UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended ~~June 30, 2019~~March 31, 2020

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

For the transition period to

Commission File Number:0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction of

incorporation or organization)

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


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

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

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	AUBN	Nasdaq Global Market

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


Class				Outstanding at ~~July 31, 2019~~May 7, 2020
Common Stock, $0.01 par value per share				~~3,569,192~~3,566,146 shares

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

INDEX


PART I. FINANCIAL INFORMATION			PAGE


Item 1	Financial Statements

		Consolidated Balance Sheets (Unaudited) as of March 31, 2020 and December 31, 2019	3

			~~Consolidated Balance Sheets (Unaudited)~~ ~~as of June 30, 2019 and December 31, 2018~~	3

			Consolidated Statements of Earnings (Unaudited) for the ~~quarter~~quarters ended March 31, 2020 and ~~six months ended June 30,~~ 2019 ~~and 2018~~	4

			Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the ~~quarter~~quarters ended March 31, 2020 and ~~six months ended June 30,~~ 2019 ~~and 2018~~	5

			Consolidated Statements of Stockholders’ Equity (Unaudited) for the ~~quarter~~quarters ended March 31, 2020 and ~~six months ended June 30,~~ 2019 ~~and 2018~~	6

			Consolidated Statements of Cash Flows (Unaudited) for the ~~six months~~quarters ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	7

			Notes to Consolidated Financial Statements (Unaudited)	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2725

			Table 1 – Explanation ofNon-GAAP Financial Measures	4443

			Table 2 – Selected Quarterly Financial Data	4544

			Table 3 – ~~Selected Financial Data~~Average Balances and Net Interest Income Analysis – for the quarters ended March 31, 2020 and 2019	4645

			Table 4 – ~~Average Balances and Net Interest Income Analysis –~~ ~~for the quarter ended June 30, 2019 and 2018~~Loan Portfolio Composition	4746

			Table 5 – ~~Average Balances~~Allowance for Loan Losses and ~~Net Interest Income Analysis –~~ ~~for the six months ended June 30, 2019 and 2018~~Nonperforming Assets	4847

			Table 6 – Allocation of Allowance for Loan ~~Portfolio Composition~~Losses	4948

			Table 7 ~~– Allowance for Loan Losses and Nonperforming Assets~~	50

			~~Table 8 – Allocation of Allowance for Loan Losses~~	51

			~~Table 9~~ – CDs and Other Time Deposits of $100,000 or more	5249

Item 3	Quantitative and Qualitative Disclosures About Market Risk		5350

Item 4	Controls and Procedures		5350

PART II. OTHER INFORMATION

Item 1	Legal Proceedings		5350

Item 1A	Risk Factors		5350

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 3	Defaults Upon Senior Securities		53

Item 4	Mine Safety Disclosures		53

Item 5	Other Information		54

Item 4 6	~~Mine Safety Disclosures~~		54

~~Item 5~~	~~Other Information~~			54

~~Item 6~~	Exhibits			54

PART 1. FINANCIAL INFORMATION

~~ITEM 1.~~

~~FINANCIAL STATEMENTS~~

ITEM 1. FINANCIAL STATEMENTS

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share data)
June 30,
2019
December 31,
2018

Assets:

Cash and due from banks
   $ 16,497 $ 13,043
Federal funds sold
   25,395 26,918
Interest-bearing bank deposits
   33,776 25,115

Cash and cash equivalents
   75,668 65,076

Securitiesavailable-for-sale
   248,813 239,801
Loans held for sale
   2,016 383
Loans, net of unearned income
   476,061 476,908
Allowance for loan losses
   (4,851 ) (4,790)

Loans, net
   471,210 472,118

Premises and equipment, net
   14,825 13,596
Bank-owned life insurance
   18,982 18,765
Other assets
   7,664 8,338

Total assets
   $ 839,178 $ 818,077

Liabilities:

Deposits:

Noninterest-bearing
   $ 206,871 201,648
Interest-bearing
   533,630 522,545

Total deposits
   740,501 724,193
Federal funds purchased and securities sold under agreements to repurchase
   1,100 2,300
Accrued expenses and other liabilities
   3,512 2,529

Total liabilities
   745,113 729,022

Stockholders’ equity:

Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares
   —   —
Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares
   39 39
Additionalpaid-in capital
   3,783 3,779
Retained earnings
   98,694 95,635
Accumulated other comprehensive income (loss), net
   680 (3,763)
Less treasury stock, at cost—385,307 shares and 313,267 shares at June 30, 2019 and December 31, 2018, respectively
   (9,131 ) (6,635)

Total stockholders’ equity
   94,065 89,055

Total liabilities and stockholders’ equity
   $         839,178 $         818,077

~~See accompanying notes to consolidated financial statements~~

~~AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES~~

~~Consolidated Statements of Earnings~~

~~(Unaudited)~~

   Quarter ended June 30,    Six months ended June 30,
(In thousands, except share and per share data)    2019    2018    2019    2018

Interest income:

Loans, including fees
   $ 5,763    $ 5,307    $ 11,490    $ 10,538
Securities:

Taxable
   985    1,012    2,000    2,089
Tax-exempt
   544    572    1,093    1,157
Federal funds sold and interest-bearing bank deposits
   311    290    663    592

Total interest income
   7,603    7,181    15,246    14,376

Interest expense:

Deposits
   1,004    845    2,025    1,717
Short-term borrowings
   2    8    4    12
Long-term debt
   —      11    —      46

Total interest expense
   1,006    864    2,029    1,775

Net interest income
   6,597    6,317    13,217    12,601
Provision for loan losses
   —      —      —      —

Net interest income after provision for loan losses
   6,597    6,317    13,217    12,601

Noninterest income:

Service charges on deposit accounts
   176    182    360    361
Mortgage lending
   187    166    376    372
Bank-owned life insurance
   107    108    217    214
Other
   407    383    1,079    745
Securities gains, net
   8    —      13    —

Total noninterest income
   885    839    2,045    1,692

Noninterest expense:

Salaries and benefits
   2,799    2,618    5,737    5,286
Net occupancy and equipment
   381    360    765    730
Professional fees
   275    266    503    494
FDIC and other regulatory assessments
   102    89    131    178
Other
   1,072    993    2,104    2,040

Total noninterest expense
   4,629    4,326    9,240    8,728

Earnings before income taxes
   2,853    2,830    6,022    5,565
Income tax expense
   546    566    1,172    1,106

Net earnings
   $ 2,307    $ 2,264    $ 4,850    $ 4,459

Net earnings per share:

Basic and diluted
   $ 0.64    $ 0.62    $ 1.35    $ 1.22

Weighted average shares outstanding:

Basic and diluted
       3,577,409        3,643,731        3,595,972        3,643,707


(Dollars in thousands, except share data)	March 31, 2020			December 31, 2019

Assets:
Cash and due from banks	$	13,002		$	15,172
Federal funds sold		29,651			25,944
Interest-bearing bank deposits		52,053			51,327

Cash and cash equivalents		94,706			92,443

Securitiesavailable-for-sale		280,435			235,902
Loans held for sale		1,563			2,202
Loans, net of unearned income		443,868			460,901
Allowance for loan losses		(4,867	)		(4,386)

Loans, net		439,001			456,515

Premises and equipment, net		14,518			14,743
Bank-owned life insurance		18,907			19,202
Other assets		7,345			6,872

Total assets	$	856,475		$	827,879

Liabilities:
Deposits:
Noninterest-bearing	$	205,769		$	196,218
Interest-bearing		541,016			527,934

Total deposits		746,785			724,152
Federal funds purchased and securities sold under agreements to repurchase		1,375			1,069
Accrued expenses and other liabilities		4,752			4,330

Total liabilities		752,912			729,551

Stockholders’ equity:
Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares		—			—
Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares		39			39
Additionalpaid-in capital		3,784			3,784
Retained earnings		102,692			101,801
Accumulated other comprehensive income, net		6,403			2,059
Less treasury stock, at cost—390,989 shares at March 31, 2020 and December 31, 2019		(9,355	)		(9,355)

Total stockholders’ equity		103,563			98,328

Total liabilities and stockholders’ equity	$	856,475		$	827,879

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of ~~Comprehensive Income~~Earnings

(Unaudited)

   Quarter ended June 30,    Six months ended June 30,
(Dollars in thousands)    2019    2018    2019    2018

Net earnings
   $           2,307    $           2,264    $           4,850    $           4,459
Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities
   2,057    (754)    4,453    (3,874)
Reclassification adjustment for net gain on securities recognized in net earnings
   (6)    —       (10)    —

Other comprehensive income (loss)
   2,051    (754)    4,443    (3,874)

Comprehensive income
   $ 4,358    $ 1,510    $ 9,293    $ 585


	Quarter ended March 31,
(Dollars in thousands, except share and per share data)	2020		2019

Interest income:
Loans, including fees	$	5,412	$	5,727
Securities
Taxable		1,111		1,015
Tax-exempt		453		549
Federal funds sold and interest bearing bank deposits		279		352

Total interest income		7,255		7,643

Interest expense:
Deposits		1,041		1,021
Short-term borrowings		2		2

Total interest expense		1,043		1,023

Net interest income		6,212		6,620
Provision for loan losses		400		—

Net interest income after provision for loan losses		5,812		6,620

Noninterest income:
Service charges on deposit accounts		172		184
Mortgage lending		230		189
Bank-owned life insurance		398		110
Other		429		672
Securities gains, net		6		5

Total noninterest income		1,235		1,160

Noninterest expense:
Salaries and benefits		2,831		2,938
Net occupancy and equipment		597		384
Professional fees		258		228
Other		1,170		1,061

Total noninterest expense		4,856		4,611

Earnings before income taxes		2,191		3,169
Income tax expense		390		626

Net earnings	$	1,801	$	2,543

Net earnings per share:
Basic and diluted	$	0.50	$	0.70

Weighted average shares outstanding:
Basic and diluted		3,566,146		3,614,741

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of ~~Stockholders’ Equity~~Comprehensive Income

(Unaudited)

            Accumulated
   Common    Additional       other
   Shares Common    paid-in    Retained    comprehensive Treasury
(Dollars in thousands, except share data)    Outstanding Stock    capital    earnings    (loss) income stock Total

Quarter ended June 30, 2019

Balance, March 31, 2019
   3,581,485 $           39    $           3,783    $           97,280    $           (1,371 ) $           (8,782 ) $           90,949
Net earnings
   —   —      —      2,307    —     —   2,307
Other comprehensive income
   —   —      —      —      2,051 —   2,051
Cash dividends paid ($0.25 per share)
   —   —      —      (893)    —     —   (893)
Stock repurchases
   (9,687 ) —      —      —      —     (350 ) (350)
Sale of treasury stock
   30 —      —      —      —     1 1

Balance, June 30, 2019
   3,571,828 $ 39    $ 3,783    $ 98,694    $ 680 $ (9,131 ) $ 94,065

Quarter ended June 30, 2018

Balance, March 31, 2018
   3,643,698 $ 39    $ 3,771    $ 91,620    $ (3,686 ) $ (6,636 ) $ 85,108
Net earnings
   —   —      —      2,264    —   —   2,264
Other comprehensive loss
   —   —      —      —      (754 ) —   (754)
Cash dividends paid ($0.24 per share)
   —   —      —      (875)    —   —�� (875)
Sale of treasury stock
   95 —      5    —      —   —   5

Balance, June 30, 2018
   3,643,793 $ 39    $ 3,776    $ 93,009    $ (4,440 ) $ (6,636 ) $ 85,748

Six months ended June 30, 2019

Balance, December 31, 2018
   3,643,868 $ 39    $ 3,779    $ 95,635    $ (3,763 ) $ (6,635 ) $ 89,055
Net earnings
   —   —      —      4,850    —   —   4,850
Other comprehensive income
   —   —      —      —      4,443 —   4,443
Cash dividends paid ($0.50 per share)
   —   —      —      (1,791)    —   —   (1,791)
Stock repurchases
   (72,205 ) —      —      —      —   (2,497 ) (2,497 )
Sale of treasury stock
   165 —      4    —      —   1 5

Balance, June 30, 2019
   3,571,828 $ 39    $ 3,783    $ 98,694    $ 680 $ (9,131 ) $ 94,065

Six months ended June 30, 2018

Balance, December 31, 2017
   3,643,668 $ 39    $ 3,771    $ 90,299    $ (566 ) $ (6,637 ) $ 86,906
Net earnings
   —   —      —      4,459    —   —   4,459
Other comprehensive loss
   —   —      —      —      (3,874 ) —   (3,874)
Cash dividends paid ($0.48 per share)
   —   —      —      (1,749)    —   —   (1,749)
Sale of treasury stock
   125 —      5    —      —   1 6

Balance, June 30, 2018
   3,643,793 $ 39    $ 3,776    $ 93,009    $ (4,440 ) $ (6,636 ) $ 85,748


	Quarter ended March 31,
(Dollars in thousands)	2020			2019

Net earnings	$	1,801		$	2,543

Other comprehensive income, net of tax:
Unrealized net holding gain on securities		4,349			2,396
Reclassification adjustment for net gain on securities recognized in net earnings		(5	)		(4)

Other comprehensive income		4,344			2,392

Comprehensive income	$	6,145		$	4,935

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Dollars in thousands, except share data)    Common
Shares
Outstanding Common
Stock    Additional
paid-in
capital    Retained
earnings Accumulated
other
comprehensive
income (loss) Treasury
stock Total

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 ($0.255 per share)
   —   —      —      (910 ) —   —   (910)

Balance, March 31, 2020
   3,566,146 $ 39    $ 3,784    $     102,692 $ 6,403 $ (9,355 ) $     103,563

Quarter ended March 31, 2019

Balance, December 31, 2018
   3,643,868 $ 39    $ 3,779    $ 95,635 $ (3,763 ) $ (6,635 ) $ 89,055
Net earnings
   —   —      —      2,543 —   —   2,543
Other comprehensive income
   —   —      —      —   2,392 —   2,392
Cash dividends paid ($0.25 per share)
   —   —      —      (898 ) —   —   (898)
Stock repurchases
   (62,518 ) —      —      —   —   (2,147 ) (2,147)
Sale of treasury stock
   135     —      4    —   —   —   4

Balance, March 31, 2019
   3,581,485 $ 39    $     3,783    $     97,280 $     (1,371 ) $     (8,782 ) $     90,949

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended June 30,					Quarter ended March 31,
(In thousands)	2019			2018		2020			2019

Cash flows from operating activities:
Net earnings	$	4,850		$	4,459	$	1,801		$	2,543
Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization		448			467
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses							400			—
Depreciation and amortization							458			212
Premium amortization and discount accretion, net		886			1,053		446			423
Net gain on securitiesavailable-for-sale		(13	)		—		(6	)		(5)
Net gain on sale of loans held for sale		(188	)		(198)		(163	)		(86)
Loans originated for sale		(11,312	)		(17,282)		(9,844	)		(5,045)
Proceeds from sale of loans		9,786			17,344		10,596			4,159
Increase in cash surrender value of bank-owned life insurance		(217	)		(213)		(117	)		(110)
Net increase in other assets		(900	)		(68)
Net increase (decrease) in accrued expenses and other liabilities		983			(635)
Income recognized from death benefit on bank-owned life insurance							(282	)		—
Net (increase) decrease in other assets							(444	)		181
Net (decrease) increase in accrued expenses and other liabilities							(1,035	)		276

Net cash provided by operating activities		4,323			4,927		1,810			2,548


Cash flows from investing activities:
Proceeds from sales of securitiesavailable-for-sale		7,662			—
Proceeds from prepayments and maturities of securitiesavailable-for-sale		22,222			17,275		9,575			10,264
Purchase of securitiesavailable-for-sale		(33,839	)		(17,124)		(48,747	)		(8,974)
Decrease (increase) in loans, net		826			(4,288)
Decrease in loans, net							17,015			4,276
Net purchases of premises and equipment		(1,459	)		(36)		(104	)		(1,446)
Decrease (increase) in FHLB stock		32			(20)
Proceeds from sale of other real estate owned		—			1,223
Proceeds from bank-owned life insurance death benefit							694			—
(Increase) decrease in FHLB stock							(9	)		32

Net cash used in investing activities		(4,556	)		(2,970)
Net cash (used in) provided by investing activities							(21,576	)		4,152


Cash flows from financing activities:
Net increase in noninterest-bearing deposits		5,223			5,552		9,551			10,607
Net increase (decrease) in interest-bearing deposits		11,085			(42,206)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(1,200	)		74
Repayments or retirement of long-term debt		—			(3,217)
Net increase in interest-bearing deposits							13,082			4,831
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase							306			(667)
Stock repurchases		(2,497	)		—		—			(2,147)
Proceeds from sale of treasury stock		5			6
Dividends paid		(1,791	)		(1,749)		(910	)		(898)

Net cash provided by (used in) financing activities		10,825			(41,540)

Net cash provided by financing activities							22,029			11,726

Net change in cash and cash equivalents		10,592			(39,583)		2,263			18,426
Cash and cash equivalents at beginning of period		65,076			105,528		92,443			65,076

Cash and cash equivalents at end of period	$	75,668		$	65,945	$	94,706		$	83,502



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,029		$	1,770	$	1,089		$	1,033
Income taxes		1,499			1,678		—			—

Supplemental disclosure ofnon-cash transactions:
Initial recognition of operating lease right of use assets		891			—		—			891
Initial recognition of operating lease liabilities		889			—		—			889
Real estate acquired through foreclosure		82			1,360		99			—

See accompanying notes to consolidated financial statements

AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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 Form10-K for the year ended December 31, ~~2018.~~2019.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Auburn National Bancorporation Capital Trust I was an affiliate of the Company and was included in these unaudited consolidated financial statements pursuant to the equity method of accounting. On April 27, 2018, the Trust was dissolved, upon the redemption of all related junior subordinated debentures and Trust securities. 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.

