UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

(Mark One)

☒

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

For the quarterly period ended

March 31, 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)

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

)

821-9200

 (Address and telephone number of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days. 

Yes

☒

 No

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and

posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required

to submit 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 accelerated filer,” “accelerated filer,” “smaller reporting

company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

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 in Rule 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's classes of common stock, as of the latest practicable date.

Class

Outstanding at April 29, 2021

Common Stock, $0.01 par value per share

3,566,326

 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX

PAGE

Item 1

3 

4

5

6

7

8

Item 2 

27

47

48

49

50

51

52

53

Item 3

54

Item 4

54

Item 1

54

Item 1A

54

Item 2

55

Item 3

55

Item 4

55

Item 5

55

Item 6

56

3

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

(Dollars in thousands, except share data)

2021

2020

Assets:

Cash and due from banks

$

15,429

$

14,868

Federal funds sold

35,987

28,557

Interest-bearing bank deposits

70,151

69,150

Cash and cash equivalents

121,567

112,575

Securities available-for-sale 

359,630

335,177

Loans held for sale

1,279

3,418

Loans, net of unearned income

461,879

461,700

Allowance for loan losses

(5,682)

(5,618)

Loans, net

456,197

456,082

Premises and equipment, net

27,651

22,193

Bank-owned life insurance

19,336

19,232

Other assets

7,603

7,920

Total assets

$

993,263

$

956,597

Liabilities:

Deposits:

Noninterest-bearing 

$

265,869

$

245,398

Interest-bearing

614,721

594,394

Total deposits

880,590

839,792

Federal funds purchased and securities sold under agreements to repurchase

3,338

2,392

Accrued expenses and other liabilities

5,696

6,723

Total liabilities

889,624

848,907

Stockholders' equity:

Preferred stock of $

.01

 par value; authorized

200,000

 shares;

no shares issued

—

—

Common stock of $

.01

 par value; authorized

8,500,000

 shares;

issued

3,957,135

 shares

39

39

Additional paid-in capital

3,791

3,789

Retained earnings

106,696

105,617

Accumulated other comprehensive income, net

2,467

7,599

Less treasury stock, at cost -

390,809

 shares and

390,859

 at March 31, 2021

and December 31, 2020, respectively

(9,354)

(9,354)

Total stockholders’ equity

103,639

107,690

Total liabilities and stockholders’ equity

$

993,263

$

956,597

See accompanying notes to consolidated financial statements

4

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

Quarter ended March 31,

(Dollars in thousands, except share and per share data)

2021

2020

Interest income:

Loans, including fees

$

5,178

$

5,412

Securities

Taxable

949

1,111

Tax-exempt

452

453

Federal funds sold and interest bearing bank deposits

28

279

Total interest income

6,607

7,255

Interest expense:

Deposits

666

1,041

Short-term borrowings

4

2

Total interest expense

670

1,043

Net interest income

5,937

6,212

Provision for loan losses

—

400

Net interest income after provision for loan losses

5,937

5,812

Noninterest income:

Service charges on deposit accounts

132

172

Mortgage lending

549

230

Bank-owned life insurance

103

398

Other

398

429

Securities gains, net

—

6

Total noninterest income

1,182

1,235

Noninterest expense:

Salaries and benefits

2,851

2,831

Net occupancy and equipment

438

597

Professional fees

256

258

Other

1,145

1,170

Total noninterest expense

4,690

4,856

Earnings before income taxes

2,429

2,191

Income tax expense

423

390

Net earnings

$

2,006

$

1,801

Net earnings per share:

Basic and diluted

$

0.56

$

0.50

Weighted average shares outstanding:

Basic and diluted

3,566,299

3,566,146

See accompanying notes to consolidated financial statements

5

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

Quarter ended March 31,

(Dollars in thousands)

2021

2020

Net earnings

$

2,006

$

1,801

Other comprehensive (loss) income, net of tax:

Unrealized net holding (loss) gain on securities

(5,132)

4,349

Reclassification adjustment for net gain on securities 

recognized in net earnings

—

(5)

Other comprehensive (loss) income

(5,132)

4,344

Comprehensive (loss) income

$

(3,126)

$

6,145

See accompanying notes to consolidated financial statements

6

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Unaudited)

Accumulated

Common

Additional

other

Shares

Common

paid-in

Retained 

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

income

stock

Total

Quarter ended March 31, 2021

Balance, December 31, 2020

3,566,276

$

39

$

3,789

$

105,617

$

7,599

$

(9,354)

$

107,690

Net earnings

—

—

—

2,006

—

—

2,006

Other comprehensive loss

—

—

—

—

(5,132)

—

(5,132)

Cash dividends paid ($

.26

 per share)

—

—

—

(927)

—

—

(927)

Sale of treasury stock

50

—

2

—

—

—

2

Balance, March 31, 2021

3,566,326

$

39

$

3,791

$

106,696

$

2,467

$

(9,354)

$

103,639

Quarter ended March 31, 2020

Balance, December 31, 2019

3,566,146

$

39

$

3,784

$

101,801

$

2,059

$

(9,355)

$

98,328

Net earnings

—

—

—

1,801

—

—

1,801

Other comprehensive income

—

—

—

—

4,344

—

4,344

Cash dividends paid ($

.255

 per share)

—

—

—

(910)

—

—

(910)

Balance, March 31, 2020

3,566,146

$

39

$

3,784

$

102,692

$

6,403

$

(9,355)

$

103,563

See accompanying notes to consolidated financial statements

7

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Quarter ended March 31,

(Dollars in thousands)

2021

2020

Cash flows from operating activities:

Net earnings

$

2,006

$

1,801

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for loan losses

—

400

Depreciation and amortization

297

458

Premium amortization and discount accretion, net

959

446

Net gain on securities available-for-sale

—

(6)

Net gain on sale of loans held for sale

(537)

(163)

Loans originated for sale

(17,503)

(9,844)

Proceeds from sale of loans

20,036

10,596

Increase in cash surrender value of bank-owned life insurance

(104)

(117)

Income recognized from death benefit on bank-owned life insurance

—

(282)

Net decrease (increase) in other assets

15

(444)

Net increase (decrease) in accrued expenses and other liabilities

695

(1,035)

Net cash provided by operating activities

5,864

1,810

Cash flows from investing activities:

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

24,145

9,575

Purchase of securities available-for-sale

(56,409)

(48,747)

(Increase) decrease in loans, net

(115)

17,015

Net purchases of premises and equipment

(5,577)

(104)

Proceeds from bank-owned life insurance death benefit

—

694

Decrease (increase) in FHLB stock

267

(9)

Net cash used in investing activities

(37,689)

(21,576)

Cash flows from financing activities:

Net increase in noninterest-bearing deposits

20,471

9,551

Net increase in interest-bearing deposits

20,327

13,082

Net increase in federal funds purchased and securities sold 

under agreements to repurchase

946

306

Dividends paid

(927)

(910)

Net cash provided by financing activities

40,817

22,029

Net change in cash and cash equivalents

8,992

2,263

Cash and cash equivalents at beginning of period

112,575

92,443

Cash and cash equivalents at end of period

$

121,567

$

94,706

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$

687

$

1,089

Income taxes

671

—

Supplemental disclosure of non-cash transactions:

Real estate acquired through foreclosure

—

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 “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's Annual Report on Form

10-K for the year ended December 31, 2020.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 

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 (“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 March 31, 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 quarter of 2021, the Company did 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 quarters ended March 31, 2021 and 2020, respectively. 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

March 31, 2021 and 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 March 31,

