollars in thousands)
# of Loans
Modified
Balance
% of Portfolio
Modified
Interest Only
Payment
P&I
Payments
Deferred
June 30, 2021:
Commercial and industrial
2
$
740
—
%
100
%
—
%
Commercial real estate
12
31,363
7
100
—
Residential real estate
2
242
—
—
100
Total
16
$
32,345
7
%
99
%
1
%
December 31, 2020:
Commercial and industrial
2
$
741
—
%
100
%
—
%
Commercial real estate
12
31,399
7
100
—
Residential real estate
2
133
—
—
100
Total
16
$
32,273
7
%
99
%
1
%
COVID-19 Modifications within Commercial Real
Estate Segment
(Dollars in thousands)
# of Loans
Modified
Balance of
Loans Modified
% of Total
Loan Class
June 30, 2021:
Hotel/motel
10
$
26,391
49
%
Multifamily
1
3,530
9
Restaurants
1
1,442
11
December 31, 2020:
Hotel/motel
10
$
26,427
49
%
Multifamily
1
3,530
9
Restaurants
1
1,442
10
41
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.
1
million at September
June 30, 20172021 compared to $4.6$5.6 million at December 31, 2016,
2020, 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 2017 2021
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) 

 

 

2021
2020
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
5,682
5,618
5,575
5,308
4,867
Charge-offs:
Commercial and industrial
—
—
(4)
—
(3)
Residential real estate
(1)
—
—
—
—
Consumer installment
—
(5)
(1)
(4)
(28)
Total charge
-offs
(1)
(5)
(5)
(4)
(31)
Recoveries
26
69
48
21
22
Net recoveries (charge-offs)
25
64
43
17
(9)
Provision for loan losses
(600)
—
—
250
450
Ending balance
$
5,107
5,682
5,618
5,575
5,308
as a % of loans
1.12
%
1.23
1.22
1.18
1.14
as a % of nonperforming loans
813
%
726
1,052
1,015
783
Net (recoveries) charge-offs as % of average loans
(a)
(0.02)
%
(0.06)
(0.04)
(0.01)
0.01
(a) Net (recoveries) charge-offs (recoveries) are annualized.

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
(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% 1.12
%
at SeptemberJune 30, 2017,2021, compared to 1.08%1.22% at December 31, 2016.
2020.
At June 30, 2021, the Company’s allowance
for loan losses was 1.17% 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 the duration and magnitude of 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 the allowance for loan losses) of $49 thousand and $31 thousand at each respective date.

Nonperforming Assets

The Company had $3.0 $0.6
million and $0.5
million in nonperforming assets at SeptemberJune 30, 2017, compared to $2.5 million in nonperforming assets at2021 and December 31, 2016.

2020,
respectively.
42
The table below provides information concerning total nonperforming
assets and certain asset quality ratios for the third second
quarter of 20172021 and the previous four quarters.

     

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 

 

2021
2020
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
628
783
534
549
678
Total nonperforming assets
$
628
783
534
549
678
as a % of loans and other real estate owned
0.14
%
0.17
0.12
0.12
0.15
as a % of total assets
0.06
%
0.08
0.06
0.06
0.07
Nonperforming loans as a % of total loans
0.14
%
0.17
0.12
0.12
0.15
The table below provides information concerning the composition
of nonaccrual loans for the thirdsecond quarter of 2017 2021
and
the previous four quarters.

     

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 

 

2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial real estate
$
199
206
212
216
218
Residential real estate
429
577
322
332
459
Consumer installment
—
—
—
1
1
Total nonaccrual loans
$
628
783
534
549
678
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,2021, the
Company had $2.9 million and $2.4 $0.6
million in loans on nonaccrual.

At September 30, 2017 there were $5 thousand innonaccrual status compared to $0.5 million at December 31,

2020.
The Company had no loans 90 days or more past due and still
accruing at June 30, 2021 compared to none$0.1 million at
December 31, 2016.

2020.

The table below provides information concerning the composition of other real estate owned for the third quarter of 2017 and the previous four quarters.

     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  

 

 

Company had no OREO at June 30, 2021 or December 31,

2020.
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 primarypri
mary regulator, for loans classified as
substandard, excluding nonaccrual loans.
Potential
problem loans, which are not included in nonperforming assets,
amounted to $5.8$2.8 million, or 1.3%0.6% of total loans at SeptemberJune 30, 2017, compared to $5.8
2021, and $2.9 million, or 1.4%0.6% of total loans at December 31, 2016.