Revenue Recognition

On January 1, 2018, the Company implemented ~~ASU~~Accounting Standards Update (“ASU” or “updates”)2014-09, Revenue from Contracts with Customers, codified at ~~ASC~~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 other real estate –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 theloan-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.

Reclassifications

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

Subsequent Events

The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to ~~June 30, 2019.~~March 31, 2020. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.

Accounting Developments

In the first ~~six months~~quarter of ~~2019,~~2020, the Company adopted new guidance related to the following ~~Accounting Standards Updates (“Updates” or “ASUs”):~~ASUs:

•

ASU~~ASU 2016-02,~~2018-13,~~Leases;~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement; and

•

ASU~~2017-12,~~2018-15,~~Targeted Improvements to~~Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40): Customer’s Accounting for ~~Hedging Activities.~~Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

Information about these pronouncements is described in more detail below.

ASU~~2016-02,~~2018-13,~~Leases~~~~, requires lessees~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to ~~recognize~~ the ~~assets~~Disclosure Requirements for Fair Value Measurement,improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and ~~liabilities that arise from leases on~~reasons for transfers between Level 1 and Level 2 of the ~~balance sheet. A lessee should recognize~~fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in ~~the statement of financial position a liability to make lease payments (the lease liability)~~unrealized gains and a~~right-of-use~~ ~~asset representing its right to use the underlying asset~~losses for the ~~lease term. In July 2018,~~period included in other comprehensive income for recurring Level 3 fair value measurements and the ~~FASB issued~~range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU~~2018-10~~ are effective for all entities for fiscal years beginning after December 15, 2019, and~~2018-11,~~ ~~which~~ all interim periods within those fiscal years. Early adoption was permitted upon issuance of the ASU. Entities are ~~designed~~permitted to ~~make targeted improvements to~~early adopt amendments that remove or modify disclosures and ~~clarifications regarding ASU2016-02.~~delay the adoption of the additional disclosures until their effective date. The Company adopted this ASU~~No. 2016-02~~ on January 1, ~~2019. ASUNo. 2016-02~~ ~~did not have a material impact on the Company’s consolidated financial statements due to the fact the Company does not have any material leases.~~

~~ASU2017-12,~~~~Targeted Improvements to Accounting for Hedging Activities,~~ ~~improves the transparency and understandability~~2020. Adoption of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and reduces the complexity of and simplifies the application of hedge accounting by preparers. The Company adopted ASU~~No. 2017-12~~ ~~on January 1, 2019. ASUNo. 2017-12~~this guidance did not have a material impact on the Company’s consolidated financial statements.

ASU 2018- 15,Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contractaligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that includeinternal-use software license). This ASU requires entities to use the guidance in FASB ASC350-40, Intangibles—Goodwill and Other—Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

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

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the ~~respective period.~~quarters ended March 31, 2020 and 2019, 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 ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation.

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

   Quarter ended June 30,    Six months ended June 30,
(In thousands, except share and per share data)    2019    2018    2019    2018

Basic and diluted:

Net earnings
   $ 2,307    $ 2,264    $ 4,850    $ 4,459
Weighted average common shares outstanding
       3,577,409        3,643,731        3,595,972        3,643,707

Net earnings per share
   $ 0.64    $ 0.62    $ 1.35    $ 1.22

   Quarter ended March 31,
(Dollars in thousands, except share and per share data)    2020    2019

Basic and diluted:

Net earnings
   $ 1,801    $ 2,543
Weighted average common shares outstanding
       3,566,146        3,614,741

Net earnings per share
   $ 0.50    $ 0.70

NOTE 3: SECURITIES
At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, all securities within the scope of ~~Accounting Standards Codification (“ASC”)~~ASC 320,Investments – Debt and Equity Securities,were classified asavailable-for-sale. The fair value and amortized cost for securitiesavailable-for-sale by contractual maturity at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, are presented below.

   1 year    1 to 5    5 to 10    After 10    Fair      Gross Unrealized      Amortized    1 year    1 to 5    5 to 10    After 10    Fair      Gross Unrealized      Amortized
(Dollars in thousands)    or less    years    years    years    Value    Gains    Losses    Cost    or less    years    years    years    Value    Gains    Losses    Cost

June 30, 2019

March 31, 2020

Agency obligations (a)
   $ 9,997    22,173    24,990    —      57,160    149    217    $ 57,228    $     5,038    28,016    29,406    5,218    67,678    2,426    111    $ 65,363
Agency RMBS (a)
   —      —      5,305    117,350    122,655    358    968    123,265    —      1,047    8,872    135,452    145,371    3,863    —      141,508
State and political subdivisions
   —      1,356    5,198    62,444    68,998    1,654    68    67,412    97    1,167    6,497    59,625    67,386    2,432    60    65,014

Totalavailable-for-sale
   $ 9,997    23,529    35,493    179,794    248,813    2,161    1,253    $ 247,905    $ 5,135    30,230    44,775    200,295    280,435    8,721    171    $ 271,885

December 31, 2018

December 31, 2019

Agency obligations (a)
   $ 14,437    19,865    16,869    —      51,171    25    1,200    $ 52,346    $ 4,993    27,245    18,470    —      50,708    215    98    $ 50,591
Agency RMBS (a)
   —      —      8,368    110,230    118,598    65    3,738    122,271    —      560    4,510    118,207    123,277    798    261    122,740
State and political subdivisions
   —      3,682    7,726    58,624    70,032    518    692    70,206    —      1,355    6,166    54,396    61,917    2,104    9    59,822

Totalavailable-for-sale
   $           14,437    23,547    32,963    168,854    239,801    608    5,630    $ 244,823    $ 4,993    29,160    29,146    172,603    235,902    3,117    368    $     233,153

(a) Includes securities issued by U.S. government agencies or government-sponsored entities.
Securities with aggregate fair values of ~~$157.1~~$154.3 million and ~~$133.1~~$147.8 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.
Included in other assets on the accompanying consolidated balance sheets arenon-marketable equity investments. The carrying amounts ofnon-marketable equity investments were $1.4 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.~~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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below.

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

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

June 30, 2019:

Agency obligations
   $ —      —      35,676    217    $ 35,676    217
Agency RMBS
   —      —      79,546    968    79,546    968
State and political subdivisions
   —      —      8,633    68    8,633    68

Total
   $ —             —             123,855           1,253    $ 123,855           1,253

December 31, 2018:

Agency obligations
   $ 4,724    28    44,307    1,172    $ 49,031    1,200
Agency RMBS
   12,325    238    99,184    3,500    111,509    3,738
State and political subdivisions
   14,840    181    14,384    511    29,224    692

Total
   $       31,889    447    157,875    5,183    $       189,764    5,630

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

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

March 31, 2020:

Agency obligations
   $ 5,218    111    —      —      $ 5,218    111
State and political subdivisions
   5,197    60    —      —      5,197    60

Total
   $ 10,415    171    —      —      $ 10,415    171

December 31, 2019:

Agency obligations
   $ 24,734    97    4,993    1    $ 29,727    98
Agency RMBS
   40,126    98    21,477    163    61,603    261
State and political subdivisions
   2,741    9    —      —      2,741    9

Total
   $       67,601    204    26,470    164    $       94,071    368

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the ~~security~~securities before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis.
In determining whether a loss is temporary, the Company considers all relevant information including:

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

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

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

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

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

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

recoveries or additional declines in fair value subsequent to the balance sheet date.
Agency obligations
The unrealized losses associated with agency obligations were primarily driven by increases in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support.

Agency RMBS

The unrealized losses associated with agency residential mortgage-backed securities (“RMBS”) were primarily driven by increases 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 increases 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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the ~~six months~~quarter ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Realized Gains and Losses

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


	Quarter ended June 30,					Six months ended June 30,					Quarter ended March 31,
(Dollars in thousands)	2019			2018		2019			2018		2020		2019

Gross realized gains	$	27			—	$	32			—	$	6	$	5
Gross realized losses		(19	)		—		(19	)		—

Realized gains, net	$	8			—	$	13			—	$	6	$	5

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES


(In thousands)	June 30, 2019			December 31, 2018		March 31, 2020			December 31, 2019

Commercial and industrial	$	54,307		$	63,467	$	56,447		$	56,782
Construction and land development		45,395			40,222		32,302			32,841
Commercial real estate:
Owner occupied		61,187			56,413		48,705			48,860
Hotel/motel							43,249			43,719
Multi-family		44,022			40,455		33,190			44,839
Other		163,291			165,028		130,955			132,900

Total commercial real estate		268,500			261,896		256,099			270,318
Residential real estate:
Consumer mortgage		53,680			56,223		45,548			48,923
Investment property		45,612			46,374		45,462			43,652

Total residential real estate		99,292			102,597		91,010			92,575
Consumer installment		9,091			9,295		8,424			8,866

Total loans		476,585			477,477		444,282			461,382
Less: unearned income		(524	)		(569)		(414	)		(481)

Loans, net of unearned income	$	476,061		$	476,908	$	443,868		$	460,901

Loans secured by real estate were approximately ~~86.7%~~85.4% of the Company’s total loan portfolio at ~~June 30, 2019.~~March 31, 2020. At ~~June 30, 2019,~~March 31, 2020, 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 ~~describe~~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 andmedium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower.

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

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

•

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

•

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, ~~hotels,~~ medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local businesses. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

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

•

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

•

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

Consumer 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.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of ~~June 30, 2019~~March 31, 2020 and

December 31, ~~2018.~~2019.


(In thousands)	Current		Accruing 30-89 Days Past Due		Accruing Greater than 90 days		Total Accruing Loans		Non- Accrual		Total Loans		Current		Accruing 30-89 Days Past Due		Accruing Greater than 90 days		Total Accruing Loans		Non- Accrual		Total Loans

June 30, 2019:
March 31, 2020:
Commercial and industrial	$	54,198		109		—		54,307		—	$	54,307	$	56,443		4		—		56,447		—	$	56,447
Construction and land development		45,044		351		—		45,395		—		45,395		32,294		8		—		32,302		—		32,302
Commercial real estate:
Owner occupied		61,187		—		—		61,187		—		61,187		48,705		—		—		48,705		—		48,705
Hotel/motel														43,249		—		—		43,249		—		43,249
Multi-family		44,022		—		—		44,022		—		44,022		33,190		—		—		33,190		—		33,190
Other		163,291		—		—		163,291		—		163,291		130,955		—		—		130,955		—		130,955

Total commercial real estate		268,500		—		—		268,500		—		268,500		256,099		—		—		256,099		—		256,099
Residential real estate:
Consumer mortgage		53,335		214		—		53,549		131		53,680		44,514		922		—		45,436		112		45,548
Investment property		45,612		—		—		45,612		—		45,612		45,462		—		—		45,462		—		45,462

Total residential real estate		98,947		214		—		99,161		131		99,292		89,976		922		—		90,898		112		91,010
Consumer installment		9,083		8		—		9,091		—		9,091		8,401		19		—		8,420		4		8,424

Total	$	475,772		682		—		476,454		131	$	476,585	$	443,213		953		—		444,166		116	$	444,282


December 31, 2018:
December 31, 2019:
Commercial and industrial	$	63,367		100		—		63,467		—	$	63,467	$	56,758		24		—		56,782		—	$	56,782
Construction and land development		39,997		225		—		40,222		—		40,222		32,385		456		—		32,841		—		32,841
Commercial real estate:
Owner occupied		56,413		—		—		56,413		—		56,413		48,860		—		—		48,860		—		48,860
Hotel/motel														43,719		—		—		43,719		—		43,719
Multi-family		40,455		—		—		40,455		—		40,455		44,839		—		—		44,839		—		44,839
Other		165,028		—		—		165,028		—		165,028		132,900		—		—		132,900		—		132,900

Total commercial real estate		261,896		—		—		261,896		—		261,896		270,318		—		—		270,318		—		270,318
Residential real estate:
Consumer mortgage		54,446		1,599		—		56,045		178		56,223		47,151		1,585		—		48,736		187		48,923
Investment property		46,233		141		—		46,374		—		46,374		43,629		23		—		43,652		—		43,652

Total residential real estate		100,679		1,740		—		102,419		178		102,597		90,780		1,608		—		92,388		187		92,575
Consumer installment		9,254		41		—		9,295		—		9,295		8,802		64		—		8,866		—		8,866

Total	$	475,193		2,106		—		477,299		178	$	477,477	$	459,043		2,152		—		461,195		187	$	461,382

Allowance for Loan Losses

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

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

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

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

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

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

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

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

The Company regularlyre-evaluates its practices in determining the allowance for loan losses. 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 ~~June 30, 2019,~~March 31, 2020, the Company increased its look-back period to 4144 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. ~~Other than expanding~~During the ~~look-back period each~~first quarter of 2020, the Company ~~has~~adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact of the novel strain of coronavirus(“COVID-19”) and resulting higher unemployment in our primary market area. If the Company had not ~~made any material changes to its methodology that would impact~~adjusted these qualitative and economic factors, the ~~calculation of the~~calculated allowance for loan losses ~~or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.~~would have decreased by approximately $400 thousand at March 31, 2020.

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

   June 30, 2019
(In thousands)    Commercial and
industrial Construction
and land
development    Commercial
real estate Residential
real estate Consumer
installment Total

Quarter ended:

Beginning balance
   $ 686 773    2,251 930 168 $ 4,808
Charge-offs
   —   —      —   —   (1 ) (1)
Recoveries
   6 —      1 33 4 44

Net recoveries
   6 —      1 33 3 43
Provision for loan losses
   34 8    35 (59 ) (18 ) —

Ending balance
   $         726         781            2,287         904         153 $         4,851

Six months ended:

Beginning balance
   $ 778 700    2,218 946 148 $ 4,790
Charge-offs
   —   —      —   —   (16 ) (16)
Recoveries
   24 —      1 47 5 77

Net recoveries (charge-offs)
   24 —      1 47 (11 ) 61
Provision for loan losses
   (76 ) 81    68 (89 ) 16 —

Ending balance
   $ 726 781    2,287 904 153 $ 4,851

   June 30, 2018
(In thousands)    Commercial and
industrial Construction
and land
development    Commercial
real estate Residential
real estate Consumer
installment Total

Quarter ended:

Beginning balance
   $ 724 670    2,119 1,053 166 $ 4,732
Charge-offs
   —   —      (39 ) —   —   (39)
Recoveries
   32 —      —   17 8 57

Net recoveries (charge-offs)
   32 —      (39 ) 17 8 18
Provision for loan losses
   (156 ) 117    117 (53 ) (25 ) —

Ending balance
   $ 600 787    2,197 1,017 149 $ 4,750

Six months ended:


Beginning balance
   $ 653 734    2,126 1,071 173 $ 4,757
Charge-offs
   (52 ) —      (39 ) (4 ) (2 ) (97)
Recoveries
   46 —      —   33 11 90

Net (charge-offs) recoveries
   (6 ) —      (39 ) 29 9 (7)
Provision for loan losses
   (47 ) 53    110 (83 ) (33 ) —

Ending balance
   $ 600 787    2,197 1,017 149 $ 4,750

   March 31, 2020
(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 recoveries (charge-offs)
   53 —      —      31 (3 ) 81
Provision for loan losses
   45 13    307    33 2 400

Ending balance
   $         675 582    2,596    877 137 $         4,867

   March 31, 2019
(In thousands)    Commercial and
industrial Construction
and land
development    Commercial
real estate    Residential
real estate Consumer
installment Total

Quarter ended:

Beginning balance
   $ 778 700    2,218    946 148 $ 4,790
Charge-offs
   —   —      —      —   (15 ) (15)
Recoveries
   18 —      —      14 1 33

Net recoveries (charge-offs)
   18 —      —      14 (14 ) 18
Provision for loan losses
           (110 ) 73    33    (30 ) 34 —

Ending balance
   $ 686 773    2,251    930 168 $         4,808

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 ~~June 30, 2019~~March 31, 2020 and ~~2018.~~    2019.