(Dollars in thousands, except share and per share data)

2021

2020

Basic and diluted:

Net earnings

$

2,006

$

1,801

Weighted average common shares outstanding

3,566,299

3,566,146

Net earnings per share

$

0.56

$

0.50

NOTE 3: SECURITIES

At March 31, 2021 and December 31, 2020, respectively, all securities within the scope of ASC 320,

Investments – Debt

and Equity Securities,

were classified as available-for-sale. The fair value and amortized cost for securities available-for-

sale by contractual maturity at March 31, 2021 and December 31, 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

March 31, 2021

Agency obligations (a)

$

10,115

26,208

57,435

11,424

105,182

1,734

1,782

$

105,230

Agency MBS (a)

—

1,021

27,745

153,740

182,506

2,405

1,970

182,071

State and political subdivisions

381

632

10,442

60,487

71,942

3,354

448

69,036

Total available-for-sale

$

10,496

27,861

95,622

225,651

359,630

7,493

4,200

$

356,337

December 31, 2020

Agency obligations (a)

$

5,048

24,834

55,367

12,199

97,448

3,156

98

$

94,390

Agency MBS (a)

—

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 entities.

Securities with aggregate fair values of $

178.1

 million and $

166.9

 million at March 31, 2021 and December 31, 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 non-marketable equity investments. The

carrying amounts of non-marketable equity investments were $

1.2

 million and $

1.4

 million at March 31, 2021 and

December 31, 2020, respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve

Bank (“FRB”) 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 March 31, 2021 and December 31, 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

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

March 31, 2021:

Agency obligations 

$

50,357

1,782

—

—

$

50,357

1,782

Agency MBS

91,931

1,970

—

—

91,931

1,970

State and political subdivisions

10,750

448

—

—

10,750

448

Total 

$

153,038

4,200

—

—

$

153,038

4,200

December 31, 2020:

Agency obligations 

$

15,416

98

—

—

$

15,416

98

Agency MBS

41,488

133

—

—

41,488

133

State and political subdivisions

2,945

11

—

—

2,945

11

Total 

$

59,849

242

—

—

$

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 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.

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 declines 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 mortgage-backed securities (“MBS”)

The unrealized losses associated with agency 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 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.

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 March 31,

2021 and December 31, 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 quarters ended March 31, 2021 and

2020, respectively.

Realized Gains and Losses

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

Quarter ended March 31,

(Dollars in thousands)

2021

2020

Gross realized gains

$

—

$

6

Gross realized losses

—

—

Realized gains, net

$

—

$

6

12

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

March 31,

December 31,

(Dollars in thousands)

2021

2020

Commercial and industrial

$

88,687

$

82,585

Construction and land development

30,332

33,514

Commercial real estate:

Owner occupied

52,257

54,033

Hotel/motel

48,268

42,900

Multi-family

37,936

40,203

Other

116,270

118,000

Total commercial real estate

254,731

255,136

Residential real estate:

Consumer mortgage

33,651

35,027

Investment property

49,197

49,127

Total residential real estate

82,848

84,154

Consumer installment

6,524

7,099

Total loans

463,122

462,488

Less: unearned income

(1,243)

(788)

Loans, net of unearned income

$

461,879

$

461,700

Loans secured by real estate were approximately

79.4%

 of the Company’s total loan portfolio at March 31, 2021. At March

31, 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 describes 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 and medium-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 are a participating lender in the Paycheck Protection Program (“PPP”). PPP loans are forgivable in whole or

in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. 

As of March 31, 2021, the Company has

373

 PPP loans with an aggregate outstanding principal balance of $

28.7

 million

included in this category. 

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, who owns the

property.

13

●

Hotel/motel

– includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon

income generated from the real estate collateral. The underwriting of these loans takes into consideration the

occupancy and rental rates, as well as the financial health of the borrower.

●

Multi-family

 – primarily includes loans to finance income-producing multi-family properties. Loans in this class

include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary

source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these

loans takes into consideration the occupancy and rental rates , as well as the financial health of the borrower. 

●

Other

 – primarily includes loans to finance income-producing commercial properties that are not owner occupied.

Loans in this class include loans for neighborhood retail centers, medical and professional offices, single retail

stores, industrial buildings, and warehouses leased to local businesses. Generally, the primary source of repayment

is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into

consideration the occupancy and rental rates, as well as the financial health of the borrower. 

Residential real estate (“RRE”) —

includes loans disaggregated into two classes: (1) consumer mortgage and (2)

investment property.

●

Consumer mortgage

 – primarily includes first or second lien mortgages and home equity lines of credit to

consumers that are secured by a primary residence or second home. These loans are underwritten in accordance

with the Bank’s general loan policies and procedures which require, among other things, proper documentation of

each borrower’s financial condition, satisfactory credit history, and property value. 

●

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 March

31, 2021 and December 31, 2020.

Accruing

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total 

(Dollars in thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

March 31, 2021:

Commercial and industrial

$

88,645

42

—

88,687

—

$

88,687

Construction and land development

30,322

10

—

30,332

—

30,332

Commercial real estate:

Owner occupied

52,257

—

—

52,257

—

52,257

Hotel/motel

48,268

—

—

48,268

—

48,268

Multi-family

37,936

—

—

37,936

—

37,936

Other

115,884

180

—

116,064

206

116,270

Total commercial real estate

254,345

180

—

254,525

206

254,731

Residential real estate:

Consumer mortgage

32,783

394

—

33,177

474

33,651

Investment property

49,089

5

—

49,094

103

49,197

Total residential real estate

81,872

399

—

82,271

577

82,848

Consumer installment

6,488

36

—

6,524

—

6,524

Total

$

461,672

667

—

462,339

783

$

463,122

December 31, 2020:

Commercial and industrial

$

82,355

230

—

82,585

—

$

82,585

Construction and land development

33,453

61

—

33,514

—

33,514

Commercial real estate:

Owner occupied

54,033

—

—

54,033

—

54,033

Hotel/motel

42,900

—

—

42,900

—

42,900

Multi-family

40,203

—

—

40,203

—

40,203

Other

117,759

29

—

117,788

212

118,000

Total commercial real estate

254,895

29

—

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

—

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

—

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 partially charged-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, net of recoveries of amounts previously 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 portfol io 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 March 31, 2021 and December 31, 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. T hese

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 regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of

2016, the Company has 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 and its balance would decrease. For the

quarter ended March 31, 2021, the Company increased its look -back period to 48 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-

back period to incorporate the effects of at least one economic downturn in its loss history. During 2020, the Company

adjusted certain qualitative and economic factors related to changes i n economic conditions driven by the impact of the

novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse economic conditions, including higher

unemployment 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.