2020.
43
The table below provides information concerning the composition
of potential problem loans for the thirdsecond quarter of 2017 2021
and the previous four quarters.

     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 September 30, 2017, approximately $0.8 million, or 14% of total

2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Potential problem loans:
Commercial and industrial
$
291
299
218
230
211
Construction and land development
239
247
254
563
568
Commercial real estate
178
173
188
188
165
Residential real estate
2,096
2,092
2,229
2,486
2,645
Consumer installment
7
9
23
42
55
Total potential problem loans were past due at least
$
2,811
2,820
2,912
3,509
3,644
At June 30, days, but less than 90 days.

The following table is a summary of2021 the Company’s performing Company had $0.1 million in 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 20172021 and the previous four quarters.

     2017   2016 
     

 

Third

   Second   First   Fourth   Third 
(In thousands)    

 

    Quarter    

       Quarter           Quarter           Quarter           Quarter     

 

 

Performing loans past due 30 to 89 days:

           

Commercial and industrial

 

$

   64    195    1    66    3  

Construction and land development

    175    2    3    395    —    

Commercial real estate

    —      748    —      242    —    

Residential real estate

    513    496    1,186    1,301    369  

Consumer installment

    33    25    17    38    40  

 

 

Total

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

 

 

quarters

.
2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial
$
1
42
230
48
83
Construction and land development
204
10
61
—
—
Commercial real estate
205
180
29
—
168
Residential real estate
68
399
1,509
106
620
Consumer installment
7
36
29
6
8
Total
$
485
667
1,858
160
879
Deposits

Total deposits were $732.6increased
$83.7 million, or 10% to $923.5 million at SeptemberJune 30, 2017, 2021,
compared to $739.1$839.8 million at December
31, 2016. Decreases of $9.4 million in interest bearing2020.
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$283.4 million, or 25.2%31% of total
deposits, at SeptemberJune 30, 2017,2021, compared to $181.9
$245.4 million, or 24.6% 29%
of total deposits at December 31, 2016.

2020.

These increases reflect deposits from customers who
received PPP loans, the impact of government stimulus checks, delayed
tax payments
and less customer spending during
the COVID-19 pandemic.
The average rate paid on total interest-bearing deposits was 0.62% 0.42
%
in the first ninesix months of 2017 and 0.69%2021 compared to 0.75% in the
first ninesix months of 2016.

2020.

The decline in average rates paid on total interest-bearing deposits
was largely driven by generally
lower market interest rates.
Other Borrowings

Other borrowings consist of short-term borrowings and long-term
debt. Short-term borrowings generally consist of federal
funds purchased and agreements with certain customers to sell certain
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, 2017,2021, and at December 31, 2016, 2020,
respectively. Securities sold
under agreements to repurchase
totaled $3.6 million and $3.4$3.5 million at SeptemberJune 30, 2017 and2021, compared to $2.4
million at December 31, 2016, respectively.

2020.

The average rate paid on short-term borrowings was 0.52%0.50% in the first nine six
months of 20172021 compared to 0.51%0.75% in the first nine
six months of 2016.

Long-term debt includes subordinated debentures related to trust preferred securities. 2020.

The Company had $3.2 million in junior subordinated debentures related to trust preferred securities outstandingno long-term debt at SeptemberJune 30, 20172021 and
December 31, 2016. The junior subordinated debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.

The average rate paid on long-term debt was 3.87% in the first nine months2020.

44
CAPITAL ADEQUACY

The Company’s consolidated stockholders’
equity was $86.5$106.0 million and $82.2$107.7 million as of SeptemberJune 30, 2017
2021 and
December 31, 2016,2020, respectively.
The increasedecrease from December 31, 20162020 was primarily driven by net earnings of $6.0 million and an
other comprehensive income
loss due to the change in unrealized gains (losses) on securities
available-for-sale,net-of-tax, net of $0.9tax of $3.3 million, which was partially offset by cash dividends
paid of $2.5$1.8 million, and repurchases of the Company’s
stock of $0.8 million.

During the first six months of 2021, the
Company repurchased 20,511 shares under the
Company’s current stock repurchase program.
These shares were
repurchased at an average cost per share of $36.56 and
a total cost of $0.8 million.
These decreases in the Company’s
consolidated stockholders’ equity were partially offset
by net earnings of $4.3 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 phase
-in period that began on January 1, 2016 and will bewas fullyphased-in phased
-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, 2021,
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 interim final rule was adopted as a final rule on August
26, 2020.
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’s Bank’s
tier 1 leverage ratio was 10.70%9.81%, common equity tier 1 (“CET1”)CET1 risk-based capital ratio
was 16.15%17.03%, tier 1 risk-based capital ratio was 16.71%17.03%, and
total risk-based capital ratio was 17.62% 17.94%
at SeptemberJune 30, 2017.2021. 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% 9.94%
at September
June 30, 2017.