   Collectively evaluated (1)    Individually evaluated (2)    Total
   Allowance    Recorded    Allowance    Recorded    Allowance    Recorded
   for loan    investment    for loan    investment    for loan    investment
   Collectively evaluated (1)    Individually evaluated (2)    Total
(In thousands)    losses    in loans    losses    in loans    losses    in loans    Allowance
for loan
losses    Recorded
investment
in loans    Allowance
for loan
losses    Recorded
investment
in loans    Allowance
for loan
losses    Recorded
investment
in loans

June 30, 2019:

March 31, 2020:

Commercial and industrial
   $ 726    54,307    —      —      726    54,307    $ 675    56,447    —      —      675    56,447
Construction and land development
   781    45,395    —      —      781    45,395    582    32,302    —      —      582    32,302
Commercial real estate
   2,287    268,500    —      —      2,287    268,500    2,596    256,099    —      —      2,596    256,099
Residential real estate
   904    99,292    —      —      904    99,292    877    91,010    —      —      877    91,010
Consumer installment
   153    9,091    —      —      153    9,091    137    8,424    —      —      137    8,424

Total
   $         4,851    476,585    —      —      4,851    476,585    $ 4,867    444,282    —      —      4,867    444,282

June 30, 2018:

March 31, 2019:

Commercial and industrial
   $ 600    52,921    —      —      600    52,921    $ 686    50,898    —      —      686    50,898
Construction and land development
   787    42,675    —      —      787    42,675    773    44,931    —      —      773    44,931
Commercial real estate
   2,194    245,252    3    877    2,197    246,129    2,251    265,149    —      —      2,251    265,149
Residential real estate
   1,017    105,705    —      —      1,017    105,705    930    103,631    —      —      930    103,631
Consumer installment
   149    9,824    —      —      149    9,824    168    8,564    —      —      168    8,564

Total
   $ 4,747    456,377    3    877    4,750    457,254    $ 4,808    473,173    —      —      4,808    473,173

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

Credit Quality Indicators

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

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

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

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

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

(In thousands)    Pass    Special
Mention    Substandard
Accruing    Nonaccrual    Total loans

March 31, 2020:

Commercial and industrial
   $ 53,875    2,326    246    —      $ 56,447
Construction and land development
   31,392    —      910    —      32,302
Commercial real estate:

Owner occupied
   47,646    910    149    —      48,705
Hotel/motel
   43,249    —      —      —      43,249
Multi-family
   33,190    —      —      —      33,190
Other
   130,088    846    21    —      130,955

Total commercial real estate
   254,173    1,756    170    —      256,099
Residential real estate:

Consumer mortgage
   41,666    1,223    2,547    112    45,548
Investment property
   44,582    514    366    —      45,462

Total residential real estate
   86,248    1,737    2,913    112    91,010
Consumer installment
   8,299    58    63    4    8,424

Total
   $ 433,987    5,877    4,302    116    $ 444,282

December 31, 2019:

Commercial and industrial
   $ 54,340    2,176    266    —      $ 56,782
Construction and land development
   31,798    —      1,043    —      32,841
Commercial real estate:

Owner occupied
   47,865    917    78    —      48,860
Hotel/motel
   43,719    —      —      —      43,719
Multi-family
   44,839    —      —      —      44,839
Other
   132,030    849    21    —      132,900

Total commercial real estate
   268,453    1,766    99    —      270,318
Residential real estate:

Consumer mortgage
   45,247    962    2,527    187    48,923
Investment property
   42,331    949    372    —      43,652

Total residential real estate
   87,578    1,911    2,899    187    92,575
Consumer installment
   8,742    60    64    —      8,866

Total
   $         450,911    5,913    4,371    187    $         461,382

(In thousands)    Pass    Special
Mention    Substandard
Accruing    Nonaccrual    Total loans

June 30, 2019:

Commercial and industrial
   $ 50,485    3,232    590    —      $ 54,307
Construction and land development
   44,566    148    681    —      45,395
Commercial real estate:

Owner occupied
   60,325    781    81    —      61,187
Multi-family
   44,022    —      —      —      44,022
Other
   162,149    1,118    24    —      163,291

Total commercial real estate
   266,496    1,899    105    —      268,500
Residential real estate:

Consumer mortgage
   49,036    1,527    2,986    131    53,680
Investment property
   44,812    165    635    —      45,612

Total residential real estate
   93,848    1,692    3,621    131    99,292
Consumer installment
   8,934    106    51    —      9,091

Total
   $         464,329    7,077    5,048    131    $ 476,585

December 31, 2018:

Commercial and industrial
   $ 61,568    1,377    522    —      $ 63,467
Construction and land development
   39,481    —      741    —      40,222
Commercial real estate:

Owner occupied
   55,942    154    317    —      56,413
Multi-family
   40,455    —      —      —      40,455
Other
   163,449    1,208    371    —      165,028

Total commercial real estate
   259,846    1,362    688    —      261,896
Residential real estate:

Consumer mortgage
   50,903    1,374    3,768    178    56,223
Investment property
   45,463    173    738    —      46,374

Total residential real estate
   96,366    1,547    4,506    178    102,597
Consumer installment
   9,149    75    71    —      9,295

Total
   $         466,410    4,361    6,528    178    $       477,477

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

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

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

The Company had no impaired loans at ~~June 30, 2019.~~March 31, 2020. The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at December 31, ~~2018.~~2019.


		December 31, 2018										December 31, 2019
(In thousands)		Unpaid principal balance (1)		Charge-offs and payments applied (2)		Recorded investment (3)			Related allowance			Unpaid principal balance (1)		Charge-offs and payments applied (2)			Recorded investment (3)		Related allowance

With no allowance recorded:	With no allowance recorded:										With no allowance recorded:
Commercial real estate:
Owner occupied		$	157		—		157

Total commercial real estate			157		—		157

Commercial and industrial												$	335		(236	)		99

Total impaired loans		$	157		—		157	$		—		$	335		(236	)		99	$	—

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

(2)	Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.

(3)	Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses.

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

       Quarter ended June 30, 2019            Six months ended June 30, 2019
   Average    Total interest    Average    Total interest
   recorded    income    recorded    income
(In thousands)    investment    recognized    investment    recognized

Impaired loans:

Commercial real estate:

Owner occupied
   $ —      —      45    9

Total commercial real estate
   —      —      45    9

Total
   $ —      —      45    9

       Quarter ended June 30, 2018            Six months ended June 30, 2018
   Average    Total interest    Average    Total interest
   recorded    income    recorded    income        Quarter ended March 31, 2020            Quarter ended March 31, 2019
(In thousands)    investment    recognized    investment    recognized    Average
recorded
investment    Total interest
income
recognized    Average
recorded
investment    Total interest
income
recognized

Impaired loans:
Impaired loans:

Impaired loans:


Commercial and industrial
   $ 7    —      17    —
Commercial real estate:

Owner occupied
   168    2    170    5    $ —      $ —      $ 78    $ 9
Other
   1,392    —      1,827    —

Total commercial real estate
   1,560    2    1,997    5    $ —      $ —      $ 78    $ 9

Total
   $ 1,567    2    2,014    5    $ —      $ —      $ 78    $ 9

Troubled Debt Restructurings
Impaired loans also include troubled debt restructurings (“TDRs”). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC340-10 TDR classifications for a limited period of time to account for the effects ofCOVID-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 onCOVID-19 Loan Modifications”), to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC310-40, “Troubled Debt Restructurings by Creditors,” apply to certainCOVID-19-related modifications. If a loan modification is eligible, a bank may elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible under section 4013, or if the bank elects not to account for the loan modification under section 4013, the Revised Statement includes criteria when a bank may presume a loan modification is not a TDR in accordance with ASC310-40.

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the Interagency Statement onCOVID-19 Loan Modifications in accordance with FASB ASC340-10 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, ~~where~~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 acharge-off to the allowance for loan losses. In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.

The Company had no TDRs as of ~~June 30, 2019. The following is a summary of accruing~~March 31, 2020 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~~ December 31, ~~2018.~~

   TDRs
            Related
(In thousands)    Accruing    Nonaccrual    Total    Allowance



December 31, 2018

Commercial real estate:

Owner occupied
   $ 157    —      157    $ —



Total commercial real estate
   $ 157    —      157    $ —



Total
   $               157       ��              —                    157    $               —



~~At June 30, 2019, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.~~
~~The following table summarizes loans modified in a TDR during the respective periods both before and after their modification.~~

   Quarter ended June 30,    Six months ended June 30,
      Pre-    Post -       Pre-    Post -
      modification    modification       modification    modification
   Number    outstanding    outstanding    Number    outstanding    outstanding
   of    recorded    recorded    of    recorded    recorded
(Dollars in thousands)    contracts    investment    investment    contracts    investment    investment

2018:


Commercial real estate:

Other
   —      $           —      —      1    $           737    737

Total commercial real estate
   —      —      —      1    737    737

Total
   —      $                   —      —      1    $                   737    737

2019. There were no loans modified in a TDR during the ~~quarter~~quarters ended March 31, 2020 and ~~six months ended June 30,~~ 2019. ~~One loan was modified in a TDR during~~For the ~~six months ended June 30, 2018. The only concession granted by~~same periods, the Company ~~was a delay in the required payment of interest.~~

The following table summarizes the recorded investment in 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) during the respective periods. During the quarter and six months ended June 30, 2019, there werehad 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).~~

                   Quarter ended June 30,                                         Six months ended June 30,
   Number of    Recorded    Number of    Recorded
(Dollars in thousands)    Contracts    investment⁽¹⁾    Contracts    investment⁽¹⁾

2018:

Commercial real estate:

Other
   —      $ —      1    $ 1,259

Total commercial real estate
   —      —      1    1,259

Total
   —      $                 —      1    $                 1,259

~~(1) Amount as of applicable month end during the respective period for which there was a payment~~ default.
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 ~~fair value of the~~ Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount ~~rates,~~rate, default rates, ~~costs~~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 ~~without recourse~~ to Fannie Mae. The Company generally sells conforming, fixed-rate,closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income.

The ~~following table details the changes~~change in amortized MSRs and the related valuation allowance for the ~~respective periods.~~quarters ended March 31, 2020 and 2019 are presented below.

       Quarter ended June 30,         Six months ended June 30,
(Dollars in thousands)    2019 2018 2019 2018

MSRs, net:

Beginning balance
   $ 1,410 $ 1,604 $ 1,441 $ 1,644
Additions, net
   39 62 80 115
Amortization expense
   (94 ) (117 ) (166 ) (210 )

Ending balance
   $ 1,355 $ 1,549 $ 1,355 $ 1,549

Valuation allowance included in MSRs, net:

Beginning of period
   $ —   $ —   $ —   $ —
End of period
   —   —   —   —

Fair value of amortized MSRs:

Beginning of period
   $             2,591 $             2,738 $             2,697 $             2,528
End of period
   2,333 2,659 2,333 2,659

   Quarter ended March 31,
(Dollars in thousands)            2020                 2019

MSRs, net:

Beginning balance
   $     1,299 $ 1,441
Additions, net
   49 41
Amortization expense
   (99 ) (72)

Ending balance
   $ 1,249 $ 1,410

Valuation allowance included in MSRs, net:

Beginning of period
   $ —   $ —
End of period
   —   —

Fair value of amortized MSRs:

Beginning of period
   $ 2,111 $     2,697
End of period
   1,917 2,591

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 ~~six months~~quarter ended ~~June 30, 2019,~~March 31, 2020, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Securitiesavailable-for-sale

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

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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)		Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2019:
March 31, 2020:
Securitiesavailable-for-sale:
Agency obligations	$	57,160		—		57,160		—	$	67,678		—		67,678		—
Agency RMBS		122,655		—		122,655		—		145,371		—		145,371		—
State and political subdivisions		68,998		—		68,998		—		67,386		—		67,386		—

Total securitiesavailable-for-sale		248,813		—		248,813		—		280,435		—		280,435		—

Total assets at fair value	$	248,813		—		248,813		—	$	280,435		—		280,435		—


December 31, 2018:
December 31, 2019:
Securitiesavailable-for-sale:
Agency obligations	$	51,171		—		51,171		—	$	50,708		—		50,708		—
Agency RMBS		118,598		—		118,598		—		123,277		—		123,277		—
State and political subdivisions		70,032		—		70,032		—		61,917		—		61,917		—

Total securitiesavailable-for-sale		239,801		—		239,801		—		235,902		—		235,902		—

Total assets at fair value	$	239,801		—		239,801		—	$	235,902		—		235,902		—

Assets and liabilities measured at fair value on a nonrecurring basis

Loans held for sale

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

Impaired Loans

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

The fair value of impaired loans 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.

Other real estate owned

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

Mortgage servicing rights, net

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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above):


			Quoted Prices in

			Active Markets		Other		Significant

			for		Observable		Unobservable

	Carrying		Identical Assets		Inputs		Inputs

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

June 30, 2019:
March 31, 2020:
Loans held for sale	$	2,016		—		2,016		—	$	1,563		—		1,563		—
Other assets⁽²⁾		1,658		—		—		1,658		1,348		—		—		1,348

Total assets at fair value	$	3,674		—		2,016		1,658	$	2,911		—		1,563		1,348

December 31, 2018:
December 31, 2019:
Loans held for sale	$	383		—		383		—	$	2,202		—		2,202		—
Loans, net⁽¹⁾		157		—		—		157		99		—		—		99
Other assets⁽²⁾		1,613		—		—		1,613		1,299		—		—		1,299

Total assets at fair value	$	2,153		—		383		1,770	$	3,600		—		2,202		1,398

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

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

Quantitative Disclosures for Level 3 Fair Value Measurements

At ~~June 30, 2019,~~March 31, 2020, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on anon-recurring basis at ~~June 30, 2019,~~March 31, 2020, 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	of Input		Carrying Amount		Valuation Technique		Significant Unobservable Input		Range			Weighted Average of Input

June 30, 2019:

March 31, 2020:
Other real estate owned		303		Appraisal	Appraisal discounts (%)		10.0%	$	99		Appraisal		Appraisal discount		10.0 -10.0	%		10.0	%

Mortgage servicing rights, net		1,355		Discounted cash flow	Prepayment speed or CPR (%)		10.1%		1,249		Discounted cash flow		Prepayment Speed or CPR		13.0 -17.4	%		14.7	%
													Discount rate		10.0 -12.0	%		10.0	%
					Discount rate (%)		10.0%



December 31, 2018:

December 31, 2019:
Impaired loans	$	157		Appraisal	Appraisal discounts (%)		10.0%	$	99		Appraisal		Appraisal discounts					10.0	%

Other real estate owned		172		Appraisal	Appraisal discounts (%)		10.0%

Mortgage servicing rights, net		1,441		Discounted cash flow	Prepayment speed or CPR (%)		8.3%		1,299		Discounted cash flow		Prepayment Speed or CPR					11.6	%
													Discount rate					10.0	%
					Discount rate (%)		10.0%

Fair Value of Financial Instruments

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

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

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. 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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 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
															Fair Value Hierarchy
(Dollars in thousands)	amount		fair value		inputs		inputs		Inputs		Carrying amount		Estimated fair value		Level 1 inputs		Level 2 inputs		Level 3 Inputs

June 30, 2019:
March 31, 2020:
Financial Assets:
Loans, net (1)	$	471,210	$	465,846	$	—	$	—	$	465,846	$	439,001	$	433,758	$	—	$	—	$	433,758
Loans held for sale		2,016		2,063		—		2,063		—		1,563		1,614		—		1,614		—
Financial Liabilities:
Time Deposits	$	170,067	$	170,542	$	—	$	170,542	$	—	$	166,974	$	168,375	$	—	$	168,375	$	—


December 31, 2018:
December 31, 2019:
Financial Assets:
Loans, net (1)	$	472,118	$	465,456	$	—	$	—	$	465,456	$	456,515	$	453,705	$	—	$	—	$	453,705
Loans held for sale		383		397		—		397		—		2,202		2,251		—		2,251		—
Financial Liabilities:
Time Deposits	$	181,237	$	181,168	$	—	$	181,168	$	—	$	167,199	$	168,316	$	—	$	168,316	$	—

(1)
~~(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.