March 31, 2021

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

807

594

3,169

944

104

$

5,618

Charge-offs

—

—

—

—

(5)

(5)

Recoveries

2

—

50

13

4

69

Net recoveries

2

—

50

13

(1)

64

Provision for loan losses

19

(43)

40

(6)

(10)

—

Ending balance

$

828

551

3,259

951

93

$

5,682

March 31, 2020

(Dollars in thousands)

Commercial and

industrial

Construction

and land

development

Commercial

real estate

Residential

real estate

Consumer

installment

Total

Quarter ended:

Beginning balance

$

577

569

2,289

813

138

$

4,386

Charge-offs

—

—

—

—

(5)

(5)

Recoveries

53

—

—

31

2

86

Net (charge-offs) recoveries

53

—

—

31

(3)

81

Provision for loan losses

45

13

307

33

2

400

Ending balance

$

675

582

2,596

877

137

$

4,867

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 March 31, 2021 and 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

March 31, 2021:

Commercial and industrial (3)

$

828

88,687

—

—

828

88,687

Construction and land development

551

30,332

—

—

551

30,332

Commercial real estate

3,259

254,525

—

206

3,259

254,731

Residential real estate

951

82,745

—

103

951

82,848

Consumer installment

93

6,524

—

—

93

6,524

Total

$

5,682

462,813

—

309

5,682

463,122

March 31, 2020:

Commercial and industrial

$

675

56,447

—

—

675

56,447

Construction and land development

582

32,302

—

—

582

32,302

Commercial real estate

2,596

256,099

—

—

2,596

256,099

Residential real estate

877

91,010

—

—

877

91,010

Consumer installment

137

8,424

—

—

137

8,424

Total

$

4,867

444,282

—

—

4,867

444,282

(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 $28.7 million of PPP loans for which no loan loss reserve 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.

18

(Dollars in thousands)

 Pass

 Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

March 31, 2021: 

Commercial and industrial

$

86,376

2,012

299

—

$

88,687

Construction and land development

30,085

—

247

—

30,332

Commercial real estate:

Owner occupied

50,091

2,029

137

—

52,257

Hotel/motel

40,452

7,816

—

—

48,268

Multi-family

34,406

3,530

—

—

37,936

Other

114,809

1,219

36

206

116,270

Total commercial real estate

239,758

14,594

173

206

254,731

Residential real estate:

Consumer mortgage

31,108

320

1,749

474

33,651

Investment property

48,465

286

343

103

49,197

Total residential real estate

79,573

606

2,092

577

82,848

Consumer installment

6,509

6

9

—

6,524

Total

$

442,301

17,218

2,820

783

$

463,122

December 31, 2020:

Commercial and industrial

$

79,984

2,383

218

—

$

82,585

Construction and land development

33,260

—

254

—

33,514

Commercial real estate:

Owner occupied

51,265

2,627

141

—

54,033

Hotel/motel

35,084

7,816

—

—

42,900

Multi-family

36,673

3,530

—

—

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

—

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 fully charged-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 March 31, 2021 and December 31, 2020.

March 31, 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

$

214

(8)

206

$

—

Total commercial real estate

214

(8)

206

—

Residential real estate:

Investment property

106

(3)

103

—

Total residential real estate

106

(3)

103

—

Total impaired loans

$

320

(11)

309

$

—

(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

$

—

Total commercial real estate

216

(4)

212

—

Residential real estate:

Investment property

109

(2)

107

—

Total residential real estate

109

(2)

107

—

Total impaired loans

$

325

(6)

319

$

—

(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 March 31, 2021

Quarter ended March 31, 2020

Average

Total interest

Average

Total interest

recorded

income

recorded

income

(Dollars in thousands)

investment

recognized

investment

recognized

Impaired loans:

Commercial real estate:

Other

$

208

—

—

$

—

Total commercial real estate

208

—

—

—

Residential real estate:

Investment property

104

—

—

—

Total residential real estate

104

—

—

—

Total 

$

312

—

—

$

—

Troubled Debt Restructurings 

Impaired loans also include troubled debt restructurings (“TDRs”). On March 27, 2020, the Coronavirus Aid, Relief, and

Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From

Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10

TDR classifications for a limited period of time to account for the effects of COVID-19. On April 7, 2020, the Federal

Reserve and the other banking agencies and regulators issued a statement, “Interagency Statement on Loan Modifications

and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (the

“Interagency Statement on COVID-19 Loan Modifications”), to encourage banks to work prudently with borrowers and to

describe the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by

Creditors,” apply to certain COVID-19-related modifications. 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.

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, when 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 a charge-off to the allowance for loan losses. 

In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.

21

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 March 31, 2021 and December 31, 2020,

respectively.

TDRs

Related

(Dollars in thousands)

Accruing

Nonaccrual

Total

Allowance

March 31, 2021

Commercial real estate:

Other

$

—

206206

$

—

Total commercial real estate

—

206206

—

Residential real estate:

Investment property

—

103103

—

Total residential real estate

—

103103

—

Total 

$

—

309309

$

—

TDRs

Related

(In thousands)

Accruing

Nonaccrual

Total

Allowance

December 31, 2020

Commercial real estate:

Other

$

—

212212

$

—

Total commercial real estate

—

212212

—

Investment property

—

107107

—

Total residential real estate

—

107107

—

Total 

$

—

319319

$

—

At March 31, 2021 there were no significant outstanding commitments to advance additional funds to customers whose

loans had been restructured.

There were no loans modified in a TDR during the quarters ended March 31, 2021 and 2020. 

During the quarters ended March 31, 2021 and 2020, respectively, there were no loans modified in a TDR within the

previous 12 months for which there was a payment default (defined as 90 days or more past due).

NOTE 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 Company’s MSRs is determined using assumptions that market

participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate,

default rates, cost 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 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. 

22

The change in amortized MSRs and the related valuation allowance for the quarters ended March 31, 2021 and 2020 are

presented below.

Quarter ended March 31,

(Dollars in thousands)

2021

2020

MSRs, net:

Beginning balance

$

1,330

$

1,299

Additions, net

142

49

Amortization expense

(150)

(99)

Ending balance

$

1,322

$

1,249

Valuation allowance included in MSRs, net:

Beginning of period

$

—

$

—

End of period

—

—

Fair value of amortized MSRs:

Beginning of period

$

1,489

$

2,111

End of period

1,774

1,917

NOTE 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 quarter ended March 31, 2021, there were no

transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

23

Assets and liabilities measured at fair value on a recurring basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company

obtains pricing from third party pricing services. These third party pricing services consider observable data that may

include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market

consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis,

management reviews the pricing received from the third party pricing services for reasonableness given current market

conditions. As part of its review, management may obtain non-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.

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March

31, 2021 and December 31, 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)

March 31, 2021:

Securities available-for-sale:

Agency obligations 

$

105,182

—

105,182

—

Agency RMBS

182,506

—

182,506

—

State and political subdivisions

71,942

—

71,942

—

Total securities available -for-sale

359,630

—

359,630

—

Total assets at fair value

$

359,630

—

359,630

—

December 31, 2020:

Securities available-for-sale:

Agency obligations 

$

97,448

—

97,448

—

Agency RMBS

163,470

—

163,470

—

State and political subdivisions

74,259

—

74,259

—

Total securities available -for-sale

335,177

—

335,177

—

Total assets at fair value

$

335,177

—

335,177

—

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 ASC 310-10-35,

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. 

24

The fair value of impaired loans was 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. 

Mortgage servicing rights, net

MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or

estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of

MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the

present value of estimated future net servicing income using assumptions that market participants would use in estimating

future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow

account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review

broker surveys and other market research to validate significant assumptions used in the model. The significant

unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average

discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s

MSRs are classified within Level 3 of the valuation hierarchy.

The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of

March 31, 2021 and December 31, 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)

March 31, 2021:

Loans held for sale

$

1,279

—

1,279

—

Loans, net

(1)

309

—

—

309

Other assets

(2)

1,322

—

—

1,322

Total assets at fair value

$

2,910

—

1,279

1,631

December 31, 2020:

Loans held for sale

$

3,418

—

3,418

—

Loans, net

(1)

319

—

—

319

Other assets

(2)

1,330

—

—

1,330

Total assets at fair value

$

5,067

—

3,418

1,649

(1)

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

of any related allowance for loan losses

(2)

Represents MSRs, net which are carried at lower of cost or estimated fair value.