2021.

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.

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.

45
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, 2017,2021, 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 off-
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 off
-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, 2017,2021, 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.

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, 20172021 and December 31, 2016,
2020, the Company had no derivative contracts designated as part
of a hedging relationship to assist in managing its interest rate
sensitivity.

46
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 of
Company could also issue common stock or other securities.
Primary uses of funds by the Company include dividends paid
to stockholders, Company 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.

expenses.

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, 2017,2021, the Bank had
a remaining available line of credit with the FHLB of $246.8
$297.9 million. At SeptemberJune 30, 2017,2021, the Bank also had $41.0
million of available federal funds lines with none no borrowings
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 Contingencies

Contractual Obligations

At SeptemberJune 30, 2017,2021, the Bank had outstanding standby letters of credit
of $7.6 $1.4
million and unfunded loan commitments
outstanding of $71.3$69.4 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, available-for-
sale, or draw on its available credit facilities.

Mortgage lending activities

Since 2009, we have

We primarily soldsell 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.

As of SeptemberJune 30, 2017, 2021,
the unpaid principal balance of residential mortgage loans, which we have originated
and sold, but
retained the servicing rights was $314.7$260.8 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

47
The Company was not required to repurchase any loans during the first nine
six months of 2017,2021 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 at June 30, 2021.
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
(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, 2021,
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 1-4 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 December 31,
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.

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;

•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.

●
ASU 2016-13,
Financial Instruments – Credit Losses (Topic
326):
Measurement of Credit Losses on
Financial
Instruments;
48
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 gener
al 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.

ASU2016-18,Statementnew standard

in January
2023, with early adoption permitted in any period prior
to that date.
49
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 non-
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 non-
GAAP financial measures to their most directly comparable
GAAP financial measures are presented below.

   2017   2016 
   

 

Third

   Second   First   

 

Fourth

   Third 
(in thousands)  

 

      Quarter      

         Quarter               Quarter         

 

      Quarter      

         Quarter       

 

   

 

 

 

Net interest income (GAAP)

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

Tax-equivalent adjustment

   304    301    300    316    316 

 

   

 

 

 

Net interest income(Tax-equivalent)

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

 

   

 

 

 
               Nine months ended September 30, 
(In thousands)              2017   2016 

 

 

Net interest income (GAAP)

        $18,251    16,997 

Tax-equivalent adjustment

         905    960 

 

 

Net interest income(Tax-equivalent)

        $19,156    17,957 

 

 

2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
5,975
5,937
6,188
5,868
6,070
Tax-equivalent adjustment
118
120
123
122
127
Net interest income (Tax
-equivalent)
$
6,093
6,057
6,311
5,990
6,197
Six months ended June 30,
(In thousands)
2021
2020
Net interest income (GAAP)
$
11,912
12,282
Tax-equivalent adjustment
238
247
Net interest income (Tax
-equivalent)
$
12,150
12,529
50
Table 2
- Selected Quarterly Financial Data

   2017   2016 
   Third  Second   First   Fourth   Third 
(Dollars in thousands, except per share amounts)  Quarter  Quarter   Quarter   Quarter   Quarter 

 

 

Results of Operations

         

Net interest income (a)

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

Less:tax-equivalent adjustment

   304   301    300    316    316 

 

 

Net interest income (GAAP)

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

Noninterest income

   968   793    836    493    1,063 

 

 

Total revenue

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

Provision for loan losses

   —     100    —      115    —   

Noninterest expense

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

Income tax expense

   868   784    717    798    740 

 

 

Net earnings

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

 

 

Per share data:

         

Basic and diluted net earnings

  $0.59   0.55    0.52    0.57    0.54 

Cash dividends declared

   0.23   0.23    0.23    0.225    0.225 

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 

Book value

  $23.75   23.36    22.88    22.55    23.34 

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 

Performance ratios:

         

Return on average equity

   9.87%   9.44    9.09    9.61    9.06 

Return on average assets

   1.03%   0.96    0.90    1.00    0.92 

Dividend payout ratio

   38.98%   41.82    44.23    39.47    41.67 

Asset Quality:

         