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

~~General~~

The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters ended March 31, 2020 and ~~six months ended June 30,~~ 2019, ~~and 2018,~~ as well as the information contained in our Annual Report on Form10-K for the year ended December 31, ~~2018 and our Quarterly Reports on Form10-Q.~~2019.

Special Notice Regarding Forward-Looking Statements

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

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

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

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

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

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

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

legislative and regulatory changes, including the CARES Act, changes in banking, securities, and tax laws, regulations and rules and their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost of FDIC ~~insurance;~~insurance, including temporary other changes to address the effects of theCOVID-19 pandemic and stabilize and stimulate the economy;

changes in accounting policies, rules, and practices;

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

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

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

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

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

the failure of assumptions and estimates underlying the establishment of allowances for possible loan and other asset impairments, losses, valuations of assets and liabilities and other ~~estimates;~~estimates, including the timing and effect of the implementation of the current expected credit losses model to financial instruments, and the significant changes in economic conditions, unemployment and GDP resulting from theCOVID-19 pandemic, and local, state and national health orders regarding shelter in place that result in workplace shutdowns, supply chain failures and economic and personal disruption;

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

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

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

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

cyber attacks and data breaches that may compromise our systems or customers’ ~~information;~~information, including increased fraud during theCOVID-19 pandemic;

the failure of assumptions and estimates, as well as differences in, and changes to, economic, market, and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan portfolio stress tests and other ~~evaluations;~~evaluations, including price and market volatility and liquidity issues resulting from theCOVID-19 pandemic;

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

other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form10-K for the year ended December 31, ~~2018~~2019 and subsequent quarterly and current reports. See Part II, Item 1A. “RISK FACTORS”.

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

Business

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

Summary of Results of Operations


	Quarter ended June 30,				Six months ended June 30,				Quarter ended March 31,
(Dollars in thousands, except per share amounts)	2019		2018		2019		2018
(Dollars in thousands, except per share data)									2020		2019

Net interest income (a)	$	6,742	$	6,469	$	13,508	$	12,909	$	6,332	$	6,766
Less:tax-equivalent adjustment		145		152		291		308		120		146

Net interest income (GAAP)		6,597		6,317		13,217		12,601		6,212		6,620
Noninterest income		885		839		2,045		1,692		1,235		1,160

Total revenue		7,482		7,156		15,262		14,293		7,447		7,780
Provision for loan losses										400		—
Noninterest expense		4,629		4,326		9,240		8,728		4,856		4,611
Income tax expense		546		566		1,172		1,106		390		626

Net earnings	$	2,307	$	2,264	$	4,850	$	4,459	$	1,801	$	2,543


Basic and diluted earnings per share	$	0.64	$	0.62	$	1.35	$	1.22	$	0.50	$	0.70

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

Financial Summary

The Company’s net earnings were ~~$4.9~~$1.8 million for the first ~~six months~~quarter of ~~2019,~~2020, compared to ~~$4.5~~$2.5 million for the first ~~six months~~quarter of ~~2018.~~2019. Basic and diluted earnings per share were ~~$1.35~~$0.50 per share for the first ~~six months~~quarter of ~~2019,~~2020, compared to ~~$1.22~~$0.70 per share for the first ~~six months~~quarter of ~~2018.~~2019.

Net interest income(tax-equivalent) was ~~$13.5~~$6.3 million for the first ~~six months~~quarter of ~~2019,~~2020, a ~~5% increase~~6% decrease compared to ~~$12.9~~$6.8 million for the first ~~six months~~quarter of ~~2018.~~2019. This ~~increase~~decrease was primarily due to loan ~~growth~~payoffs and recent ~~increases~~declines in ~~short-term~~ market interest rates. Average loans were ~~up 6%~~down 5% to ~~$475.3~~$451.2 million in the first ~~six months~~quarter of ~~2019,~~2020, compared to ~~$449.9~~$477.3 million in the first ~~six months~~quarter of ~~2018.~~2019. The Company’s net interest margin(tax-equivalent) ~~increased~~decreased to ~~3.52%~~3.23% in the first ~~six months~~quarter of ~~2019,~~2020, compared to ~~3.33%~~3.54% for the first ~~six months~~quarter of ~~2018~~2019 as yields on earning assets ~~improved.~~declined.

At March 31, 2020, the Company’s allowance for loan losses was $4.9 million, or 1.10% of total loans, compared to $4.4 million, or 0.95% of total loans, at December 31, 2019 and $4.8 million, or 1.02% of total loans, at March 31, 2019. The ~~Company recorded~~provision for loan losses was $0.4 million for the first quarter of 2020, compared to no provision for loan losses during the first ~~six months~~quarter of ~~2019~~2019. The increase in the provision for loan losses was related to changes in economic conditions driven by the impact ofCOVID-19 and ~~2018, respectively.~~resulting 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 ~~$2.0~~$1.2 million for the first ~~six months~~quarter of 2020 and 2019, ~~compared to $1.7 million for~~respectively. For the first ~~six months~~quarter of ~~2018. The increase was primarily due to~~2020, noninterest income included $0.3 million innon-taxable death benefits from bank-owned life insurance and a $0.3 millionpre-tax gain from an insurance recovery ~~received~~ in the first ~~six months of 2019 with respect to a $0.4 millionpre-tax~~ ~~loss incurred in the third~~ quarter of ~~2018 related to a misappropriation of assets.~~2019.

Noninterest expense was ~~$9.2~~$4.9 million for the first ~~six months~~quarter of ~~2019~~2020 compared to ~~$8.7~~$4.6 million for the first ~~six months~~quarter of ~~2018.~~2019. The increase was primarily due to ~~increases~~$0.2 million of various expenses related to the redevelopment of the Company’s headquarters in ~~salaries~~downtown Auburn, including revised depreciation estimates and ~~benefits expense.~~temporary relocation costs. The Company expects it will incur additional expense in 2020 related to this redevelopment project.

Income tax expense was ~~$1.2~~$0.4 million and ~~$1.1~~$0.6 million for the first ~~six months~~quarter of ~~2019~~2020 and ~~2018,~~2019, respectively, reflecting an effective tax rate of ~~19.46%~~17.80% and ~~19.87%~~19.75%, respectively. This change was primarily due to a decrease in the level of earnings before taxes relative totax-exempt sources of income. The Company’s effective income tax rate is principally impacted bytax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.

The Company paid cash dividends of ~~$0.50~~$0.255 per share in the first ~~six months~~quarter of ~~2019,~~2020, an increase of ~~4.2%~~2% from the same period of ~~2018.~~2019. At ~~June 30, 2019,~~March 31, 2020, 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 ~~17.14%~~18.72%, a tier 1 leverage ratio of ~~11.14%~~11.17% and a common equity tier 1 (“CET1”) ratio of ~~16.26%~~17.77% at ~~June 30, 2019.~~March 31, 2020.

~~For~~

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 ~~second quarter~~United States. In March 2020, the World Health Organization declaredCOVID-19 a global pandemic and the United States declared a National Public Health Emergency. TheCOVID-19 pandemic has severely restricted the level of ~~2019, net earnings were $2.3 million,~~economic activity in our markets. In response to theCOVID-19 pandemic, the state of Alabama, and of most other states, have taken preventative or ~~$0.64 per share, compared~~protective actions to ~~$2.3 million,~~prevent the spread of the virus, including imposing restrictions on travel and business operations, advising or ~~$0.62 per share,~~requiring individuals to limit or forego their time outside of their homes, and causing temporary closures of businesses that have been deemed to benon-essential. Auburn University, a major source of economic activity in Lee County, went to remote instruction on March 16, 2020, which will continue for the ~~second quarter~~summer session.

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 ~~2018. Net interest income~~the pandemic, the development of~~(tax-equivalent)~~COVID-19 ~~was $6.7~~testing and contact tracing, effective drug treatments and vaccines, together with governmental, regulatory and private sector responses.COVID-19 has had significant effects on the economy, financial markets and our employees, customers and vendors. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to make deposits and repay their loans, the value of collateral underlying our secured loans, market value, stability and liquidity and demand for loans and other products and services we offer, all of which are affected by the pandemic.

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

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

We have changed our Annual Shareholders’ Meeting from a physical meeting to a virtual meeting. The date and time are unchanged, but 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 byCOVID-19, provided such customers were not more than 30 days past due at the time of the request; and

We have chosen to participate in the CARES Act Paycheck Protection Program that will provide government guaranteed and forgivable loans to our customers. Through April 30, 2020, we had 389 applications approved by the SBA totaling over $35 million in loans for our customers, which will help support close to 5,500 employees in our markets. We believe these loans and our participation in the program is good for our customers and the communities we serve. We are evaluating the Federal Reserve’s Main Street Lending Program, which has been announced, but has not started.

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 ~~second~~ quarter ended March 31, 2020, and our financial condition at that date reflect only the initial effects of ~~2019 compared to $6.5 million for~~ the ~~second quarter~~pandemic, and may not be indicative of ~~2018. The Company recorded no provision for loan losses in the second quarter of 2019~~future results or 2018. Noninterest income was $0.9 million in the second quarter of 2019 and $0.8 million in the second quarter of 2018. Noninterest expense was $4.6 million in the second quarter of 2019 compared to $4.3 million in the second quarter of 2018. This increase was due to increases in salaries and benefits expense. Income tax expense was $0.5 million for the second quarter of 2019, compared to $0.6 million in the second quarter of 2018. The Company’s effective tax rate for the second quarter of 2019 was 19.14%, compared to 20.00% in the second quarter of 2018.financial conditions.

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 andnon-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for Loan Losses

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.

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

The Company regularlyre-evaluates its practices in determining the allowance for loan losses. 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 ~~June 30, 2019,~~March 31, 2020, the Company increased its look-back period to 4144 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. ~~Other than expanding~~During the ~~look-back period each~~first quarter of 2020, the Company ~~has~~adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact ofCOVID-19 and resulting higher unemployment in our primary market area. If the Company had not ~~made any material changes to its methodology that would impact~~adjusted these qualitative and economic factors, the ~~calculation of the~~calculated allowance for loan losses ~~or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.~~would have decreased by approximately $400 thousand at March 31, 2020.

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.

Fair Value Determination

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

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

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

Other Real Estate Owned

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or fair value of collateral, less estimated costs to sell at the date acquired, with any loss recognized as acharge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other OREO.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it ismore-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at ~~June 30, 2019.~~March 31, 2020. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.

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

RESULTS OF OPERATIONS

Average Balance Sheet and Interest Rates


	Six months ended June 30,
	2019				2018				Quarter ended March 31,
	Average		Yield/		Average		Yield/		2020					2019
									Average		Yield/			Average		Yield/
(Dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate			Balance		Rate

Loans and loans held for sale	$	476,063		4.87%	$	451,063		4.71%	$	452,155		4.81	%	$	478,059		4.86	%
Securities - taxable		173,528		2.32%		189,442		2.22%		196,422		2.27	%		171,543		2.40	%
Securities -tax-exempt		68,386		4.08%		71,283		4.14%		60,895		3.78	%		68,481		4.12	%

Total securities		241,914		2.82%		260,725		2.75%		257,317		2.63	%		240,024		2.89	%
Federal funds sold		19,198		2.36%		28,932		1.64%		29,758		1.26	%		21,404		2.37	%
Interest bearing bank deposits		36,683		2.41%		41,765		1.72%		49,378		1.52	%		36,676		2.51	%

Total interest-earning assets		773,858		4.05%		782,485		3.78%		788,608		3.76	%		776,163		4.07	%

Deposits:
NOW		134,242		0.54%		138,163		0.30%		149,344		0.51	%		132,358		0.54	%
Savings and money market		215,892		0.41%		220,022		0.36%		220,909		0.46	%		220,311		0.41	%
Time Deposits		173,423		1.43%		185,588		1.21%		167,447		1.44	%		177,186		1.43	%

Total interest-bearing deposits		523,557		0.78%		543,773		0.64%		537,700		0.78	%		529,855		0.78	%
Short-term borrowings		1,615		0.74%		2,888		0.84%		1,361		0.50	%		1,974		0.49	%
Long-term debt		—		—		2,062		4.50%

Total interest-bearing liabilities		525,172		0.78%		548,723		0.65%		539,061		0.78	%		531,829		0.78	%

Net interest income and margin(tax-equivalent)	$	13,508		3.52%	$	12,909		3.33%	$	6,332		3.23	%	$	6,766		3.54	%

Net Interest Income and Margin

Net interest income(tax-equivalent) was ~~$13.5~~$6.3 million for the first ~~six months~~quarter of ~~2019~~2020 compared to ~~$12.9~~$6.8 million for the first ~~six months~~quarter of ~~2018.~~2019. This ~~increase~~decrease was ~~primarily~~ due to ~~improvement~~a decline in the Company’s net interest margin(tax-equivalent).

~~Expansion~~Thetax-equivalent yield on total interest-earning assets decreased by 31 basis points to 3.76% in the first quarter of 2020 compared to the first quarter of 2019. The decline in our ~~interest-earning~~earning asset yields was primarily driven by loan ~~growth~~payoffs and ~~recent increases~~decreases in ~~short-term~~ market interest ~~rates, which positively impacted the yields on our short-term assets, including federal funds sold and interest bearing bank deposits.~~rates.

The cost of total interest-bearing liabilities was 0.78% for the first ~~six months~~quarter of ~~2019, an increase of 14 basis points compared to the first six months of 2018. This increase in our funding costs was primarily due to higher prevailing market interest rates.~~

2020 and 2019.
~~We continue~~The Company continues to deploy various asset liability management strategies to manage ~~our~~its risk to interest rate fluctuations. Although the rise in interest rates over the last two years has lifted the yields we receive on earning assets, pricing for creditworthy borrowers and meaningful depositors is very competitive in our markets. We anticipate that this challenging competitive environment will continue during the remainder of 2019. In the event that short-term interest rates were to be cut in 2019 or beyond ourThe Company’s net interest margin ~~would~~could continue to experience pressure due to reduced earning asset yields and increased competition for quality loan opportunities. Management anticipates the Company’s net interest income and margin will likely ~~be negatively impacted~~continue to decrease in 2020 compared to 2019 as ~~our~~the Company’s ability to lower ~~our funding cost on our~~its deposit ~~products would~~costs will likely continue to lag the ~~pace with which these cuts would impact our yields on our~~current decrease in earning assets. Though we believe our net interest margin may decrease slightly for the remainder of 2019, we believe our net interest income should continue to increase in 2019 compared to 2018 primarily due to increased average loan volumes. We seek to fund these increased loan volumes by growing our core deposits, but will utilize noncore funding to fund shortfalls, if any.asset yields.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. The ~~Company recorded~~provision for loan losses was $0.4 million for the first quarter of 2020, compared to no provision for loan losses for the first ~~six months~~quarter of ~~2019~~2019. The increase in the provision for loan losses was related to changes in economic conditions driven by the impact ofCOVID-19 and ~~2018.~~resulting 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 ~~1.02%~~1.10% at ~~June 30, 2019,~~March 31, 2020, compared to ~~1.00%~~0.95% at December 31, ~~2018.~~2019. 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 June 30,    Six months ended June 30,
(Dollars in thousands)    2019    2018    2019    2018

Service charges on deposit accounts
   $ 176    $ 182    $ 360    $ 361
Mortgage lending income
   187    166    376    372
Bank-owned life insurance
   107    108    217    214
Securities gains, net
   8    —      13    —
Other
   407    383    1,079    745

Total noninterest income
   $         885    $         839    $       2,045    $       1,692

~~The increase in other noninterest income was primarily due to a $0.3 millionpre-tax~~ ~~gain from an insurance recovery received in the first quarter of 2019 with respect to a $0.4 millionpre-tax~~ ~~loss incurred in the third quarter of 2018 related to a misappropriation of assets.~~
   Quarter ended March 31,
(Dollars in thousands)    2020    2019

Service charges on deposit accounts
   $ 172    $ 184
Mortgage lending income
   230    189
Bank-owned life insurance
   398    110
Securities gains, net
   6    5
Other
   429    672

Total noninterest income
   $         1,235    $         1,160

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

   Quarter ended June 30,    Six months ended June 30,    Quarter ended March 31,
(Dollars in thousands)    2019    2018    2019    2018    2020    2019

Origination income
   $ 102    $ 92    $ 188    $ 198
Origination income, net
   $ 163    $ 86
Servicing fees, net
   85    74    188    174      67    103