25

Quantitative Disclosures for Level 3 Fair Value Measurements

At March 31, 2021, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets

measured at fair value on a non-recurring basis at March 31, 2021, the significant unobservable inputs used in the fair value

measurements are presented below

.

Weighted 

Carrying 

Significant 

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Range

of Input

March 31, 2021:

Impaired loans

$

309

Appraisal

Appraisal discounts

10.0

-

10.0

%

10.0

%

Mortgage servicing rights, net

1,322

Discounted cash flow

Prepayment Speed or CPR

12.2

-

16.4

16.0

Discount rate

10.0

-

12.0

10.0

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.

26

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. Expected future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments. The fair value of 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. 

The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial

instruments at March 31, 2021 and December 31, 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 deposits. Fair value approximates

carrying value in these financial liabilities due to these products having no stated maturity. 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

March 31, 2021:

Financial Assets:

Loans, net (1)

$

456,197

$

452,585

$

—

$

—

$

452,585

Loans held for sale

1,279

1,318

—

1,318

—

Financial Liabilities:

Time Deposits

$

159,162

$

160,606

$

—

$

160,606

$

—

December 31, 2020:

Financial Assets:

Loans, net (1)

$

456,082

$

451,816

$

—

$

—

$

451,816

Loans held for sale

3,418

3,509

—

3,509

—

Financial Liabilities:

Time Deposits

$

160,401

$

162,025

$

—

$

162,025

$

—

(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.

27

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

OPERATIONS

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 ended March 31, 2021 and 2020, as well as the information contained in our Annual Report on Form

10-K for the year ended December 31, 2020. 

Special Notice Regarding Forward-Looking Statements

Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” and elsewhere,

are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933 and

Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,

anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks,

uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different from future results, performance,

achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can

identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,”

“could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may

not be realized due to a variety of factors, including, without limitation:

●

the effects of future economic, business and market conditions and changes, foreign, domestic and locally,

including 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 borrowers’ credit risks and 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-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;

28

●

the effects of competition from a wide variety of local, regional, national and other providers of financial,

investment and insurance services, including the disruption 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 technology or products that may be more difficult, costly, or less effective than anticipated;

●

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

information;

●

the risks 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 that we may be able to utilize for income tax

purposes; and

●

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 Form 10-K for the year ended December 31, 2020 and subsequent quarterly and

current reports. See Part II, Item 1A. “RISK FACT ORS”.

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.

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, and in 1994 it succeeded its Alabama predecessor as

the 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 Bank since 1984. As a bank holding

company, the Company may diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the Bank. 

The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including

Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April 1995. The

Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama

Superintendent”). The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”) since 1991. 

Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by

reference to other documents, are “forward-looking statements” within the meaning of, and subject to, the protections of

Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange

Act of 1934, as amended (the “Exchange Act”). 

29

Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

2021

2020

Net interest income (a)

$

6,057

$

6,332

Less: tax-equivalent adjustment

120

120

Net interest income (GAAP)

5,937

6,212

Noninterest income 

1,182

1,235

Total revenue 

7,119

7,447

Provision for loan losses

— 

400

Noninterest expense

4,690

4,856

Income tax expense 

423

390

Net earnings

$

2,006

$

1,801

Basic and diluted earnings per share

$

0.56

$

0.50

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

Financial Summary

The Company’s net earnings were $2.0 million for the first quarter of 2021, compared to $1.8 million for the first quarter of

2020. Basic and diluted earnings per share were $0.56 per share for the first quarter of 2021, compared to $0.50 per share

for the first quarter of 2020. 

Net interest income (tax-equivalent) was $6.1 million for the first quarter of 2021, a 4% decrease compared to $6.3 million

for the first quarter of 2020. This decrease was primarily due to net interest margin compression resulting from the Federal

Reserve’s interest rate reductions in response to COVID-19. Net interest margin (tax-equivalent) decreased to 2.66% in the

first quarter of 2021, compared to 3.23% for the first quarter of 2020, primarily due to the lower interest rate environment

and changes in our asset mix from the significant increase in customer deposits. 

At March 31, 2021, the Company’s allowance for loan losses was $5.7 million, or 1.23% of total loans, compared to $5.6

million, or 1.22% of total loans, at December 31, 2020, and $4.9 million, or 1.10% of total loans, at March 31, 2020. 

Excluding PPP loans, which are guaranteed by the SBA, the Company’s allowance for loan losses was 1.31% of total loans

at March 31, 2021. The Company had no provision for loan losses during the first quarter of 2021, compared to a provision

for loan losses of $0.4 million during the first quarter of 2020. The provision for loan losses during the first quarter of 2020

was related to changes in economic conditions and portfolio trends driven by COVID-19 and resulting adverse economic

conditions, including higher unemployment in our primary market area. The provision for loan losses is based upon

various estimates and judgements, including the absolute level of loans, loan growth, credit quality and the amount of net

charge-offs.

Noninterest income was $1.2 million for the first quarter of 2021 and 2020, respectively. For the first quarter of 2021,

noninterest income included an increase in mortgage lending income of $0.3 million. The increase was primarily due to an

increase in mortgage lending income as lower interest rates for mortgage loans positively affected refinance activity and

pricing margins improved. For the first quarter of 2020, noninterest income included $0.3 million in non-taxable death

benefits from bank-owned life insurance.

Noninterest expense was $4.7 million for the first quarter of 2021 compared to $4.9 million for the first quarter of 2020. 

The decrease was primarily due to a reduction of $0. 2 million in various expenses related to the redevelopment of the

Company’s headquarters in downtown Auburn.

Income tax expense was $0.4 million for the first quarter of 2021 and 2020, respectively, reflecting an effective tax rate of

17.41% and 17.80%, respectively. 

The Company paid cash dividends of $0.26 per share in the first quarter of 2021, an increase of 2% from the same period of

2020. At March 31, 2021, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well

capitalized” under current regulatory standards with a total risk-based capital ratio of 18.25%, a tier 1 leverage ratio of

9.99% and a common equity tier 1 (“CET1”) ratio of 17.21% at March 31, 2021.

30

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 2020/2021 school year, which involves both remote and in person instruction as well as other social

distancing measures. The economic effects of these measures are not presently known.

COVID-19 has significantly affected local state, national and global health and economic activity and its future effects are

uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, the

development and distribution of COVID-19 testing and contact tracing, effective drug treatments and vaccines, together

with governmental, regulatory and private sector responses. COVID-19 has had 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.

• 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. 

On June 1, 2020, we re-opened some of our branch lobbies as permitted by state public health guidelines. 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. 

• Our 2021 Annual Shareholders’ Meeting will, again, be a virtual meeting. Shareholders that wish to participate

may access web portals and live streams of the Annual Shareholders’ Meeting.

• 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 are 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. 

31

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, which will be recognized net of

related costs, as a yield adjustment over the life of the underlying PPP loans. 

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. 

A summary of PPP loans extended 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

6

6,494

35

Up to $350,000

192

94

12,217

65

Total

204

100

%

$

18,711

100

%

As of March 31, 2021, we collected approximately $0.9 million in fees related to PPP loans under the Economic Aid Act,

which will be recognized net of related costs, as a yield adjustment over the life of the underlying PPP loans. The PPP, as

amended and extended, is scheduled to stop accepting applications by May 31, 2021.

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 quarter ended March 31, 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. 

As of March 31, 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. GAAP 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 and non-recurring fair value measurements and the valuation of OREO and deferred tax assets, were

critical to the determination of our financial position and results of operations. Other policies also require subjective

judgment and assumptions and may accordingly impact our financial position and results of operations. 