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 

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 

Nonperforming loans as a % of total loans

   0.65%   0.52    0.54    0.55    0.38 

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

   0.27%   (0.25)    0.05    0.05    (0.05) 

Capital Adequacy:

         

CET 1 risk-based capital ratio

   16.15%   16.22    16.24    16.44    15.74 

Tier 1 risk-based capital ratio

   16.71%   16.79    16.83    17.00    17.07 

Total risk-based capital ratio

   17.62%   17.77    17.75    17.95    17.97 

Tier 1 leverage ratio

   10.70%   10.56    10.40    10.27    10.36 

Other financial data:

         

Net interest margin (a)

   3.32%   3.28    3.19    3.05    2.94 

Effective income tax rate

   28.89%   28.21    27.50    27.76    27.50 

Efficiency ratio (b)

   56.09%   55.80    58.62    49.48    56.96 

Selected average balances:

         

Securities

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

Loans, net of unearned income

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

Total assets

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

Total deposits

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

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 

Selected period end balances:

         

Securities

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

Loans, net of unearned income

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

Allowance for loan losses

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

Total assets

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

Total deposits

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

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 

 

 

2021
2020
Second
First
Fourth
Third
Second
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,093
6,057
6,311
5,990
6,197
Less: tax-equivalent adjustment
118
120
123
122
127
Net interest income (GAAP)
5,975
5,937
6,188
5,868
6,070
Noninterest income
1,110
1,182
1,403
1,374
1,363
Total revenue
7,085
7,119
7,591
7,242
7,433
Provision for loan losses
(600)
—
—
250
450
Noninterest expense
4,895
4,690
5,086
4,653
4,959
Income tax expense
504
423
449
403
363
Net earnings
$
2,286
2,006
2,056
1,936
1,661
Per share data:
Basic and diluted net earnings
$
0.65
0.56
0.58
0.54
0.47
Cash dividends declared
0.26
0.26
0.255
0.255
0.255
Weighted average shares outstanding:
Basic and diluted
3,554,871
3,566,299
3,566,276
3,566,239
3,566,166
Shares outstanding
3,545,855
3,566,326
3,566,276
3,566,276
3,566,176
Book value
$
29.91
29.06
30.20
29.81
29.53
Common stock price
High
$
38.90
48.00
43.00
56.80
63.40
Low
34.50
37.55
36.75
26.26
36.81
Period end
35.46
38.37
42.29
36.26
57.09
To earnings ratio
15.22
x
17.85
20.23
15.97
24.29
To book value
119
%
132
140
122
193
Performance ratios:
Return on average equity
8.74
%
7.37
7.63
7.26
6.34
Return on average assets
0.91
%
0.82
0.87
0.84
0.74
Dividend payout ratio
40.00
%
46.43
43.97
47.22
54.26
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.12
%
1.23
1.22
1.18
1.14
Nonperforming loans
813
%
726
1,052
1,015
783
Nonperforming assets as a % of:
Loans and other real estate owned
0.14
%
0.17
0.12
0.12
0.15
Total assets
0.06
%
0.08
0.06
0.06
0.07
Nonperforming loans as a % of total loans
0.14
%
0.17
0.12
0.12
0.15
Annualized net (recoveries) chargeoffs as a % of average loans
(0.02)
%
(0.06)
(0.04)
(0.01)
0.01
Capital Adequacy: (c)
CET 1 risk-based capital ratio
17.03
%
17.21
17.27
17.70
18.00
Tier 1 risk-based capital ratio
17.03
%
17.21
17.27
17.70
18.00
Total risk-based capital ratio
17.94
%
18.25
18.31
18.77
19.04
Tier 1 leverage ratio
9.81
%
9.99
10.32
10.38
10.62
Other financial data:
Net interest margin (a)
2.60
%
2.66
2.81
2.72
2.95
Effective income tax rate
18.06
%
17.41
17.92
17.23
17.93
Efficiency ratio (b)
67.96
%
64.79
65.93
63.19
65.60
Selected average balances:
Securities
$
370,582
353,031
325,102
315,542
291,333
Loans, net of unearned income
460,672
463,424
466,704
465,285
466,971
Total assets
1,005,041
980,884
944,439
924,949
893,720
Total deposits
894,757
863,194
828,801
810,747
782,381
Total stockholders’ equity
104,591
108,890
107,791
106,709
104,820
Selected period end balances:
Securities
$
384,865
359,630
335,177
320,922
302,193
Loans, net of unearned income
456,984
461,879
461,700
472,453
464,274
Allowance for loan losses
5,107
5,682
5,618
5,575
5,308
Total assets
1,036,232
993,263
956,597
937,890
942,887
Total deposits
923,462
880,590
839,792
823,980
829,810
Total stockholders’ equity
106,043
103,639
107,689
106,314
105,299
(a) Tax-equivalent. See “Table"Table 1 - Explanation ofNon-GAAP Financial Measures.”