Total mortgage lending income
   $ 187    $ 166    $ 376    $ 372      $ 230    $ 189

The increase in mortgage lending income was primarily due to an increase in the level of 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.
Income from bank-owned life insurance increased primarily due to $0.3 million innon-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) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings on these policies are generally not taxable.
The decrease in other noninterest income was primarily due to a$0.3 million pre-tax gain from an insurance recovery received in the first quarter of 2019.
Noninterest Expense

       Quarter ended June 30,            Six months ended June 30,        Quarter ended March 31,
(Dollars in thousands)    2019    2018    2019    2018    2020    2019

Salaries and benefits
   $ 2,799    $ 2,618    $ 5,737    $ 5,286      $ 2,831    $ 2,938
Net occupancy and equipment
   381    360    765    730      597    384
Professional fees
   275    266    503    494      258    228
FDIC and other regulatory assessments
   102    89    131    178
Other
   1,072    993    2,104    2,040      1,170    1,061

Total noninterest expense
   $ 4,629    $ 4,326    $ 9,240    $ 8,728      $ 4,856    $ 4,611

The ~~increase~~decrease in ~~noninterest~~salaries and benefits expense was primarily due to ~~increases~~lower incentive accruals.
The increase in ~~salaries~~net occupancy and ~~benefits expense.~~equipment expense was primarily due to $0.2 million of various expenses related to the redevelopment of the Company’s headquarters in downtown Auburn. This amount includes revised depreciation estimates and other temporary relocation costs.
Income Tax Expense
Income tax expense was ~~$1.2~~$0.4 million and ~~$1.1~~$0.6 million for the first ~~six months~~quarter of ~~2019~~2020 and ~~2018~~2019 reflecting an effective tax rate of ~~19.46%~~17.80% and ~~19.87%~~19.75%, respectively. This change was primarily due to a decrease in the level of earnings before taxes relative totax-exempt sources of income. The Company’s effective income tax rate is principally impacted bytax-exempt earnings from the Company’s investments in municipal securities and bank-owned life insurance.
BALANCE SHEET ANALYSIS
Securities
Securitiesavailable-for-sale were ~~$248.8~~$280.4 million at ~~June 30, 2019~~March 31, 2020 compared to ~~$239.8~~$235.9 million at December 31, ~~2018.~~2019. This increase reflects an increase in the amortized cost basis of securitiesavailable-for-sale of $38.7 million, and an increase of $5.8 million in the fair value of securitiesavailable-for-sale. The increase in the amortized cost basis of securitiesavailable-for-salewas primarily ~~due~~attributable to anmanagement allocating more funding to the investment portfolio as the loan portfolio declined. The increase in the fair value of securities aswas primarily due to a decrease in long-term interest ~~rates declined during the first six months of 2019.~~rates. The average annualizedtax-equivalent yields earned on total securities were ~~2.82%~~2.63% in ~~2019~~2020 and ~~2.75%~~2.89% in ~~2018.~~2019.
Loans

   2019 2018
   Second First Fourth Third Second
(In thousands)    Quarter Quarter Quarter Quarter Quarter

Commercial and industrial
   $ 54,307 50,898 63,467 52,430 52,921
Construction and land development
   45,395 44,931 40,222 45,109 42,675
Commercial real estate
   268,500 265,149 261,896 250,150 246,129
Residential real estate
   99,292 103,631 102,597 103,329 105,705
Consumer installment
   9,091 8,564 9,295 9,942 9,824

Total loans
   476,585 473,173 477,477 460,960 457,254
Less: unearned income
   (524 ) (523 ) (569 ) (633 ) (682)

Loans, net of unearned income
   $ 476,061 472,650 476,908 460,327 456,572

   2020 2019
   First Fourth Third Second First
(In thousands)    Quarter Quarter Quarter Quarter Quarter

Commercial and industrial
   $ 56,447 56,782 52,288 54,307 50,898
Construction and land development
   32,302 32,841 41,599 45,395 44,931
Commercial real estate
   256,099 270,318 267,346 268,500 265,149
Residential real estate
   91,010 92,575 95,215 99,292 103,631
Consumer installment
   8,424 8,866 9,148 9,091 8,564

Total loans
   444,282 461,382 465,596 476,585 473,173
Less: unearned income
   (414 ) (481 ) (488 ) (524 ) (523)

Loans, net of unearned income
   $ 443,868 460,901 465,108 476,061 472,650

Total loans, net of unearned income, were ~~$476.1~~$443.9 million at ~~June 30, 2019, compared to $476.9~~March 31, 2020, a decrease of $17.0 million, or 4%, from $460.9 million at December 31, ~~2018.~~2019. The decrease was primarily due topay-downs in commercial real estate loans of $14.2 million and residential real estate of $1.6 million. Four loan categories represented the majority of the loan portfolio at ~~June 30, 2019:~~March 31, 2020: commercial real estate ~~(56%~~(58%), residential real estate (21%), construction and land development ~~(10%~~(7%) and commercial and industrial ~~(11%~~(13%). Approximately ~~23%~~19% of the Company’s commercial real estate loans were classified as owner-occupied at ~~June 30, 2019.~~March 31, 2020.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately ~~$11.8~~$11.2 million, or 2% of total loans, at ~~June 30, 2019,~~March 31, 2020, compared to ~~$12.3~~$10.8 million, or 3% of total loans, at December 31, ~~2018.~~2019. For residential real estate mortgage loans with a consumer purpose, ~~$1.6~~$0.3 million required interest-only payments at ~~June 30, 2019,~~March 31, 2020, compared to ~~$0.5~~$0.8 million at December 31, ~~2018.~~2019. The Company’s residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.
The average yield earned on loans and loans held for sale was ~~4.87%~~4.81% in the first ~~six months~~quarter of ~~2019~~2020 and ~~4.71%~~4.86% in the first ~~six months~~quarter of ~~2018.~~2019.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of current economic conditions, including theCOVID-19 pandemic’s effects, on our borrowers’ cash flows, real estate market sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral values ornon-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.
The Company attempts to reduce these economic and credit risks through itsloan-to-value guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of approximately ~~$19.4~~$19.7 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of ~~$17.4~~$17.7 million. Our loan policy requires that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit. At ~~June 30, 2019,~~March 31, 2020, the Bank had no relationships exceeding these limits.
We periodically analyze our commercial loan portfolio 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 ~~June 30, 2019~~March 31, 2020 (and related balances at December 31, ~~2018)~~2019).

   June 30,    December 31,
   March 31,    December 31,
(In thousands)    2019    2018    2020    2019

Lessors of 1 to 4 family residential properties
   $     45,612    $ 46,374      $     45,462    $     43,652
Hotel/motel
   44,664    47,936      43,249    43,719
Shopping centers
   34,037    30,407
Multi-family residential properties
   44,022    40,455      33,190    44,839
Shopping centers
   37,153    25,421
Office buildings
   26,836    35,789      25,552    29,548

SupplementalCOVID-19 Industry Exposure
We have identified certain commercial sectors with enhanced risk resulting from the impact of COVID-19. See table below for a summary of loans outstanding for these sectors at March 31, 2020.
   Portfolio Segment
(In thousands)    Commercial and
industrial    Construction
and land
development    Commercial
real estate    Total    % of Total
Loans

March 31, 2020:

Hotel/motel
   $ 755    7,293    43,249    $ 51,297    12 %
Shopping centers
   25    —      34,037    34,062    8
Retail, excluding shopping centers
   435    826    18,413    19,674    4
Restaurants
   566    —      14,089    14,655    3

Total
   $     1,781    8,119    109,788    $     119,688    27 %

In light of recent disruptions in economic conditions caused by the coronavirus disease, the financial regulators have issued statements encouraging banks to work constructively, in accordance with safe and sound banking practices, with borrowers affected by the virus in our community. Upon demonstrating the need for payment relief, the bank will work with qualified borrowers 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 asix-month period. The bank recognizes that a combination of the payment relief options may be prudent dependent on a borrower’s business type. Through April 30, 2020 we have granted loan payment deferrals or payments of interest only on loans totaling $43.3 million, or 10% of total loans. Based on current requests, we expect the number of modifications or deferrals to continue to increase in the second quarter of 2020. The table below provides information concerning the composition of these COVID-19 modifications through April 30, 2020.
COVID-19 Modifications through April 30, 2020
(In thousands)    Balance    % of Portfolio
Modified

Commercial and industrial
   $ 939    2 %
Construction and land development
   58    —
Commercial real estate
       37,639    15
Residential real estate
   4,557    5
Consumer installment
   118    1

Total
   $ 43,311    10 %

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). In addition, the Interagency Statement onCOVID-19 Loan Modifications provides more limited circumstances in which a loan modification is not subject to classification as a Troubled Debt Restructuring.
Allowance for Loan Losses
The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $4.9 million at ~~June 30, 2019~~March 31, 2020 compared to ~~$4.8~~$4.4 million at December 31, ~~2018~~2019, which management believed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under “Critical Accounting Policies.”
A summary of the changes in the allowance for loan losses and certain asset quality ratios for the ~~second~~first quarter of ~~2019~~2020 and the previous four quarters is presented below.

   2019 2018    2020 2019
   Second First Fourth Third Second    First Fourth Third Second First
(Dollars in thousands)        Quarter         Quarter         Quarter         Quarter         Quarter            Quarter         Quarter         Quarter         Quarter         Quarter

Balance at beginning of period
   $ 4,808 4,790 4,785 4,750 4,732      $ 4,386 4,807 4,851 4,808 4,790
Charge-offs:

Commercial real estate
   —   —   —   —   (39)
Commercial and industrial
   —   (236 ) (128 ) —   —
Residential real estate
   —   —   (11 ) (11 ) —        —   (5 ) (1 ) —   —
Consumer installment
   (1 ) (15 ) (42 ) (7 ) —        (5 ) (20 ) (2 ) (1 ) (15)

Total charge-offs
   (1 ) (15 ) (53 ) (18 ) (39)    (5 ) (261 ) (131 ) (1 ) (15)
Recoveries
   44 33 58 53 57      86 90 87 44 33

Net recoveries
   43 18 5 35 18
Net recoveries (charge-offs)
   81 (171 ) (44 ) 43 18
Provision for loan losses
   400 (250 ) —   —   —

Ending balance
   $     4,851 4,808 4,790 4,785 4,750      $     4,867 4,386 4,807 4,851 4,808

as a % of loans
   1.02 % 1.02 1.00 1.04 1.04      1.10 % 0.95 1.03 1.02 1.02
as a % of nonperforming loans
   3,703 % 2,845 2,691 512 430      4,196 % 2,345 2,763 3,703 2,845
Net recoveries as % of average loans (a)
   (0.04 )% (0.02 ) —   (0.03 ) (0.02)
Net (recoveries) charge-offs as % of average loans (a)
   (0.07 )% 0.15 0.04 (0.04 ) (0.02)

(a) Net ~~recoveries~~(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 ~~1.02%~~1.10% at ~~June 30, 2019,~~March 31, 2020, compared to ~~1.00%~~0.95% at December 31, ~~2018.~~2019. 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, includingCOVID-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.
Our allowance for loan losses is expected to increase as the cumulative effects of theCOVID0-19 pandemic affect our customers for a longer period and are more fully realized as a result.
Nonperforming Assets
The Company had ~~$0.4~~$0.2 million in nonperforming assets at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019, respectively.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the ~~second~~first quarter of ~~2019~~2020 and the previous four quarters.

   2019    2018
   Second First    Fourth    Third    Second
(Dollars in thousands)    Quarter Quarter    Quarter    Quarter    Quarter

Nonperforming assets:

Nonaccrual loans
   $ 131 169    178    934    1,104
Other real estate owned
   303 172    172    137    137

Total nonperforming assets
   $ 434 341    350    1,071    1,241

as a % of loans and other real estate owned
   0.09 % 0.07    0.07    0.23    0.27
as a % of total assets
   0.05 % 0.04    0.04    0.13    0.15
Nonperforming loans as a % of total loans
           0.03 % 0.04    0.04    0.20    0.24

   2020 2019
   First Fourth    Third    Second    First
(Dollars in thousands)        Quarter         Quarter            Quarter            Quarter            Quarter

Nonperforming assets:

Nonaccrual loans
   $ 116 187    174    131    169
Other real estate owned
   99 —      —      303    172

Total nonperforming assets
   $         215 187    174    434    341

as a % of loans and other real estate owned
   0.05 % 0.04    0.04    0.09    0.07
as a % of total assets
   0.03 % 0.02    0.02    0.05    0.04
Nonperforming loans as a % of total loans
   0.03 % 0.04    0.04    0.03    0.04

The table below provides information concerning the composition of nonaccrual loans for the ~~second~~first quarter of ~~2019~~2020 and the previous four quarters.

     2019      2018    2020    2019
     Second      First      Fourth      Third      Second    First    Fourth    Third    Second    First
(In thousands)      Quarter      Quarter      Quarter      Quarter      Quarter        Quarter            Quarter            Quarter            Quarter            Quarter

Nonaccrual loans:

Construction and land development
     —        —        —        36      36
Commercial real estate
     —        —        —        696      710
Residential real estate
     131      169      178      194      347    112    187    174    131    169
Consumer installment
     —        —        —        8      11    4    —      —      —      —

Total nonaccrual loans
     $         131              169              178              934              1,104    $         116    187    174    131    169

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 ~~June 30, 2019 and December~~March 31, ~~2018, respectively,~~2020, the Company had $0.1 million ~~and $0.2 million, respectively,~~ in loans on nonaccrual ~~status.~~status compared to $0.2 million at December 31, 2019.
At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, respectively, there were no loans 90 days or more past due and still accruing.
The table below provides information concerning the composition of ~~other real estate owned~~OREO for the ~~second~~first quarter of ~~2019~~2020 and the previous four quarters.

     2019      2018    2020    2019
     Second      First      Fourth      Third      Second    First    Fourth    Third    Second    First
(In thousands)      Quarter      Quarter      Quarter      Quarter      Quarter        Quarter            Quarter            Quarter            Quarter            Quarter

Other real estate owned:

Residential
     $ 303      172      172      137      137    $ 99    —      —      303    172

Total other real estate owned
     $         303              172              172              137              137    $         99    —      —      303    172

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 ~~$5.0~~$4.3 million, or ~~1.1%~~1.0% of total loans at ~~June 30, 2019,~~March 31, 2020, and ~~$6.5~~$4.4 million, or ~~1.4%~~0.9% of total loans at December 31, ~~2018.~~2019.
The table below provides information concerning the composition of potential problem loans for the ~~second~~first quarter of ~~2019~~2020 and the previous four quarters.

     2019      2018
     Second      First      Fourth      Third      Second
(In thousands)      Quarter      Quarter      Quarter      Quarter      Quarter

Potential problem loans:

Commercial and industrial
     $ 590      570      522      96      218
Construction and land development
     681      719      741      763      657
Commercial real estate
     105      338      688      698      710
Residential real estate
     3,621      3,724      4,506      4,025      3,929
Consumer installment
     51      130      71      69      51

Total potential problem loans
     $         5,048              5,481              6,528              5,651              5,565

   2020    2019
   First    Fourth    Third    Second    First
(In thousands)        Quarter            Quarter            Quarter            Quarter            Quarter

Potential problem loans:

Commercial and industrial
   $ 246    266    500    590    570
Construction and land development
   910    1,043    660    681    719
Commercial real estate
   170    99    102    105    338
Residential real estate
   2,913    2,899    3,460    3,621    3,724
Consumer installment
   63    64    45    51    130

Total potential problem loans
   $         4,302    4,371    4,767    5,048    5,481

At ~~June 30, 2019,~~March 31, 2020, approximately $0.4 million, or 8% of total potential problem loans were past due at least 30 days, but less than 90 days.
The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than 90 days, for the ~~second~~first quarter of ~~2019~~2020 and the previous four quarters.