32

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. 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 evaluati on 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 partially charged-off after a

“confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will

be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due

according to the contractual terms means that both the interest and principal payments of a loan will be collected as

scheduled in the loan agreement. 

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The

impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected

future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment

measurement is based on the fair value of the collateral, less estimated disposal costs. 

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the

portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-

offs, net of recoveries of amounts previously 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. 

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 March 31, 2021 and December 31, 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 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. 

33

The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of

2016, the Company has 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 and its balance would decrease. For the

quarter ended March 31, 2021, the Company increased its look -back period to 48 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-

back period to incorporate the effects of at least one economic downturn in its loss history. During 2020, the Company

adjusted certain qualitative and economic factors related to changes in economic conditions and portfolio trends driven by

the impact of the COVID-19 pandemic and resulting adverse economic conditions, including higher unemployment in our

primary market area. Further adjustments may be made in the future as a result of the 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 debt securities with an unrealized loss, an other-than -temporary impairment write-down is triggered when (1) the

Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the

debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized

cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will

be required to sell the debt security before recovery, the other-than -temporary write-down is equal to the entire difference

between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not

more likely than not that it will be required to sell the security before recovery, the other -than-temporary impairment write-

down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The

credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the

present value of its expected future cash flows. The remaining difference between the security’s fair value and the present

value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive

income, net of applicable taxes. 

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.

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 as available-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 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. 

34

Other Real Estate Owned

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 a charge-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 March 31, 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 is 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 March 31, 2021. The amount of

the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates

Quarter ended March 31,

2021

2020

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale 

$

466,368

4.50%

$

452,155

4.81%

Securities - taxable

289,981

1.33%

196,422

2.27%

Securities - tax-exempt 

63,050

3.68%

60,895

3.78%

Total securities 

353,031

1.75%

257,317

2.63%

Federal funds sold

32,809

0.15%

29,758

1.26%

Interest bearing bank deposits

70,350

0.09%

49,378

1.52%

Total interest-earning assets

922,558

2.96%

788,608

3.76%

Deposits:

NOW

172,055

0.16%

149,344

0.51%

Savings and money market

281,844

0.25%

220,909

0.46%

Time Deposits

159,466

1.09%

167,447

1.44%

Total interest-bearing deposits

613,365

0.44%

537,700

0.78%

Short-term borrowings

3,161

0.50%

1,361

0.50%

Total interest-bearing liabilities

616,526

0.44%

539,061

0.78%

Net interest income and margin (tax-equivalent)

$

6,057

2.66%

$

6,332

3.23%

Net Interest Income and Margin

Net interest income (tax-equivalent) was $6.1 million for the first quarter of 2021 compared to $6.3 million for the first

quarter of 2020. This decrease was due to a decline in the Company’s net interest margin (tax-equivalent).

The tax-equivalent yield on total interest-earning assets decreased by 80 basis points to 2.96% in the first quarter of 2021

compared to 3.76% in the first quarter of 2020. This decrease was primarily due to the lower rate environment, including a

150 basis point reduction in the federal funds rate that occurred in March 2020 and changes in our asset mix due to the

significant increase in customer deposits.

35

The cost of total interest-bearing liabilities decreased 34 basis points in the first quarter of 2021 from the first quarter of

2020 to 0.44%. The net decrease in our funding costs was primarily due to lower prevailing market interest rates. Such

costs declined less than the declines in rates earned on our 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 reduced earning asset yields

and increased competition for quality loan 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. There was no provision for loan losses for the first quarter of 2021, compared to $0.4 million in

provision for loan losses for the first quarter of 2020. The provision for loan losses during the first quarter of 2020 was

related to changes in economic conditions and portfolio trends driven by the impact of COVID-19 and resulting adverse

economic conditions, including higher unemployment in our primary market area. The provision for loan losses is based

upon various factors, including the absolute level of loans, loan growth, the credit quality, and the amount of net charge-

offs or recoveries.

Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes

should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance

for loan losses as a percentage of total loans was 1.23% at March 31, 2021, compared to 1.22% at December 31, 2020. At

March 31, 2021, the Company’s allowance for loan losses was 1.31% 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 March 31,

(Dollars in thousands)

2021

2020

Service charges on deposit accounts

$

132

$

172

Mortgage lending income

549

230

Bank-owned life insurance

103

398

Securities gains, net

— 

6

Other

398

429

Total noninterest income

$

1,182

$

1,235

The decrease in service charges on deposit accounts was driven by a decline in consumer spending activity as a result of the

COVID-19 pandemic. 

The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of new mortgage

loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the

mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans,

which are netted against the commission expense associated with these originations. The Company’s normal practice is to

originate mortgage loans for sale in the secondary market and to either sell or retain the associated 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. 

36

The Company evaluates MSRs 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 March 31,

(Dollars in thousands)

2021

2020

Origination income, net

$

537

$

163

Servicing fees, net

12

67

Total mortgage lending income

$

549

$

230

The increase in mortgage lending income was primarily due to an increase in mortgage refinance activity. The Company’s

income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily attributable to the

origination and sale of new mortgage loans. The increase in mortgage lending income was partially offset by a decrease in

servicing fees, net of related amortization expense as prepayment speeds increased in the first quarter of 2021, resulting in

increased amortization expense.

Income from bank-owned life insurance decreased primarily due to $0.3 million in non-taxable death benefits received in

the first quarter of 2020. The assets that support these policies are administered by the life insurance carriers and the income

we receive (i.e., increases or decreases in the cash surrender value of the policies and death benefits received) on these

policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support

these policies. Earnings on these policies are generally not taxable.

Noninterest Expense

Quarter ended March 31,

(Dollars in thousands)

2021

2020

Salaries and benefits

$

2,851

$

2,831

Net occupancy and equipment

438

597

Professional fees

256

258

Other

1,145

1,170

Total noninterest expense

$

4,690

$

4,856

The decrease in net occupancy and equipment expense was primarily due to a reduction of $0.2 million in various expenses

related to the redevelopment of the Company’s headquarters in downtown Auburn.

Income Tax Expense

Income tax expense was $0.4 million for the first quarter of 2021 and 2020, respectively, reflecting an effective tax rate of

17.41% and 17.80%, respectively. 

BALANCE SHEET ANALYSIS

Securities 

Securities available-for-sale were $3 59.6 million at March 31, 2021 compared to $335.2 million at December 31, 2020. 

This increase reflects an increase in the amortized cost basis of securities available-for-sale of $31.3 million, and a decrease

of $6.9 million in the fair value of securities available-for-sale. The increase in the amortized cost basis of securities

available-for-sale was primarily attributable to management allocating more funding to the investment portfolio following

the significant increase in customer deposits. The decrease in the fair value of securities was primarily due to an increase in

long-term interest rates. The average annualized tax-equivalent yields earned on total securities were 1.75% in 2021 and

2.63% in 2020.

37

Loans

2021

2020

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial and industrial

$

88,687

82,585

98,244

87,754

56,447

Construction and land development

30,332

33,514

31,651

32,967

32,302

Commercial real estate

254,731

255,136

250,992

250,588

256,099

Residential real estate

82,848

84,154

85,054

85,825

91,010

Consumer installment

6,524

7,099

7,731

8,631

8,424

Total loans

463,122

462,488

473,672

465,765

444,282

Less: unearned income

(1,243)

(788)

(1,219)

(1,491)

(414)

Loans, net of unearned income

$

461,879

461,700

472,453

464,274

443,868

Total loans, net of unearned income, were $461.9 million at March 31, 2021, an increase of $0.2 million from $461.7

million at December 31, 2020. Excluding PPP loans, total loans net of unearned income, were $433.2 million, a decrease

of $9.5 million, or 2% from $442.7 million at December 31, 2020 . This decrease was primarily due to a decrease in

commercial and industrial loans, excluding PPP loans, commercial and land development loans and residential real estate

loans of $3.6 million, $3.2 million and $1.3 million, respectively, as lower rates increased refinance activity and payoffs . 