"

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

(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
51
Table 3
- Selected Financial Data

   

Nine months ended September 30,

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

 

 

Results of Operations

   

Net interest income (a)

  $19,156   17,957 

Less:tax-equivalent adjustment

   905   960 

 

 

Net interest income (GAAP)

   18,251   16,997 

Noninterest income

   2,597   2,890 

 

 

Total revenue

   20,848   19,887 

Provision for loan losses

   100   (600) 

Noninterest expense

   12,358   12,110 

Income tax expense

   2,369   2,304 

 

 

Net earnings

  $6,021   6,073 

 

 

Per share data:

   

Basic and diluted net earnings

  $1.65   1.67 

Cash dividends declared

   0.69   0.675 

Weighted average shares outstanding:

   

Basic and diluted

         3,643,598         3,643,498 

Shares outstanding, at period end

   3,643,668   3,643,523 

Book value

  $23.75   23.34 

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 

Performance ratios:

   

Return on average equity

   9.47%   9.67 

Return on average assets

   0.96%   0.97 

Dividend payout ratio

   41.82%   40.42 

Asset Quality:

   

Allowance for loan losses as a % of:

   

Loans

   1.04%   1.07 

Nonperforming loans

   161%   284 

Nonperforming assets as a % of:

   

Loans and other real estate owned

   0.67%   0.39 

Total assets

   0.36%   0.19 

Nonperforming loans as a % of total loans

   0.65%   0.38 

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

   0.02%   (0.27) 

Capital Adequacy:

   

CET 1 risk-based capital ratio

   16.15%   15.74 

Tier 1 risk-based capital ratio

   16.71%   17.07 

Total risk-based capital ratio

   17.62%   17.97 

Tier 1 leverage ratio

   10.70%   10.36 

Other financial data:

   

Net interest margin (a)

   3.26%   3.05 

Effective income tax rate

   28.24%   27.50 

Efficiency ratio (b)

   56.81%   58.09 

Selected average balances:

   

Securities

  $268,612   229,185 

Loans, net of unearned income

   436,740   431,213 

Total assets

   832,637   834,721 

Total deposits

   738,255   734,241 

Long-term debt

   3,217   7,217 

Total stockholders’ equity

   84,780   83,740 

Selected period end balances:

   

Securities

  $265,171   249,556 

Loans, net of unearned income

   449,378   427,203 

Allowance for loan losses

   4,670   4,578 

Total assets

   828,546   851,672 

Total deposits

   732,648   751,915 

Long-term debt

   3,217   7,217 

Total stockholders’ equity

   86,538   85,055 

 

 

Six months ended June 30,
(Dollars in thousands, except per share amounts)
2021
2020
Results of Operations
Net interest income (a)
$
12,150
12,529
Less: tax-equivalent adjustment
238
247
Net interest income (GAAP)
11,912
12,282
Noninterest income
2,292
2,598
Total revenue
14,204
14,880
Provision for loan losses
(600)
850
Noninterest expense
9,585
9,815
Income tax expense
927
753
Net earnings
$
4,292
3,462
Per share data:
Basic and diluted net earnings
$
1.21
0.97
Cash dividends declared
0.520
0.51
Weighted average shares outstanding:
Basic and diluted
3,560,554
3,566,156
Shares outstanding, at period end
3,545,855
3,566,176
Book value
$
29.91
29.53
Common stock price
High
$
48.00
63.40
Low
34.50
24.11
Period end
35.46
57.09
To earnings ratio
15.22
x
24.29
To book value
119
%
193
Performance ratios:
Return on average equity
8.04
%
6.78
Return on average assets
0.86
%
0.80
Dividend payout ratio
42.98
%
52.58
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.12
%
1.14
Nonperforming loans
813
%
783
Nonperforming assets as a % of:
Loans and other real estate owned
0.14
%
0.15
Total assets
0.06
%
0.07
Nonperforming loans as a % of total loans
0.14
%
0.15
Annualized net recoveries as a % of average loans
(0.04)
%
(0.03)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
17.03
%
18.00
Tier 1 risk-based capital ratio
17.03
%
18.00
Total risk-based capital ratio
17.94
%
19.04
Tier 1 leverage ratio
9.81
%
10.62
Other financial data:
Net interest margin (a)
2.63
%
3.09
Effective income tax rate
17.76
%
17.86
Efficiency ratio (b)
66.37
%
64.88
Selected average balances:
Securities
$
361,855
274,325
Loans, net of unearned income
462,040
459,091
Total assets
992,940
866,222
Total deposits
879,063
758,215
Total stockholders’ equity
106,729
102,190
Selected period end balances:
Securities
$
384,865
302,193
Loans, net of unearned income
456,984
464,274
Allowance for loan losses
5,107
5,308
Total assets
1,036,232
942,887
Total deposits
923,462
829,810
Total stockholders’ equity
106,043
105,299
(a) Tax-equivalent. See “Table"Table 1 - Explanation ofNon-GAAP Financial Measures.”