     2019      2018    2020    2019
     Second      First      Fourth      Third      Second    First    Fourth    Third    Second    First
(In thousands)      Quarter      Quarter      Quarter      Quarter      Quarter        Quarter            Quarter            Quarter            Quarter            Quarter

Performing loans past due 30 to 89 days:

Commercial and industrial
     $ 109      428      100      10      108    $ 4    24    53    109    428
Construction and land development
     351      152      225      241      138    8    456    449    351    152
Residential real estate
     214      339      1,740      186      885    922    1,608    94    214    339
Consumer installment
     8      8      41      17      7    19    64    21    8    8

Total
     $         682              927              2,106              454              1,138    $         953    2,152    617    682    927

Deposits
Total deposits were ~~$740.5~~$746.8 million at ~~June 30, 2019,~~March 31, 2020, compared to $724.2 million at December 31, ~~2018. The increase was due to growth of $11.1 million in interest-bearing deposits and $5.2 million in noninterest-bearing deposits during the first six months of~~ 2019. Noninterest-bearing deposits were ~~$206.9~~$205.8 million, or ~~27.9%~~27.6% of total deposits, at ~~June 30, 2019,~~March 31, 2020, compared to ~~$201.6~~$196.2 million, or ~~27.8%~~27.1% of total deposits at December 31, ~~2018.~~2019.
The average rate paid on total interest-bearing deposits was 0.78% in the first ~~six months~~quarter of 2020 and 2019, ~~and 0.64% in the first six months of 2018.~~respectively.
Other Borrowings
Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none outstanding at ~~June 30, 2019,~~March 31, 2020, and at December 31, ~~2018,~~2019, respectively. Securities sold under agreements to repurchase totaled ~~$1.1~~$1.4 million at ~~June 30, 2019,~~March 31, 2020, compared to ~~$2.3~~$1.1 million at December 31, ~~2018.~~2019.
The average rate paid on short-term borrowings was ~~0.74%~~0.50% in the first ~~six months~~quarter of ~~2019~~2020 compared to ~~0.84%~~0.49% in the first ~~six months~~quarter of ~~2018.~~2019.
The Company had no long-term debt at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.
CAPITAL ADEQUACY
The Company’s consolidated stockholders’ equity was ~~$94.1~~$103.6 million and ~~$89.1~~$98.3 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The increase from December 31, ~~2018~~2019 was primarily ~~due to~~driven by net earnings of $1.8 million and other comprehensive income due to the change in unrealized ~~gains/losses~~gains on securitiesavailable-for-sale,~~net-of-tax,~~ net of ~~$4.4~~tax of $4.3 million, ~~and net earnings of $4.9 million, which were~~ partially offset by ~~the repurchase of shares in the Company’s stock of $2.5 million and~~ cash dividends paid of ~~$1.8~~$0.9 million. During the first six months of 2019, the Company repurchased 72,205 shares under the Company’s current stock repurchase program, which began January 15, 2019. These shares were repurchased at an average cost per share of $34.57 and a total cost of $2.5 million. As of June 30, 2019, the approximate dollar value of shares that may be repurchased under the current repurchase program was $2.5 million.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer was subject to a three yearphase-in period that began on January 1, 2016 and was fullyphased-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 ~~June 30, 2019,~~March 31, 2020, the Bank’s ratio was sufficient to meet the fullyphased-in conservation buffer.
Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that amended the capital conservation buffer. The new rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by making the limitations on capital distributions more gradual. The eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of all net income over the preceding four quarters. The interim final rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital distribution decisions.
The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s policy. Accordingly, our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries. The Bank’s tier 1 leverage ratio was ~~11.14%~~11.17%, CET1 risk-based capital ratio was ~~16.26%~~17.77%, tier 1 risk-based capital ratio was ~~16.26%~~17.77%, and total risk-based capital ratio was ~~17.14%~~18.72% at ~~June 30, 2019.~~March 31, 2020. These ratios exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Bank’s capital conservation buffer was ~~9.14%~~10.72% at ~~June 30, 2019.~~March 31, 2020.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity (“EVE”) model.
Earnings simulation. Management believes that interest rate risk is best estimated by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, andoff-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:

●
+/- 20% for a gradual change of 400 basis points
●
+/- 15% for a gradual change of 300 basis points
●
+/- 10% for a gradual change of 200 basis points
●
+/- 5% for a gradual change of 100 basis points
At ~~June 30, 2019,~~March 31, 2020, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.
Economic Value of Equity. EVE measures the extent that the estimated economic values of our assets, liabilities, andoff-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, andoff-balance sheet items, which establishes a base case EVE. In contrast with our earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for there-pricing of all assets, liabilities, andoff-balance sheet items. Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

●
45% for an instantaneous change of +/- 400 basis points
●
35% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At ~~June 30, 2019,~~March 31, 2020, our EVE model indicated that we were in compliance with the policy guidelines noted above.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Company’s established liquidity, loan, investment, borrowing, and capital policies.
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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had no derivative contracts designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
Liquidity Risk Management
Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory restrictions.
The primary source of funding and 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 and stock repurchases.
Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities, sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in the FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At ~~June 30, 2019,~~March 31, 2020, the Bank had a remaining available line of credit with the FHLB of ~~$246.7~~$248.0 million. At ~~June 30, 2019,~~March 31, 2020, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.
Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations
At ~~June 30, 2019,~~March 31, 2020, the Bank had outstanding standby letters of credit of ~~$5.6~~$1.5 million and unfunded loan commitments outstanding of ~~$59.6~~$55.7 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securitiesavailable-for-sale, or draw on its available credit facilities.
Mortgage lending activities
Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other matters.
As of ~~June 30, 2019,~~March 31, 2020, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was ~~$281.9~~$269.0 million. Although these loans are generally sold on anon-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
The Company was not required to repurchase any loans during the first ~~six months~~quarter of ~~2019~~2020 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 ~~June 30, 2019.~~March 31, 2020.
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected loan.
Although repurchase and make whole requests related to representation and warranty provisions and servicing activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering losses on their purchased loans. As of ~~June 30, 2019,~~March 31, 2020, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.
Section 4021 of the CARES Act allows borrowers under1-to-4 family residential mortgage loans sold to Fannie Mae to request forbearance to the servicer after affirming that such borrower is experiencing financial hardships during theCOVID-19 emergency. Such forbearance will be up to 180 days, subject to up to a 180 day extension. During forbearance, no fees, penalties or interest shall be charged beyond those applicable if all contractual payments were fully and timely paid. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on similar procedures or related evictions or sales until May 17, 2020. The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial 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.

•
ASU2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;
•
~~ASU2018-13,~~~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement; and~~
•
~~ASU2018-15,~~~~Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40):~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.~~
Information about these pronouncements is described in more detail below.
ASU2016-13,Financial Instruments—Credit Losses (Topic 326):—Measurement of Credit Losses on Financial Instruments, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases,off-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~~cash.For public business entities, ~~that are SEC filers,~~ the new guidance iswas originally effective for annual and interim periods in fiscal years beginning after December 15, ~~2019, and early adoption is permitted beginning in~~ 2019. The Company has developed an implementation team that is following a general timeline. The team has been working with an advisory consultant, with whom a third-party software license has been purchased. The Company’s preliminary evaluation indicates the provisions of ASUNo. 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 ~~July 17,~~October 16, 2019, the FASB ~~voted to issue~~approved a previously issued proposal ~~for public comment that would potentially result in~~granting smaller reporting companies a postponement of the required implementation date for ASU2016-13. ~~Management~~ ~~will continue to monitor any new developments regarding this possible delay.~~
~~ASU2018-13,~~~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,~~improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. The Company ~~is currently evaluating~~will now be required to implement the ~~impact this ASU will have on its consolidated financial statements.~~
~~ASU 2018-15,~~~~Intangibles – Goodwill and Other – Internal Use Software (Subtopic350-40):~~ ~~Customer’s Accounting for Implementation Costs Incurred~~new standard in ~~a Cloud Computing Arrangement~~January 2023, with early adoption permitted in any period prior to that ~~is a Service Contract~~aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain~~internal-use~~ ~~software (and hosting arrangements that includeinternal-use~~ ~~software license). This ASU requires entities to use the guidance in FASB ASC350-40,~~ Intangibles—Goodwill and Other—Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (ii) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement; (iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element; and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.date.
Table 1 – Explanation ofNon-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form10-Q includes certain designated net interest income amounts presented on atax-equivalent basis, anon-GAAP financial measure, including the presentation and calculation of the efficiency ratio.
The Company believes the presentation of net interest income on atax-equivalent basis provides comparability of net interest income from both taxable andtax-exempt sources and facilitates comparability within the industry. Although the Company believes thesenon-GAAP financial measures enhance investors’ understanding of its business and performance, thesenon-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of thesenon-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.


   2019    2018
   Second    First    Fourth    Third    Second
(in thousands)    Quarter    Quarter    Quarter    Quarter    Quarter

Net interest income (GAAP)
   $ 6,597    6,620    6,547    6,422    6,317
Tax-equivalent adjustment
   145    146    152    153    152

Net interest income(Tax-equivalent)
   $ 6,742    6,766    6,699    6,575    6,469

   Six months ended June 30,    2020    2019
(In thousands)    2019    2018
   First    Fourth    Third    Second    First
(in thousands)        Quarter            Quarter            Quarter            Quarter            Quarter

Net interest income (GAAP)
   $             13,217            12,601    $ 6,212    6,280    6,567    6,597    6,620
Tax-equivalent adjustment
   291    308    120    126    140    145    146

Net interest income(Tax-equivalent)
   $ 13,508    12,909    $ 6,332    6,406    6,707    6,742    6,766

Table 2 - Selected Quarterly Financial Data

   2019 2018
   Second First Fourth    Third Second
(Dollars in thousands, except per share amounts)    Quarter Quarter Quarter    Quarter Quarter

Results of Operations

Net interest income (a)
   $ 6,742 6,766 6,699    6,575 6,469
Less:tax-equivalent adjustment
   145 146 152    153 152

Net interest income (GAAP)
   6,597 6,620 6,547    6,422 6,317
Noninterest income
   885 1,160 842    791 839

Total revenue
   7,482 7,780 7,389    7,213 7,156
Noninterest expense
   4,629 4,611 4,396    4,750 4,326
Income tax expense
   546 626 593    488 566

Net earnings
   $ 2,307 2,543 2,400    1,975 2,264

Per share data:

Basic and diluted net earnings
   $ 0.64 0.70 0.66    0.54 0.62
Cash dividends declared
   0.25 0.25 0.24    0.24 0.24
Weighted average shares outstanding:

Basic and diluted
   3,577,409 3,614,741 3,643,868    3,643,834 3,643,731
Shares outstanding
         3,571,828 3,581,485 3,643,868    3,643,868 3,643,793
Book value
   $ 26.34 25.39 24.44    23.45 23.53
Common stock price

High
   $ 39.55 39.43 41.50    53.50 50.99
Low
   31.06 30.61 28.88    38.31 37.40
Period end
   33.50 39.43 31.66    38.32 49.61
To earnings ratio
   13.19 x 15.71 13.14    16.96 21.48
To book value
   127 % 155 130    163 211
Performance ratios:

Return on average equity
   10.00 % 11.31 11.05    9.08 10.48
Return on average assets
   1.12 % 1.23 1.20    0.97 1.10
Dividend payout ratio
   39.06 % 35.71 36.36    44.44 38.71
Asset Quality:

Allowance for loan losses as a % of:

Loans
   1.02 % 1.02 1.00    1.04 1.04
Nonperforming loans
   3,703 % 2,845 2,691    512 430
Nonperforming assets as a % of:

Loans and other real estate owned
   0.09 % 0.07 0.07    0.23 0.27
Total assets
   0.05 % 0.04 0.04    0.13 0.15
Nonperforming loans as a % of total loans
   0.03 % 0.04 0.04    0.20 0.24
Annualized net recoveries as a % of average loans
   (0.04 )% (0.02 ) —      (0.03 ) (0.02 )
Capital Adequacy: (c)

CET 1 risk-based capital ratio
   16.26 % 16.17 16.49    16.31 16.17
Tier 1 risk-based capital ratio
   16.26 % 16.17 16.49    16.31 16.17
Total risk-based capital ratio
   17.14 % 17.06 17.38    17.21 17.07
Tier 1 leverage ratio
   11.14 % 10.87 11.33    11.01 10.80
Other financial data:

Net interest margin (a)
   3.50 % 3.54 3.54    3.41 3.36
Effective income tax rate
   19.14 % 19.75 19.81    19.81 20.00
Efficiency ratio (b)
   60.69 % 58.18 58.29    64.49 59.20
Selected average balances:

Securities
   $ 243,784 240,024 240,334    248,684 255,877
Loans, net of unearned income
   473,281 477,335 467,380    457,969 448,493
Total assets
   821,706 827,143 802,555    813,531 820,706
Total deposits
   725,263 732,539 711,043    721,566 728,457
Long-term debt
   —   —   —      —   919
Total stockholders’ equity
   92,272 89,934 86,881    86,958 86,420
Selected period end balances:

Securities
   $ 248,813 241,287 239,801    243,336 251,320
Loans, net of unearned income
   476,061 472,650 476,908    460,327 456,572
Allowance for loan losses
   4,851 4,808 4,790    4,785 4,750
Total assets
   839,178 835,014 818,077    808,951 811,791
Total deposits
   740,501 739,631 724,193    719,306 721,005
Total stockholders’ equity
   94,065 90,949 89,055    85,459 85,748

~~(a)Tax-equivalent.~~ ~~See “Table 1 - Explanation ofNon-GAAP~~ ~~Financial Measures.”~~
~~(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income andtax-equivalent~~ ~~net interest income.~~
~~(c) Regulatory capital ratios presented are for the Company’s wholly-owned subsidary, AuburnBank.~~
~~Table 3 - Selected Financial Data~~
   Six months ended June 30,    2020 2019
(Dollars in thousands, except per share amounts)    2019 2018
First
Quarter
Fourth
Quarter Third
Quarter    Second
Quarter First
Quarter

Results of Operations

Net interest income (a)
   $ 13,508 12,909    $ 6,332 6,406 6,707    6,742 6,766
Less:tax-equivalent adjustment
   291 308    120 126 140    145 146

Net interest income (GAAP)
   13,217 12,601    6,212 6,280 6,567    6,597 6,620
Noninterest income
   2,045 1,692    1,235 2,458 991    885 1,160

Total revenue
   15,262 14,293    7,447 8,738 7,558    7,482 7,780
Provision for loan losses
   400 (250 ) —      —   —
Noninterest expense
   9,240 8,728    4,856 5,633 4,824    4,629 4,611
Income tax expense
   1,172 1,106    390 671 527    546 626

Net earnings
   $ 4,850 4,459    $ 1,801 2,684 2,207    2,307 2,543

Per share data:

Basic and diluted net earnings
   $ 1.35 1.22    $ 0.50 0.76 0.62    0.64 0.70
Cash dividends declared
   0.50 0.48    0.26 0.25 0.25    0.25 0.25
Weighted average shares outstanding:

Basic and diluted
         3,595,972 3,643,707    3,566,146 3,566,146 3,568,287    3,577,409 3,614,741
Shares outstanding, at period end
   3,571,828 3,643,793          3,566,146 3,566,146 3,566,146    3,571,828 3,581,485
Book value
   $ 26.34 23.53    $ 29.04 27.57 27.12    26.34 25.39
Common stock price

High
   $ 39.55 50.99    $ 59.99 53.90 47.38    39.55 39.43
Low
   30.61 35.50    24.11 40.00 32.33    31.06 30.61
Period end
   33.50 49.61
Period end:
   41.98 53.00 47.38    33.50 39.43
To earnings ratio
   13.19 x 21.48    16.66 19.49 18.08    13.19 15.71
To book value
   127 % 211    145 % 192 175    127 155
Performance ratios:

Return on average equity
   10.65 % 10.22    7.24 % 10.86 9.25    10.00 11.31
Return on average assets
   1.18 % 1.07    0.86 % 1.30 1.06    1.12 1.23
Dividend payout ratio
   37.04 % 39.34    51.00 % 32.89 40.32    39.06 35.71
Asset Quality:

Allowance for loan losses as a % of:

Loans
   1.02 % 1.04    1.10 % 0.95 1.03    1.02 1.02
Nonperforming loans
   3,703 % 430    4,196 % 2,345 2,763    3,703 2,845
Nonperforming assets as a % of:

Loans and other real estate owned
   0.09 % 0.27    0.05 % 0.04 0.04    0.09 0.07
Total assets
   0.05 % 0.15    0.03 % 0.02 0.02    0.05 0.04
Nonperforming loans as a % of total loans
   0.03 % 0.24    0.03 % 0.04 0.04    0.03 0.04
Annualized net (recoveries) charge-offs as a % of average loans
   (0.03 )% —
Annualized net (recoveries) charge-offs as % of average loans
   (0.07 )% 0.15 0.04    (0.04 ) (0.02 )
Capital Adequacy: (c)

CET 1 risk-based capital ratio
   16.26 % 16.17    17.77 % 17.28 17.06    16.26 16.17
Tier 1 risk-based capital ratio
   16.26 % 16.17    17.77 % 17.28 17.06    16.26 16.17
Total risk-based capital ratio
   17.14 % 17.07    18.72 % 18.12 17.96    17.14 17.06
Tier 1 leverage ratio
   11.14 % 10.80    11.17 % 11.23 11.22    11.14 10.87
Other financial data:

Net interest margin (a)
   3.52 % 3.33    3.23 % 3.27 3.41    3.50 3.54
Effective income tax rate
   19.46 % 19.87    17.80 % 20.00 19.28    19.14 19.75
Efficiency ratio (b)
   59.41 % 59.78    64.17 % 63.55 62.67    60.69 58.18
Selected average balances:

Securities
   $ 241,914 260,725    $ 257,317 249,106 247,114    243,784 240,024
Loans, net of unearned income
   475,297 449,911    451,210 469,579 472,747    473,281 477,335
Total assets
   824,409 831,205    838,725 827,684 829,761    821,706 827,143
Total deposits
   728,881 736,415    734,047 723,557 729,608    725,263 732,539
Long-term debt
   —   2,062
Total stockholders’ equity
   91,110 87,297    99,560 98,887 95,400    92,272 89,934
Selected period end balances:

Securities
   $ 248,813 251,320    $ 280,435 235,902 251,152    248,813 241,287
Loans, net of unearned income
   476,061 456,572    443,868 460,901 465,108    476,061 472,650
Allowance for loan losses
   4,851 4,750    4,867 4,386 4,807    4,851 4,808
Total assets
   839,178 811,791    856,475 828,570 824,963    839,178 835,014
Total deposits
   740,501 721,005    746,785 724,152 723,071    740,501 739,631
Total stockholders’ equity
   94,065 85,748    103,563 98,328 96,720    94,065 90,949

(a)Tax-equivalent. See “Table 1 - Explanation ofNon-GAAP Financial Measures.”
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income andtax-equivalent net interest income.
(c) Regulatory capital ratios presented are for the Company’s wholly-owned subsidiary, AuburnBank.
Table 43 - Average Balances and Net Interest Income Analysis

   Quarter ended June 30,    Quarter ended March 31,


2019


2018


2020
   2019
(Dollars in thousands)
Average

Balance

Interest

Income/

Expense

Yield/

Rate

Average

Balance

Interest

Income/

Expense

Yield/

Rate

Average

Balance

Interest

Income/

Expense

Yield/

Rate

Average

Balance

Interest

Income/

Expense

Yield/

Rate









Interest-earning assets:

Loans and loans held for sale (1)
$    474,089    $ 5,763    4.88% $    449,650    $ 5,307    4.73% $    452,155    $ 5,412    4.81 % $    478,059    $ 5,727    4.86 %
Securities - taxable
   175,492    985    2.25%    185,013    1,012    2.19%    196,422    1,111    2.27 %    171,543    1,015    2.40 %
Securities -tax-exempt (2)
   68,292    689    4.05%    70,864    724    4.10%
Securities-tax-exempt (2)
   60,895    573    3.78 %    68,481    695    4.12 %









Total securities
   243,784    1,674    2.75%    255,877    1,736    2.72%    257,317    1,684    2.63 %    240,024    1,710    2.89 %
Federal funds sold
   17,016    99    2.33%    29,938    130    1.74%    29,758    93    1.26 %    21,404    125    2.37 %
Interest bearing bank deposits
   36,691    212    2.32%    36,181    160    1.77%    49,378    186    1.52 %    36,676    227    2.51 %









Total interest-earning assets
   771,580    $     7,748        4.03%    771,646    $     7,333        3.81%    788,608    $ 7,375    3.76 %    776,163    $ 7,789    4.07 %
Cash and due from banks
   13,822          13,480          14,184          14,622
Other assets
   36,304          35,580          35,933          36,358










Total assets
$    821,706       $    820,706       $    838,725       $    827,143










Interest-bearing liabilities:

Deposits:

NOW
$    136,105    $ 184    0.54% $    130,480    $ 97    0.30% $    149,344    $ 188    0.51 % $    132,358    $ 175    0.54 %
Savings and money market
   211,521    217    0.41%    218,798    197    0.36%    220,909    253    0.46 %    220,311    222    0.41 %
Time deposits
   169,702    603    1.43%    183,757    551    1.20%    167,447    600    1.44 %    177,186    624    1.43 %





Total interest-bearing deposits
   517,328    1,004    0.78%    533,035    845    0.64%    537,700    1,041    0.78 %    529,855    1,021    0.78 %
Short-term borrowings
   1,260    2    0.49%    2,801    8    1.15%    1,361    2    0.50 %    1,974    2    0.49 %
Long-term debt
   —      —      —      919    11    4.80%









Total interest-bearing liabilities
   518,588    $ 1,006    0.78%    536,755    $ 864    0.65%    539,061    $ 1,043    0.78 %    531,829    $ 1,023    0.78 %
Noninterest-bearing deposits
   207,935          195,422          196,347          202,684
Other liabilities
   2,911          2,109          3,757          2,696
Stockholders’ equity
   92,272          86,420          99,560          89,934










Total liabilities and stockholders’ equity
$    821,706       $    820,706       $    838,725       $    827,143










Net interest income and margin(tax-equivalent)
      $ 6,742    3.50%       $ 6,469    3.36%       $     6,332        3.23 %       $     6,766        3.54 %









(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
(2) Yields ontax-exempt securities have been computed on atax-equivalent basis using a federal income tax rate of 21%.
Table 54 - ~~Average Balances and Net Interest Income Analysis~~Loan Portfolio Composition

   Six months ended June 30,


2019


2018

(Dollars in thousands)
Average

Balance

Interest

Income/

Expense

Yield/

Rate

Average

Balance
   Interest
Income/
Expense
Yield/

Rate





Interest-earning assets:

Loans and loans held for sale (1)
$    476,063    $ 11,490    4.87%    $    451,063    $ 10,538    4.71%
Securities - taxable
   173,528    2,000    2.32%       189,442    2,089    2.22%
Securities -tax-exempt (2)
   68,386    1,384    4.08%       71,283    1,465    4.14%





Total securities
   241,914    3,384    2.82%       260,725    3,554    2.75%
Federal funds sold
   19,198    225    2.36%       28,932    236    1.64%
Interest bearing bank deposits
   36,683    438    2.41%       41,765    356    1.72%





Total interest-earning assets
   773,858    $ 15,537    4.05%       782,485    $ 14,684    3.78%
Cash and due from banks
   14,220             13,661
Other assets
   36,331             35,059






Total assets
$    824,409          $    831,205






Interest-bearing liabilities:

Deposits:

NOW
$    134,242    $ 359    0.54%    $    138,163    $ 208    0.30%
Savings and money market
   215,892    440    0.41%       220,022    396    0.36%
Time deposits
   173,423    1,226    1.43%       185,588    1,113    1.21%



Total interest-bearing deposits
   523,557    2,025    0.78%       543,773    1,717    0.64%
Short-term borrowings
   1,615    4    0.74%       2,888    12    0.84%
Long-term debt
   —      —      —         2,062    46    4.50%





Total interest-bearing liabilities
   525,172    $ 2,029    0.78%       548,723    $ 1,775    0.65%
Noninterest-bearing deposits
   205,324             192,642
Other liabilities
   2,803             2,543
Stockholders’ equity
   91,110             87,297






Total liabilities and stockholders’ equity
$    824,409          $    831,205






Net interest income and margin(tax-equivalent)
      $ 13,508    3.52%
$12,909
   3.33%





~~(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.~~
~~(2) Yields ontax-exempt~~ ~~securities have been computed on atax-equivalent~~ ~~basis using a federal income tax rate of 21%.~~
      2020 2019
      First Fourth Third Second First
(In thousands)       Quarter Quarter Quarter Quarter Quarter

Commercial and industrial
   $    56,447 56,782 52,288 54,307 50,898
Construction and land development
      32,302 32,841 41,599 45,395 44,931
Commercial real estate
      256,099 270,318 267,346 268,500 265,149
Residential real estate
      91,010 92,575 95,215 99,292 103,631
Consumer installment
      8,424 8,866 9,148 9,091 8,564

Total loans
      444,282 461,382 465,596 476,585 473,173
Less: unearned income
      (414 ) (481 ) (488 ) (524 ) (523 )

Loans, net of unearned income
      443,868     460,901     465,108         476,061         472,650
Less: allowance for loan losses
      (4,867 ) (4,386 ) (4,807 ) (4,851 ) (4,808 )

Loans, net
   $        439,001 456,515 460,301 471,210 467,842

Table ~~6 - Loan Portfolio Composition~~

      2019 2018
      Second First Fourth Third Second
(In thousands)       Quarter Quarter Quarter Quarter Quarter

Commercial and industrial
   $    54,307 50,898 63,467 52,430 52,921
Construction and land development
      45,395 44,931 40,222 45,109 42,675
Commercial real estate
      268,500 265,149 261,896 250,150 246,129
Residential real estate
      99,292 103,631 102,597 103,329 105,705
Consumer installment
      9,091 8,564 9,295 9,942 9,824

Total loans
      476,585 473,173 477,477 460,960 457,254
Less: unearned income
      (524 ) (523 ) (569 ) (633 ) (682)

Loans, net of unearned income
      476,061     472,650     476,908         460,327     456,572
Less: allowance for loan losses
      (4,851 ) (4,808 ) (4,790 ) (4,785 ) (4,750)

Loans, net
   $        471,210 467,842 472,118 455,542 451,822

~~Table 7~~5 - Allowance for Loan Losses and Nonperforming Assets

      2019 2018
      Second First Fourth Third Second       2020 2019
(Dollars in thousands)       Quarter Quarter Quarter Quarter Quarter       First
Quarter Fourth
Quarter Third
Quarter Second
Quarter First
Quarter

Allowance for loan losses:

Balance at beginning of period
   $    4,808 4,790 4,785 4,750 4,732    $    4,386 4,807 4,851 4,808 4,790
Charge-offs:

Commercial real estate
      —   —   —   —   (39)
Commercial and industrial
      —   (236 ) (128 ) —   —
Residential real estate
      —   —   (11 ) (11 ) —         —   (5 ) (1 ) —   —
Consumer installment
      (1 ) (15 ) (42 ) (7 ) —         (5 ) (20 ) (2 ) (1 ) (15)

Total charge-offs
      (1 ) (15 ) (53 ) (18 ) (39)       (5 ) (261 ) (131 ) (1 ) (15)
Recoveries
      44 33 58 53 57       86 90 87 44 33

Net recoveries
      43 18 5 35 18
Net recoveries (charge-offs)
      81 (171 ) (44 ) 43 18
Provision for loan losses
      400 (250 ) —   —   —

Ending balance
      $ 4,851 4,808 4,790 4,785 4,750    $    4,867 4,386 4,807 4,851 4,808

as a % of loans
      1.02 % 1.02 1.00 1.04 1.04       1.10 % 0.95 1.03 1.02 1.02
as a % of nonperforming loans
      3,703 % 2,845         2,691 512 430       4,196 % 2,345         2,763 3,703 2,845
Net recoveries as % of avg. loans (a)
      (0.04 )% (0.02 ) —   (0.03 ) (0.02)
Net (recoveries) charge-offs as % of avg. loans (a)
      (0.07 )% 0.15 0.04 (0.04 ) (0.02 )

Nonperforming assets:

Nonaccrual loans
   $    131 169 178 934 1,104    $    116 187 174 131 169
Other real estate owned
      303 172 172 137 137       99 —   —           303         172

Total nonperforming assets
   $    434 341 350         1,071         1,241    $    215 187 174 434 341

as a % of loans and other real estate owned
      0.09 %     0.07 0.07 0.23 0.27       0.05 %     0.04 0.04 0.09 0.07
as a % of total assets
      0.05 % 0.04 0.04 0.13 0.15       0.03 % 0.02 0.02 0.05 0.04
Nonperforming loans as a % of total loans
      0.03 % 0.04 0.04 0.20 0.24       0.03 % 0.04 0.04 0.03 0.04
Accruing loans 90 days or more past due
   $    —   —   94 —   —

(a) Net ~~recoveries~~(recoveries) charge-offs are annualized.
Table 86 - Allocation of Allowance for Loan Losses

2019 2018       2020    2019
Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter       First Quarter       Fourth Quarter       Third Quarter       Second Quarter       First Quarter
(Dollars in thousands) Amount %* Amount %* Amount %* Amount %* Amount %*       Amount    %*       Amount    %*       Amount    %*       Amount    %*       Amount    %*

Commercial and industrial
$ 726 11.4 $ 686 10.8 $ 778 13.3 $ 544 11.4 $ 600 11.6    $    675    12.7    $    577    12.3    $    685    11.2    $    726    11.4    $    686    10.8
Construction and land development
781 9.5 773 9.5 700 8.4 836 9.8 787 9.3       582    7.3       569    7.1       730    8.9       781    9.5       773    9.5
Commercial real estate
2,287 56.4 2,251 56.0 2,218 54.9 2,241 54.2 2,197 53.9       2,596    57.6       2,289    58.6       2,354    57.4       2,287    56.4       2,251    56.0
Residential real estate
904 20.8 930 21.9 946 21.5 997 22.4 1,017 23.1       877    20.5       813    20.1       890    20.5       904    20.8       930    21.9
Consumer installment
153 1.9 168 1.8 148 1.9 167 2.2 149 2.1       137    1.9       138    1.9       148    2.0       153    1.9       168    1.8

Total allowance for loan losses
$ 4,851 $ 4,808 $ 4,790 $ 4,785 $ 4,750    $    4,867       $    4,386       $    4,807       $    4,851       $    4,808

* Loan balance in each category expressed as a percentage of total loans.
Table 97 - CDs and Other Time Deposits of $100,000 or More

(Dollars in thousands)    ~~June 30, 2019~~March 31, 2020

Maturity of:

3 months or less
   $ ~~20,069~~7,155
Over 3 months through 6 months
   ~~22,807~~21,589
Over 6 months through 12 months
   ~~21,211~~28,723
Over 12 months
   ~~43,091~~50,680

Total CDs and other time deposits of $100,000 or more
   $             ~~107,178~~108,147