Four loan categories represented the majority of the loan portfolio at March 31, 2021: commercial real estate (55%),

residential real estate (18%), commercial and industrial (19%) and construction and land development (7%). 

Approximately 20% of the Company’s commercial real estate loans were classified as owner -occupied at March 31, 2021.

Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $8.2 million,

or 2% of total loans, at March 31, 2021, compared to $8.7 million, or 2% of total loans, at December 31, 2020. For

residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest-only

payments at March 31, 2021 and December 31, 2020. The Company’s residential real estate mortgage portfolio does not

include any option ARM loans, subprime loans, or any mater ial amount of other high-risk consumer mortgage products. 

The average yield earned on loans and loans held for sale was 4.50 % in the first quarter of 2021 and 4.81% in the first

quarter of 2020. 

The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of

current economic conditions, including the COVID-19 pandemic’s effects, on our borrowers’ cash flows, real estate market

sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive

pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral

values or non-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 its loan-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 $20.6 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $18.5 million. Our loan policy requires that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit. At March 31, 2021, the Bank had no

relationships exceeding these limits.

38

We periodically analyze our commercial and industrial and commercial real estate loan portfolios 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 March 31, 2021 (and related balances at December

31, 2020).

March 31,

December 31,

(Dollars in thousands)

2021

2020

Hotel/motel

$

48,268

$

42,900

Lessors of 1-4 family residential properties

49,196

49,127

Multi-family residential properties

37,936

40,203

Shopping centers

29,562

30,000

Supplemental COVID-19 Industry Exposure

We have identified certain commercial sectors with enhanced risk resulting from the impact of COVID-19. Loans within

these sectors represent 86% of the Company’s total COVID-19 related modifications at March 31, 2021 and December 31,

2020. The table below summarizes the loans outstanding for these sectors at March 31, 2021 and December 31, 2020.

Portfolio Segment

Commercial and 

Construction and

Commercial 

(Dollars in thousands)

industrial

land development

real estate

Total

% of Total Loans

March 31, 2021:

Hotel/motel

$

741

5,604

48,268

$

54,613

12

%

Shopping centers

—

—

29,562

29,562

6

Retail, excluding shopping centers

401

—

17,544

17,945

4

Restaurants

1,317

—

12,158

13,475

3

Total

$

2,459

5,604

107,532

$

115,595

25

%

Portfolio Segment

Commercial and 

Construction and

Commercial 

(Dollars in thousands)

industrial

land development

real estate

Total

% of Total Loans

December 31, 2020:

Hotel/motel

$

866

10,549

42,900

$

54,315

12

%

Shopping centers

8

—

30,000

30,008

6

Retail, excluding shopping centers

327

—

18,053

18,380

4

Restaurants

1,407

—

12,865

14,272

3

Total

$

2,608

10,549

103,818

$

116,975

25

%

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 March 31, 2021 we have granted loan payment deferrals or payments of interest-only primarily on commercial and

industrial and commercial real estate loans totaling $32.4 million, or 7% of total loans, compared to $32.3 million, or 7% of

total loans at December 31, 2020. 

39

The tables below provide information concerning the composition of these COVID-19 modifications as of March 31, 2021

and December 31, 2020.

COVID-19 Modifications

Modification Types

(Dollars in thousands)

# of Loans

Modified

Balance

% of Portfolio

Modified

Interest Only

Payment

P&I Payments

Deferred

March 31, 2021:

Commercial and industrial

2

$

741

 — 

%

100

%

—

%

Commercial real estate

12

31,391

 7 

100

—

Residential real estate

3

314

 — 

—

100

Total

17

$

32,446

 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 High Exposure Commercial Real Estate Segments

(Dollars in thousands)

# of Loans

Modified

Balance of

Loans Modified

% of Total

Segment Loans

March 31, 2021:

Hotel/motel

10

$

26,419

48

%

Restaurants

1

1,442

11

December 31, 2020:

Hotel/motel

10

$

26,427

49

%

Restaurants

1

1,442

10

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 $5. 7 million at

March 31, 2021 compared to $5.6 million at December 31, 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.”

40

A summary of the changes in the allowance for loan losses and certain asset quality ratios for the first quarter of 2021 and

the previous four quarters is presented below.

2021

2020

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Balance at beginning of period

$

5,618

5,575

5,308

4,867

4,386

Charge-offs:

Commercial and industrial

—

(4)

—

(3)

—

Consumer installment

(5)

(1)

(4)

(28)

(5)

Total charge -offs

(5)

(5)

(4)

(31)

(5)

Recoveries

69

48

21

22

86

Net recoveries (charge-offs)

64

43

17

(9)

81

Provision for loan losses

—

—

250

450

400

Ending balance

$

5,682

5,618

5,575

5,308

4,867

as a % of loans

1.23

%

1.22

1.18

1.14

1.10

as a % of nonperforming loans

726

%

1,052

1,015

783

4,196

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

(0.06)

%

(0.04)

(0.01)

0.01

(0.07)

(a) Net (recoveries) charge-offs 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 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 1.23 % at March 31, 2021, compared to 1.22% at December 31,

2020. At March 31, 2021, the Company’s allowance for loan losses was 1.31% 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. 

Nonperforming Assets

The Company had $0.8 million and $0.5 million in nonperforming assets at March 31, 2021 and December 31, 2020,

respectively. 

The table below provides information concerning total nonperforming assets and certain asset quality ratios for the first

quarter of 2021 and the previous four quarters.

2021

2020

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonperforming assets:

Nonaccrual loans

$

783

534

549

678

116

Other real estate owned

—

—

—

—

99

Total nonperforming assets

$

783

534

549

678

215

as a % of loans and other real estate owned

0.17

%

0.12

0.12

0.15

0.05

as a % of total assets

0.08

%

0.06

0.06

0.07

0.03

Nonperforming loans as a % of total loans

0.17

%

0.12

0.12

0.15

0.03

41

The table below provides information concerning the composition of nonaccrual loans for the first quarter of 2021 and the

previous four quarters.

2021

2020

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Nonaccrual loans:

Commercial real estate

$

206

212

216

218

—

Residential real estate

577

322

332

459

112

Consumer installment

—

—

1

1

4

Total nonaccrual loans

$

783

534

549

678

116

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 March 31, 2021, the

Company had $0.8 million in loans on nonaccrual 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 March 31, 2021 compared to $0.1 million at

December 31, 2020.

The table below provides information concerning the composition of OREO for the first quarter of 2021 and the previous

four quarters. 

2021

2020

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Other real estate owned:

Residential

$

—

—

—

—

99

Total other real estate owned

$

—

—

—

—

99

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, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential

problem loans, which are not included in nonperforming assets, amounted to $2.8 million, or 0.6% of total loans at March

31, 2021, and $2.9 million, or 0.6% of total loans at December 31, 2020. 

The table below provides information concerning the composition of potential problem loans for the first quarter of 2021

and the previous four quarters.