"

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

(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
52
Table 4
- Average
Balances and Net Interest Income Analysis

     Quarter ended September 30, 
     

 

2017

     

 

2016

 
(Dollars in thousands)    

Average

 

Balance

   

Interest

 

Income/

 

Expense

   

Yield/

 

Rate

     

Average

 

Balance

   

Interest

 

Income/

 

Expense

   

Yield/

 

Rate

 

 

   

 

 

    

 

 

 

Interest-earning assets:

              

Loans and loans held for sale (1)

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

Securities - taxable

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

Securities -tax-exempt (2)

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

 

   

 

 

    

 

 

 

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% 

Interest bearing bank deposits

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

 

   

 

 

    

 

 

 

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      

Other assets

    34,241          35,179      

 

   

 

 

        

 

 

     

Total assets

 $   831,097       $   851,409      

 

   

 

 

        

 

 

     

Interest-bearing liabilities:

              

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% 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

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

Short-term borrowings

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

Long-term debt

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

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

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

Noninterest-bearing deposits

    180,144          172,953      

Other liabilities

    2,382          6,917      

Stockholders’ equity

    86,543          86,103      

 

   

 

 

        

 

 

     

Total liabilities and stockholders’ equity

 $   831,097       $   851,409      

 

   

 

 

        

 

 

     

Net interest income and margin(tax-equivalent)

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

 

     

 

 

      

 

 

 

Quarter ended June 30,
2021
2020
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
462,319
$
5,112
4.44%
$
470,335
$
5,494
4.70%
Securities - taxable
307,941
1,009
1.31%
226,585
1,056
1.87%
Securities - tax-exempt (2)
62,641
562
3.60%
64,748
603
3.75%
Total securities
370,582
1,571
1.70%
291,333
1,659
2.29%
Federal funds sold
36,570
11
0.12%
31,673
16
0.20%
Interest bearing bank deposits
72,144
17
0.09%
51,352
11
0.09%
Total interest-earning assets
941,615
$
6,711
2.86%
844,693
$
7,180
3.42%
Cash and due from banks
14,824
13,361
Other assets
48,602
35,666
Total assets
$
1,005,041
$
893,720
Interest-bearing liabilities:
Deposits:
NOW
$
174,138
$
45
0.10%
$
154,225
$
138
0.36%
Savings and money market
286,477
150
0.21%
231,571
263
0.46%
Time deposits
159,347
419
1.05%
165,922
580
1.41%
Total interest-bearing deposits
619,962
614
0.40%
551,718
981
0.72%
Short-term borrowings
3,370
4
0.50%
1,428
2
0.50%
Total interest-bearing liabilities
623,332
$
618
0.40%
553,146
$
983
0.71%
Noninterest-bearing deposits
274,795
230,663
Other liabilities
2,323
5,091
Stockholders' equity
104,591
104,820
Total liabilities and
stockholders' equity
$
1,005,041
$
893,720
Net interest income and margin (tax-equivalent)
$
6,093
2.60%
$
6,197
2.95%
(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 ontax-exempt securities
have been computed on atax-equivalent basis using ana federal income
tax rate of 34%21%.