2021

2020

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Potential problem loans:

Commercial and industrial

$

299

218

230

211

246

Construction and land development

247

254

563

568

910

Commercial real estate

173

188

188

165

170

Residential real estate

2,092

2,229

2,486

2,645

2,913

Consumer installment

9

23

42

55

63

Total potential problem loans

$

2,820

2,912

3,509

3,644

4,302

At March 31, 2021 the Company had $0.2 million in potential problem loans that were past due at least 30 days, but less

than 90 days.

42

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 first quarter of 2021 and the previous four quarters .

2021

2020

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Performing loans past due 30 to 89 days:

Commercial and industrial

$

42

230

48

83

4

Construction and land development

10

61

—

—

8

Commercial real estate

180

29

—

168

—

Residential real estate

399

1,509

106

620

922

Consumer installment

36

29

6

8

19

Total 

$

667

1,858

160

879

953

Deposits

Total deposits increased $40.8 million, or 5% to $880.6 million at March 31, 2021, compared to $839.8 million at

December 31, 2020. Noninterest-bearing deposits were $265.9 million, or 30 % of total deposits, at March 31, 2021,

compared to $245.4 million, or 29% of total deposits at December 31, 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 0.44 % in the first quarter of 2021 compared to 0.78% in the

first quarter of 2020. 

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 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 March 31, 2021, and at December 31, 2020, respectively. Securities sold under agreements to repurchase

totaled $3.3 million at March 31, 2021, compared to $2.4 million at December 31, 2020. 

The average rate paid on short-term borrowings was 0.50% in the first quarter of 2021 and 2020. 

The Company had no long-term debt at March 31, 2021 and December 31, 2020.

CAPITAL ADEQUACY 

The Company’s consolidated stockholders’ equity was $103.6 million and $107.7 million as of March 31, 2021 and

December 31, 2020, respectively. The decrease from December 31, 2020 was primarily driven by an other comprehensive

loss due to the change in unrealized gains (losses) on securities available-for-sale, net of tax of $5.1 million and cash

dividends paid of $0.9 million, partially offset by net earnings of $2.0 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 rules included the implementation of a

capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital

conservation buffer was subject to a three year phase -in period that began on January 1, 2016 and was fully phased -in on

January 1, 2019 at 2.5%. 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 March 31, 2021, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.

43

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 its consolidated subsidiaries. The Bank’s

tier 1 leverage ratio was 9.99%, CET1 risk-based capital ratio was 17.21%, tier 1 risk-based capital ratio was 17.21%, and

total risk-based capital ratio was 18.25% at March 31, 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 Bank’s capital conservation buffer was

10.25% at March 31, 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.

Earnings simulation

. Management believes that interest rate risk is best estimated by our earnings simulation modeling.

Forecasted levels of earning assets, interest-bearing liabilities, and off-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

At March 31, 2021, our earnings simulation model indicated that we were in compliance with the policy guidelines noted

above. 

44

Economic Value of Equity

. EVE measures the extent that the estimated economic values of our assets, liabilities, and 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, and off-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 the re-pricing of all assets, liabilities, and 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

At March 31, 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 to facilitate customer

transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not designated as

hedging instruments. At March 31, 2021 and December 31, 2020, the Company had no derivative contracts designated as

part of a hedging relationship to assist in managing its interest rate sensitivity. 

Liquidity Risk Management 

Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the

Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead

to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities. 

Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The

management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal

entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The

Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and

dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory

restrictions. 

The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the

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 Company expenses. 

45

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 March 31, 2021, the Bank had a remaining available line of credit with the FHLB of

$286.9 million. At March 31, 2021, the Bank also had $41.0 million of available federal funds lines with 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 Contractual Obligations

At March 31, 2021, the Bank had outstanding standby letters of credit of $1.4 million and unfunded loan commitments

outstanding of $72.1 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 securities available-for-

sale, or draw on its available credit facilities. 

Mortgage lending activities

We primarily sell 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 March 31, 2021, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but

retained the servicing rights was $263.7 million. Although these loans are generally sold on a non-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.

The Company was not required to repurchase any loans during the first quarter of 2021 as a result of representation and

warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or

make-whole requests at March 31, 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.

46

Although repurchase and make whole requests related to representation and warranty provisions and servicing activities

have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred

(make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on

their purchased loans. As of March 31, 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 forbeara nce.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein have been prepared in

accordance with U.S. GAAP 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 ASUs have been issued by the FASB but are not yet effective. 

●

ASU 2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial

Instruments;

Information about these pronouncements is described in more detail below.

ASU 2016-13,

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-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, the new guidance was

originally effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company has

developed an implementation team that is following 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 particular

the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential impact and

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 2016-13. The Company will now be required to implement the new standard in January

2023, with early adoption permitted in any period prior to that date.

47

Table 1 – Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly

report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-

GAAP financial measure, including the presentation and calculation of the efficiency ratio. 

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the

Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-

GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

2021

2020

First

Fourth

Third

Second

First

(in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Net interest income (GAAP)

$

5,937

6,188

5,868

6,070

6,212

Tax-equivalent adjustment

120

123

122

127

120

Net interest income (Tax -equivalent)

$

6,057

6,311

5,990

6,197

6,332

48

Table 2 - Selected Quarterly Financial Data

2021

2020

First

Fourth

Third

Second

First

(Dollars in thousands, except per share amounts)

Quarter

Quarter

Quarter

Quarter

Quarter

Results of Operations

Net interest income (a)

$

6,057

6,311

5,990

6,197

6,332

Less: tax-equivalent adjustment

120

123

122

127

120

Net interest income (GAAP)

5,937

6,188

5,868

6,070

6,212

Noninterest income

1,182

1,403

1,374

1,363

1,235

Total revenue

7,119

7,591

7,242

7,433

7,447

Provision for loan losses

— 

— 

250

450

400

Noninterest expense

4,690

5,086

4,653

4,959

4,856

Income tax expense

423

449

403

363

390

Net earnings

$

2,006

2,056

1,936

1,661

1,801

Per share data:

Basic and diluted net earnings 

$

0.56

0.58

0.54

0.47

0.50

Cash dividends declared

0.26

0.255

0.255

0.255

0.255

Weighted average shares outstanding:

Basic and diluted

3,566,299

3,566,276

3,566,239

3,566,166

3,566,146

Shares outstanding, at period end

3,566,326

3,566,276

3,566,276

3,566,176

3,566,146

Book value

$

29.06

30.20

29.81

29.53

29.04

Common stock price

High

$

48.00

43.00

56.80

63.40

59.99

Low 

37.55

36.75

26.26

36.81

24.11

Period end:

38.37

42.29

36.26

57.09

41.98

To earnings ratio

17.85

20.23

15.97

24.29

16.66

To book value

132

%

140

122

193

145

Performance ratios:

Return on average equity 

7.37

%

7.63

7.26

6.34

7.24

Return on average assets 

0.82

%

0.87

0.84

0.74

0.86

Dividend payout ratio

46.43

%

43.97

47.22

54.26

51.00

Asset Quality:

Allowance for loan losses as a % of:

Loans

1.23

%

1.22

1.18

1.14

1.10

Nonperforming loans

726

%

1,052

1,015

783

4,196

Nonperforming assets as a % of:

Loans and other real estate owned

0.17

%

0.12

0.12

0.15

0.05

Total assets 

0.08

%

0.06

0.06

0.07

0.03

Nonperforming loans as a % of total loans

0.17

%

0.12

0.12

0.15

0.03

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

(0.06)

%

(0.04)

(0.01)

0.01

(0.07)

Capital Adequacy: (c)