53
Table 5
- Average
Balances and Net Interest Income Analysis

     Nine months ended September 30, 
     

 

2017

     

 

2016

 
         

 

Interest

             Interest     
     Average   

 

Income/

   Yield/     Average   Income/   Yield/ 
(Dollars in thousands)    Balance   

 

Expense

   Rate     Balance   Expense   Rate 

 

   

 

 

    

 

 

 

Interest-earning assets:

              

Loans and loans held for sale (1)

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

Securities - taxable

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

Securities -tax-exempt (2)

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

 

   

 

 

    

 

 

 

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% 

Interest bearing bank deposits

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

 

   

 

 

    

 

 

 

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     

Other assets

    34,179         35,019     

 

   

 

 

        

 

 

     

Total assets

 $   832,637      $   834,721     

 

   

 

 

        

 

 

     

Interest-bearing liabilities:

              

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% 

 

    

 

 

 

Total interest-bearing deposits

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

Short-term borrowings

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

Long-term debt

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

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

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

Noninterest-bearing deposits

    179,521         164,640     

Other liabilities

    2,759         6,651     

Stockholders’ equity

    84,780         83,740     

 

   

 

 

        

 

 

     

Total liabilities and stockholders’ equity

 $   832,637      $   834,721     

 

   

 

 

        

 

 

     

Net interest income and margin(tax-equivalent)

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

 

     

 

 

      

 

 

 

Six months ended June 30,
2021
2020
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
464,332
$
10,290
4.47%
$
461,245
$
10,906
4.75%
Securities - taxable
299,011
1,958
1.32%
211,503
2,167
2.06%
Securities - tax-exempt (2)
62,844
1,134
3.64%
62,822
1,176
3.76%
Total securities
361,855
3,092
1.72%
274,325
3,343
2.45%
Federal funds sold
34,700
23
0.13%
30,716
109
0.71%
Interest bearing bank deposits
71,252
33
0.09%
50,365
197
0.79%
Total interest-earning assets
932,139
$
13,438
2.91%
816,651
$
14,555
3.58%
Cash and due from banks
14,355
13,773
Other assets
46,446
35,798
Total assets
$
992,940
$
866,222
Interest-bearing liabilities:
Deposits:
NOW
$
173,102
$
111
0.13%
$
151,785
$
326
0.43%
Savings and money market
284,174
321
0.23%
226,240
516
0.46%
Time deposits
159,406
848
1.07%
166,685
1,180
1.42%
Total interest-bearing deposits
616,682
1,280
0.42%
544,710
2,022
0.75%
Short-term borrowings
3,266
8
0.50%
1,394
4
0.50%
Total interest-bearing liabilities
619,948
$
1,288
0.42%
546,104
$
2,026
0.75%
Noninterest-bearing deposits
262,381
213,505
Other liabilities
3,882
4,423
Stockholders' equity
106,729
102,190
Total liabilities and
stockholders' equity
$
992,940
$
866,222
Net interest income and margin (tax-equivalent)
$
12,150
2.63%
$
12,529
3.09%
(1) Average loan balances
are shown net of unearned income and loans on nonaccrual statusstat
us have been included
in the computation of average balances.

(2) Yields ontax-exempt securities
have been computed on atax-equivalent basis using ana federal income
tax rate of 34%21%.

54
Table 6
- Loan Portfolio Composition

       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  

Less: allowance for loan losses

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

 

 

Loans, net

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

 

 

2021
2020
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
87,933
88,687
82,585
98,244
87,754
Construction and land development
37,477
30,332
33,514
31,651
32,967
Commercial real estate
242,845
254,731
255,136
250,992
250,588
Residential real estate
82,164
82,848
84,154
85,054
85,825
Consumer installment
7,762
6,524
7,099
7,731
8,631
Total loans
458,181
463,122
462,488
473,672
465,765
Less:
unearned income
(1,197)
(1,243)
(788)
(1,219)
(1,491)
Loans, net of unearned income
456,984
461,879
461,700
472,453
464,274
Less: allowance for loan losses
(5,107)
(5,682)
(5,618)
(5,575)
(5,308)
Loans, net
$
451,877
456,197
456,082
466,878
458,966
55
Table 7
- Allowance for Loan Losses and Nonperforming Assets

     2017      2016 
                         
     Third  Second   First      Fourth   Third 
(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  

 

 

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 avg. loans (a)

    0.27 %   (0.25)     0.05       0.05     (0.05) 

 

 

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 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  

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  

 

 