CET 1 risk-based capital ratio

17.21

%

17.27

17.70

18.00

17.77

Tier 1 risk-based capital ratio

17.21

%

17.27

17.70

18.00

17.77

Total risk-based capital ratio

18.25

%

18.31

18.77

19.04

18.72

Tier 1 leverage ratio

9.99

%

10.32

10.38

10.62

11.17

Other financial data:

Net interest margin (a)

2.66

%

2.81

2.72

2.95

3.23

Effective income tax rate

17.41

%

17.92

17.23

17.93

17.80

Efficiency ratio (b)

64.79

%

65.93

63.19

65.60

64.17

Selected average balances:

Securities

$

353,031

325,102

315,542

291,333

257,317

Loans, net of unearned income

463,424

466,704

465,285

466,971

451,210

Total assets

980,884

944,439

924,949

893,720

838,725

Total deposits

863,194

828,801

810,747

782,381

734,047

Total stockholders’ equity

108,890

107,791

106,709

104,820

99,560

Selected period end balances: 

Securities

$

359,630

335,177

320,922

302,193

280,435

Loans, net of unearned income

461,879

461,700

472,453

464,274

443,868

Allowance for loan losses

5,682

5,618

5,575

5,308

4,867

Total assets

993,263

956,597

937,890

942,887

856,475

Total deposits

880,590

839,792

823,980

829,810

746,785

Total stockholders’ equity

103,639

107,689

106,314

105,299

103,563

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

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

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

49

Table 3 - Average Balances and Net Interest Income Analysis

Quarter ended March 31,

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)

$

466,368

$

5,178

4.50%

$

452,155

$

5,412

4.81%

Securities - taxable

289,981

949

1.33%

196,422

1,111

2.27%

Securities - tax-exempt (2)

63,050

572

3.68%

60,895

573

3.78%

Total securities 

353,031

1,521

1.75%

257,317

1,684

2.63%

Federal funds sold

32,809

12

0.15%

29,758

93

1.26%

Interest bearing bank deposits

70,350

16

0.09%

49,378

186

1.52%

Total interest-earning assets

922,558

$

6,727

2.96%

788,608

$

7,375

3.76%

Cash and due from banks

13,880

14,184

Other assets

44,446

35,933

Total assets

$

980,884

$

838,725

Interest-bearing liabilities:

Deposits:

NOW

$

172,055

$

66

0.16%

$

149,344

$

188

0.51%

Savings and money market

281,844

172

0.25%

220,909

253

0.46%

Time deposits

159,466

428

1.09%

167,447

600

1.44%

Total interest-bearing deposits

613,365

666

0.44%

537,700

1,041

0.78%

Short-term borrowings

3,161

4

0.50%

1,361

2

0.50%

Total interest-bearing liabilities

616,526

$

670

0.44%

539,061

$

1,043

0.78%

Noninterest-bearing deposits

249,829

196,347

Other liabilities

5,639

3,757

Stockholders' equity

108,890

99,560

Total liabilities and stockholders' equity

$

980,884

$

838,725

Net interest income and margin (tax-equivalent)

$

6,057

2.66%

$

6,332

3.23%

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

 in the computation of average balances.

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

tax rate of 21%.

50

Table 4 - Loan Portfolio Composition

2021

2020

First

Fourth

Third

Second

First

(In thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Commercial and industrial

$

88,687

82,585

98,244

87,754

56,447

Construction and land development

30,332

33,514

31,651

32,967

32,302

Commercial real estate

254,731

255,136

250,992

250,588

256,099

Residential real estate

82,848

84,154

85,054

85,825

91,010

Consumer installment

6,524

7,099

7,731

8,631

8,424

Total loans

463,122

462,488

473,672

465,765

444,282

Less: unearned income

(1,243)

(788)

(1,219)

(1,491)

(414)

Loans, net of unearned income

461,879

461,700

472,453

464,274

443,868

Less: allowance for loan losses

(5,682)

(5,618)

(5,575)

(5,308)

(4,867)

Loans, net

$

456,197

456,082

466,878

458,966

439,001

51

Table 5 - Allowance for Loan Losses and Nonperforming Assets

2021

2020

First

Fourth

Third

Second

First

(Dollars in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Allowance for loan losses:

Balance at beginning of period

$

5,618

5,575

5,308

4,867

4,386

Charge-offs:

Commercial and industrial

—

(4)

—

(3)

—

Consumer installment

(5)

(1)

(4)

(28)

(5)

Total charge -offs

(5)

(5)

(4)

(31)

(5)

Recoveries

69

48

21

22

86

Net recoveries (charge-offs)

64

43

17

(9)

81

Provision for loan losses

—

—

250

450

400

Ending balance

$

5,682

5,618

5,575

5,308

4,867

as a % of loans

1.23

%

1.22

1.18

1.14

1.10

as a % of nonperforming loans

726

%

1,052

1,015

783

4,196

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

(0.06)

%

(0.04)

(0.01)

0.01

(0.07)

Nonperforming assets:

Nonaccrual loans

$

783

534

549

678

116

Other real estate owned

—

—

—

—

99

Total nonperforming assets

$

783

534

549

678

215

as a % of loans and other real estate owned

0.17

%

0.12

0.12

0.15

0.05

as a % of total assets

0.08

%

0.06

0.06

0.07

0.03

Nonperforming loans as a % of total loans

0.17

%

0.12

0.12

0.15

0.03

Accruing loans 90 days or more past due

$

—

21

71

49

—

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

52

Table 6 - Allocation of Allowance for Loan Losses

2021

2020

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

(Dollars in thousands)

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Amount

%*

Commercial and industrial

$

828

19.1

$

807

17.9

$

798

20.7

$

679

18.8

$

675

12.7

Construction and land 

development

551

6.5

594

7.2

582

6.7

613

7.1

582

7.3

Commercial real estate

3,259

55.2

3,169

55.2

3,120

53.0

2,915

53.8

2,596

57.6

Residential real estate

951

17.9

944

18.2

954

18.0

954

18.4

877

20.5

Consumer installment

93

1.4

104

1.5

121

1.6

147

1.9

137

1.9

Total allowance for loan losses

$

5,682

$

5,618

$

5,575

$

5,308

$

4,867

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

53

Table 7 - CDs and Other Time Deposits of $100,000 or More

(Dollars in thousands)

March 31, 2021

Maturity of:

3 months or less

$

8,221

Over 3 months through 6 months

21,323

Over 6 months through 12 months

29,453

Over 12 months

45,678

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

$

104,675

54

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK

MANAGEMENT” and is incorporated herein by reference. 

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer,

carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as

defined in Rules 13a-15(e) and 15d-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 Form 10-K for the

year ended December 31, 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 Form 10-K for the year ended December 31, 2020,

which could materially affect our business, financial condition or future results. The risks described in our annual report on

Form 10-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. 

55

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

The Company’s repurchases of its common stock during the first 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)

January 1 - January 31, 2021

—

$

—

—

$

5,000,000

February 1 - February 28, 2021

—

—

—

5,000,000

March 1 - March 31, 2021

—

—

—

5,000,000

Total

—

—

—

5,000,000

(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.

56

ITEM 6. EXHIBITS

Exhibit 

Number Description 

3.1

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

3.2

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

31.1

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive
Officer.

31.2

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief
Financial Officer.

32.1

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

32.2

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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

* 

 Incorporated by reference from Registrant’s 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: April 30, 2021 

By: /s/ Robert W. Dumas 

Robert W. Dumas

Chairman, President and CEO

Date: April 30, 2021 

By: /s/ David A. Hedges 

David A. Hedges

Executive Vice President and Chief Financial Officer