2021
2020
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Allowance for loan losses:
Balance at beginning of period
$
5,682
5,618
5,575
5,308
4,867
Charge-offs:
Commercial and industrial
—
—
(4)
—
(3)
Residential real estate
(1)
—
—
—
—
Consumer installment
—
(5)
(1)
(4)
(28)
Total charge
-offs
(1)
(5)
(5)
(4)
(31)
Recoveries
26
69
48
21
22
Net recoveries (charge-offs)
25
64
43
17
(9)
Provision for loan losses
(600)
—
—
250
450
Ending balance
$
5,107
5,682
5,618
5,575
5,308
as a % of loans
1.12
%
1.23
1.22
1.18
1.14
as a % of loans (excluding PPP loans)
1.17
%
1.31
1.27
1.28
1.24
as a % of nonperforming loans
813
%
726
1,052
1,015
783
Net (recoveries) charge-offs as % of avg. loans
(a)
(0.02)
%
(0.06)
(0.04)
(0.01)
0.01
Nonperforming assets:
Nonaccrual loans
$
628
783
534
549
678
Total nonperforming assets
$
628
783
534
549
678
as a % of loans and other real estate owned
0.14
%
0.17
0.12
0.12
0.15
as a % of total assets
0.06
%
0.08
0.06
0.06
0.07
Nonperforming loans as a % of total loans
0.14
%
0.17
0.12
0.12
0.15
Accruing loans 90 days or more past due
$
—
—
21
71
49
(a) Net charge-offs (recoveries)recoveries (charge-offs) are annualized.

56
Table 8
- Allocation of Allowance for Loan Losses

    2017 2016 
    Third Quarter    Second Quarter    First Quarter Fourth Quarter    Third Quarter 
(Dollars in thousands)   Amount   %*    Amount   %*    Amount   %*    Amount  %*    Amount   %* 

 

 

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  

Residential real estate

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

Consumer installment

   177    2.2     174    2.1     151    2.1     113   2.0     138    2.1  

 

 

Total allowance for loan losses

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

 

 

2021
2020
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
829
19.2
$
828
19.1
$
807
17.9
$
798
20.7
$
679
18.8
Construction and land
development
639
8.2
551
6.5
594
7.2
582
6.7
613
7.1
Commercial real estate
2,704
53.0
3,259
55.1
3,169
55.2
3,120
53.0
2,915
53.8
Residential real estate
838
17.9
951
17.9
944
18.2
954
18.0
954
18.4
Consumer installment
97
1.7
93
1.4
104
1.5
121
1.6
147
1.9
Total allowance for loan losses
$
5,107
$
5,682
$
5,618
$
5,575
$
5,308
* Loan balance in each category expressed as a percentage of total loans.

57
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, 2021
Maturity of:
3 months or less
$
21,587
Over 3 months through 6 months
22,640
Over 6 months through 12 months
21,072
Over 12 months
40,693
Total CDs and other
time deposits of $100,000 or more
$
105,992
58
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
(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.

2020.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report,
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,
2020,
which could materially affect our business, financial
condition or future results. The risks described in our annual report
on
Form10-K 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.

59
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 2021 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, 2021
2,477
$
35.84
2,477
$
4,911,235
May 1 - May 31, 2021
18,034
36.66
18,034
4,250,048
June 1 - June 30, 2021
—
—
—
4,250,048
Total
20,511
36.56
20,511
4,250,048
(1)
On March 9, 2021, the Company adopted a $5 million stock repurchase program that become effective April 1, 2021.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES

Not applicable.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.
OTHER INFORMATION

Not applicable.

60
ITEM 6.
EXHIBITS

Exhibit    

Number

Description
3.1Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*
3.2Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **
31.1
Exhibit
Number
Description
3.1
3.2
31.1
31.2Certification 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, Chief Financial Officer.
32.1Certification 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, President and Chief Executive Officer.***
32.2Certification 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, Chief Financial Officer.***
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document

*Incorporated by reference from Registrant’s Form10-Q dated September 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.

SIGNATURES

Pursuant to Rule 13a-14(a) of the requirementsSecurities ExchangeAct of 1934, As Adopted Pursuant To

31.2
32.1
32.2
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
104
Cover Page Interactive Data File (formatted as inline XBRL and
contained in Exhibit 101)
*
Incorporated by reference from Registrant’s
Form 10-Q dated June 30, 2002.
**
Incorporated by reference from Registrant’s
Form 10-K dated March 31, 2008.
***
The certifications attached as exhibits 32.1 and 32.2 to
this quarterly report on Form 10-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.
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)

Date:            October 27, 2017                            By:          /s/ Robert W. Dumas                            
Robert W. Dumas
President and Chief Executive Officer
Date:            October 27, 2017                            By:          /s/ David A. Hedges                             
David A. Hedges
EVP, Chief Financial Officer

AUBURN NATIONAL
BANCORPORATION,
INC.
(Registrant)
Date:
July 30, 2021
By:
/s/ Robert W.
Dumas
Robert W.
Dumas
Chairman, President and CEO
Date:
July 30, 2021
By:
/s/ David A. Hedges
David A. Hedges
Executive Vice President and
Chief Financial Officer