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK MANAGEMENT” and is incorporated herein by reference.
ITEM 4.
CONTROLS AND PROCEDURES
The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the Company files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form10-K for the year ended December 31, ~~2018.~~2019.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report and the risk factors discussed below, you should carefully consider the factors discussed in Part I, Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form10-K for the year ended December 31, ~~2018,~~2019, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form10-K and below are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.
TheCOVID-19 pandemic is expected to continue to adversely affect our business, financial condition and results of operations. The ultimate effects of the pandemic on our business, financial condition and results of operations will depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of governmental actions in response to the pandemic.
The ongoingCOVID-19 national health emergency has significantly disrupted the United States and international economies and financial markets. Through March 31, 2020, the pandemic’s effects on us have been relatively small, but we expect that theCOVID-19 pandemic and its effects will adversely affect our business, financial condition and results of operations in future periods. The spread ofCOVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. The State of Alabama and many other states have taken preventative and protective actions, such as imposing restrictions on travel, business operations, public gatherings, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures ofnon-essential businesses. The travel, hospitality and food and beverage industries, restaurants and auto manufacturers, and their suppliers have been severely affected. A significant number of layoffs, furloughs of employees, as well as mandated remote work have occurred in these and other industries, including government offices, schools and universities. Auburn University is holding virtual classes only from March 16, 2020 through the Summer Session. Hyundai’s Montgomery plant and Kia’s West Point, Georgia plants have been shut and are scheduled to reopen in early May 2020.
The ultimate effects of theCOVID-19 pandemic on the economy, generally, our markets, and on us cannot be predicted. The timing and effects of theCOVID-19 pandemic on our business, results of operations and financial condition may include, among various other consequences, the following. These effects depend on the severity, scope and duration of the pandemic, its cumulative economic effects, and the effectiveness of healthcare; business and governmental actions addressing to the pandemic’s effects.
Employees’ health could be adversely affected, necessitating their recovery away from work;
Unavailability of key personnel necessary to conduct our business activities;
Our operating effectiveness may be reduced as our employees work from home or suffer from theCOVID-19 virus;
Shelter in place, or other restrictions and interruptions of our business and contact with our customers;
Sustained closures of our branch lobbies or the offices of our customers;
Declines in demand for loans and other banking services and products, and reduced interchange fees on payment cards ;
Reduced consumer spending due to both job losses, health concerns and required practices, such as social distancing and shelter in place, attributable to theCOVID-19 pandemic;
Reduced interchange revenue from reduced retail sales, travel and payment card usage, generally;
Significant volatility in United States financial markets and our investment securities portfolio, including credit concerns over state, county and municipal securities;
Our growth has been slowed, and may slow further, or our asset size may decline;
Reduced economic activity and reduced customer income and cash flows from normal business and employment could reduce the amounts of our deposits, increase deposit costs, and adversely affect our liquidity, financial condition and results of operations;
Declines in the credit quality of our loan portfolio, owing to the effects of theCOVID-19 pandemic in the markets we serve, leading to increased provisions for loan losses and increases in our allowance for possible credit losses;
Declines in the value of collateral for loans, including real estate collateral, especially in industries such as travel and hospitality;
Declines in the net worth and liquidity of borrowers, impairing their ability to pay timely their loan obligations to us;
Decreases in market interest rates that are expected to reduce our net interest income and our profitability;
Loan deferrals and loan modifications, including those mandated by law, or which are encouraged by our regulators, may increase our expense and risks of collectability, reduce our cash flows and liquidity and adversely affect our results of operations and financial condition;
Our waiver of various fees and service charges to support our customers and communities will adversely affect our results of operation and our liquidity and financial position;
TheCOVID-19 pandemic may change customer financial behaviors and payment practices. Electronic banking could become more popular with less customers doing business at our offices;
Certain of our assets, including loans and securities, may become impaired, which would adversely affect our results of operation and financial condition;
Reductions in income or losses will adversely affect our capital and growth of capital, including our capital for bank regulatory purposes;
Losses or reductions in net income may adversely affect the growth or amount of dividends we can pay on our common stock;
The effects of government fiscal and monetary policies on the economy and financial stability, generally, and on our business, results of operations and financial condition cannot be predicted;
The restoration of financial stability and economic growth may depend on the health care system developing and deployingCOVID-19 testing and contact tracing, and drugs that better addressCOVID-19, and vaccines to preventCOVID-19, which promote consumer and employee health and confidence in the economy.
These factors, together or in combination with other events or occurrences that are unknown or anticipated, may materially and adversely affect our business, financial condition and results of operations.
Our stock price may reflect securities market conditions
The ongoingCOVID-19pandemic has resulted in substantial securities market losses, especially for bank stocks and has, and may continue to, adversely affect the market of our common stock. The spread, intensification and duration ofCOVID-19 outbreak, as well as the effectiveness of governmental, fiscal and monetary policies, and regulatory responses to the pandemic, further affect the financial markets and the market prices for securities generally, and the market prices for bank stocks, including our common stock.
TheCOVID-19 global pandemic could result in deterioration of asset quality and an increase in credit losses.
Many businesses have or will have lower revenues and cash flows and many consumers will have lower income. These could result in an inability to repay loans timely in full, reduce our asset quality and reduce our deposits. Loan modifications and payment deferrals may also increase our credit risks. Our business, results of operations, liquidity and financial condition could be adversely affected.
TheCOVID-19pandemic has resulted in increased operational risks.
TheCOVID-19pandemic has resulted in heightened operational risks. Much of our workforce has been working remotely, and increased levels of remote access create additional cybersecurity risk and opportunities for cybercriminals to exploit vulnerabilities. Cybercriminals may increase their attempts to compromise business and consumer emails, including an increase in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey upon consumers and businesses during this time. This could result in increased fraud losses to us or our clients. The increase in online and remote banking activities may also increase the risk of fraud against our customers. State and local orders and regulations regarding the conduct ofin-person business operations have affected and may continue to affect our ability to operate at normal levels and to restore operations to theirpre-pandemic level for an unknown period of time. Separately, our third-party service providers have also been affected by the pandemic. To date, these disruptions have not been material and we have developed solutions to these disruptions, but we may experience additional disruption in the future, which could adversely affect our business, results of operations and financial condition.
The COVID-19 global pandemic may continue to cause uncertainty in markets and may result in an increase in our cost of funds.
The COVID-19 global pandemic has caused a great amount of uncertainty in markets, causing credit markets to seize and forcing companies, including our clients, to seek liquidity in the face of uncertain future cash flows. To the extent the clients’ funds are not used as working capital and not placed on deposit with us, we could be faced with funding draws of committed lending facilities, along with requests for new credit facilities from our clients. As clients use deposit balances to fund their businesses, this may put funding pressure on us, which may cause us to pay higher rates than normal for deposits and other funding.
As a participating lender in the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), the Bank is subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
The CARES Act and the PPP Enhancement Act included an approximately $659 billion loan for the PPP administered through by the SBA and the U.S. Department of the Treasury. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved PPP lenders, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. As of April 23, 2020, we have secured funding of approximately 250 loans totaling approximately $30 million though the PPP program. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved approximately $310 billion of additional funding for the PPP on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both customers andnon-customers that approached the Bank regarding PPP loans, regarding its procedures used in processing applications for the PPP. If any such litigation is filed against the Bank and is not resolved favorably to the Bank, it may result in financial liability or adversely affect our reputation. Litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse effect on our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans, if the SBA determines deficiencies in the manner in which PPP loans were originated, funded or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, including those related to the ambiguity in the laws, rules and guidance regarding the PPP’s operation. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there were one or more deficiencies in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the PPP loan guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company. Similar issues may also result in the denial of forgiveness of PPP loans, which would adversely affect and could result in losses, including possible bankruptcies, which may expose us to further costs and potential losses.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock during the ~~second~~first quarter of ~~2019~~2020 were as follows:

Period
Total Number of
Shares Purchased

Average Price
  Paid per Share

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


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

April 1 - April 30, 2019
   717        $ 35.62    717    $ 2,827,454
May 1 - May 31, 2019
   6,277        37.00    6,277    2,595,205
June 1 - June 30, 2019
   2,693        34.04    2,693    2,503,535
Total
   9,687        36.08    9,687    2,503,535
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, 2020
—   $           —   —   $         2,279,285
February 1 - February 29, 2020
—   —   —   2,279,285
March 1 - March 31, 2020
—   —   —   2,279,285
Total
—   —   —   2,279,285
⁽¹⁾ ~~These repurchases are part of~~On January 15, 2019 the Company adopted a $5 million stock repurchase program which the company had $2.3 million remaining.
On March 10, 2020, the Company adopted ~~on January 15, 2019. As of June 30, 2019, the approximate remaining dollar value of shares~~a new $5 million stock repurchase program that ~~may be purchased under the program was $2.5 million.~~became effective April 1, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS

Exhibit
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. **
~~10.1~~ Agreement dated July 24, 2017, by and between J. Michael King and AuburnBank. ***
31.1    Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive Officer.
31.2    Certification Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.
32.1    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive Officer.****
32.2    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.****
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

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

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

***
~~Incorporated by reference from Registrant’s Form8-K~~ ~~dated March 10, 2019.~~
~~****~~
The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form10-Q are “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~AUBURN NATIONAL BANCORPORATION, INC.~~

~~(Registrant)~~

AUBURN NATIONAL BANCORPORATION, INC.
(Registrant)
Date:            ~~August 1, 2019~~                                        May 8, 2020                             By:          /s/ Robert W. Dumas

Robert W. Dumas

Chairman, President and CEO
Date:            ~~August 1, 2019~~                                         May 8, 2020                             By:          /s/ David A. Hedges

David A. Hedges
~~EVP~~ Executive Vice President and Chief Financial Officer


(Dollars in thousands, except share data)	June 30, 2019			December 31, 2018

Assets:
Cash and due from banks	$	16,497		$	13,043
Federal funds sold		25,395			26,918
Interest-bearing bank deposits		33,776			25,115

Cash and cash equivalents		75,668			65,076

Securitiesavailable-for-sale		248,813			239,801
Loans held for sale		2,016			383
Loans, net of unearned income		476,061			476,908
Allowance for loan losses		(4,851	)		(4,790)

Loans, net		471,210			472,118

Premises and equipment, net		14,825			13,596
Bank-owned life insurance		18,982			18,765
Other assets		7,664			8,338

Total assets	$	839,178		$	818,077

Liabilities:
Deposits:
Noninterest-bearing	$	206,871			201,648
Interest-bearing		533,630			522,545

Total deposits		740,501			724,193
Federal funds purchased and securities sold under agreements to repurchase		1,100			2,300
Accrued expenses and other liabilities		3,512			2,529

Total liabilities		745,113			729,022

Stockholders’ equity:
Preferred stock of $.01 par value; authorized 200,000 shares; no issued shares		—			—
Common stock of $.01 par value; authorized 8,500,000 shares; issued 3,957,135 shares		39			39
Additionalpaid-in capital		3,783			3,779
Retained earnings		98,694			95,635
Accumulated other comprehensive income (loss), net		680			(3,763)
Less treasury stock, at cost—385,307 shares and 313,267 shares at June 30, 2019 and December 31, 2018, respectively		(9,131	)		(6,635)

Total stockholders’ equity		94,065			89,055

Total liabilities and stockholders’ equity	$	839,178		$	818,077


	Quarter ended June 30,				Six months ended June 30,
(In thousands, except share and per share data)	2019		2018		2019		2018

Interest income:
Loans, including fees	$	5,763	$	5,307	$	11,490	$	10,538
Securities:
Taxable		985		1,012		2,000		2,089
Tax-exempt		544		572		1,093		1,157
Federal funds sold and interest-bearing bank deposits		311		290		663		592

Total interest income		7,603		7,181		15,246		14,376

Interest expense:
Deposits		1,004		845		2,025		1,717
Short-term borrowings		2		8		4		12
Long-term debt		—		11		—		46

Total interest expense		1,006		864		2,029		1,775

Net interest income		6,597		6,317		13,217		12,601
Provision for loan losses		—		—		—		—

Net interest income after provision for loan losses		6,597		6,317		13,217		12,601

Noninterest income:
Service charges on deposit accounts		176		182		360		361
Mortgage lending		187		166		376		372
Bank-owned life insurance		107		108		217		214
Other		407		383		1,079		745
Securities gains, net		8		—		13		—

Total noninterest income		885		839		2,045		1,692

Noninterest expense:
Salaries and benefits		2,799		2,618		5,737		5,286
Net occupancy and equipment		381		360		765		730
Professional fees		275		266		503		494
FDIC and other regulatory assessments		102		89		131		178
Other		1,072		993		2,104		2,040

Total noninterest expense		4,629		4,326		9,240		8,728

Earnings before income taxes		2,853		2,830		6,022		5,565

Income tax expense		546		566		1,172		1,106


Net earnings	$	2,307	$	2,264	$	4,850	$	4,459


Net earnings per share:
Basic and diluted	$	0.64	$	0.62	$	1.35	$	1.22


Weighted average shares outstanding:
Basic and diluted		3,577,409		3,643,731		3,595,972		3,643,707


										Accumulated
	Common					Additional				other
	Shares			Common		paid-in		Retained		comprehensive			Treasury
(Dollars in thousands, except share data)	Outstanding			Stock		capital		earnings		(loss) income			stock			Total

Quarter ended June 30, 2019

Balance, March 31, 2019		3,581,485		$	39	$	3,783	$	97,280	$	(1,371	)	$	(8,782	)	$	90,949
Net earnings		—			—		—		2,307		—			—			2,307
Other comprehensive income		—			—		—		—		2,051			—			2,051
Cash dividends paid ($0.25 per share)		—			—		—		(893)		—			—			(893)
Stock repurchases		(9,687	)		—		—		—		—			(350	)		(350)
Sale of treasury stock		30			—		—		—		—			1			1

Balance, June 30, 2019		3,571,828		$	39	$	3,783	$	98,694	$	680		$	(9,131	)	$	94,065



Quarter ended June 30, 2018

Balance, March 31, 2018		3,643,698		$	39	$	3,771	$	91,620	$	(3,686	)	$	(6,636	)	$	85,108
Net earnings		—			—		—		2,264		—			—			2,264
Other comprehensive loss		—			—		—		—		(754	)		—			(754)
Cash dividends paid ($0.24 per share)		—			—		—		(875)		—			—��			(875)
Sale of treasury stock		95			—		5		—		—			—			5

Balance, June 30, 2018		3,643,793		$	39	$	3,776	$	93,009	$	(4,440	)	$	(6,636	)	$	85,748



Six months ended June 30, 2019

Balance, December 31, 2018		3,643,868		$	39	$	3,779	$	95,635	$	(3,763	)	$	(6,635	)	$	89,055
Net earnings		—			—		—		4,850		—			—			4,850
Other comprehensive income		—			—		—		—		4,443			—			4,443
Cash dividends paid ($0.50 per share)		—			—		—		(1,791)		—			—			(1,791)
Stock repurchases		(72,205	)		—		—		—		—			(2,497	)		(2,497	)
Sale of treasury stock		165			—		4		—		—			1			5

Balance, June 30, 2019		3,571,828		$	39	$	3,783	$	98,694	$	680		$	(9,131	)	$	94,065



Six months ended June 30, 2018

Balance, December 31, 2017		3,643,668		$	39	$	3,771	$	90,299	$	(566	)	$	(6,637	)	$	86,906
Net earnings		—			—		—		4,459		—			—			4,459
Other comprehensive loss		—			—		—		—		(3,874	)		—			(3,874)
Cash dividends paid ($0.48 per share)		—			—		—		(1,749)		—			—			(1,749)
Sale of treasury stock		125			—		5		—		—			1			6

Balance, June 30, 2018		3,643,793		$	39	$	3,776	$	93,009	$	(4,440	)	$	(6,636	)	$	85,748


(Dollars in thousands, except share data)	Common Shares Outstanding			Common Stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total

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 ($0.255 per share)		—			—		—		(910	)		—			—			(910)

Balance, March 31, 2020		3,566,146		$	39	$	3,784	$	102,692		$	6,403		$	(9,355	)	$	103,563



Quarter ended March 31, 2019

Balance, December 31, 2018		3,643,868		$	39	$	3,779	$	95,635		$	(3,763	)	$	(6,635	)	$	89,055
Net earnings		—			—		—		2,543			—			—			2,543
Other comprehensive income		—			—		—		—			2,392			—			2,392
Cash dividends paid ($0.25 per share)		—			—		—		(898	)		—			—			(898)
Stock repurchases		(62,518	)		—		—		—			—			(2,147	)		(2,147)
Sale of treasury stock		135			—		4		—			—			—			4

Balance, March 31, 2019		3,581,485		$	39	$	3,783	$	97,280		$	(1,371	)	$	(8,782	)	$	90,949


	1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized		1 year		1 to 5		5 to 10		After 10		Fair		Gross Unrealized				Amortized
(Dollars in thousands)	or less		years		years		years		Value		Gains		Losses		Cost		or less		years		years		years		Value		Gains		Losses		Cost

June 30, 2019
March 31, 2020
Agency obligations (a)	$	9,997		22,173		24,990		—		57,160		149		217	$	57,228	$	5,038		28,016		29,406		5,218		67,678		2,426		111	$	65,363
Agency RMBS (a)		—		—		5,305		117,350		122,655		358		968		123,265		—		1,047		8,872		135,452		145,371		3,863		—		141,508
State and political subdivisions		—		1,356		5,198		62,444		68,998		1,654		68		67,412		97		1,167		6,497		59,625		67,386		2,432		60		65,014

Totalavailable-for-sale	$	9,997		23,529		35,493		179,794		248,813		2,161		1,253	$	247,905	$	5,135		30,230		44,775		200,295		280,435		8,721		171	$	271,885


December 31, 2018
December 31, 2019
Agency obligations (a)	$	14,437		19,865		16,869		—		51,171		25		1,200	$	52,346	$	4,993		27,245		18,470		—		50,708		215		98	$	50,591
Agency RMBS (a)		—		—		8,368		110,230		118,598		65		3,738		122,271		—		560		4,510		118,207		123,277		798		261		122,740
State and political subdivisions		—		3,682		7,726		58,624		70,032		518		692		70,206		—		1,355		6,166		54,396		61,917		2,104		9		59,822

Totalavailable-for-sale	$	14,437		23,547		32,963		168,854		239,801		608		5,630	$	244,823	$	4,993		29,160		29,146		172,603		235,902		3,117		368	$	233,153


	Less than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

June 30, 2019:
Agency obligations	$	—		—		35,676		217	$	35,676		217
Agency RMBS		—		—		79,546		968		79,546		968
State and political subdivisions		—		—		8,633		68		8,633		68

Total	$	—		—		123,855		1,253	$	123,855		1,253


December 31, 2018:
Agency obligations	$	4,724		28		44,307		1,172	$	49,031		1,200
Agency RMBS		12,325		238		99,184		3,500		111,509		3,738
State and political subdivisions		14,840		181		14,384		511		29,224		692

Total	$	31,889		447		157,875		5,183	$	189,764		5,630


	June 30, 2019
(In thousands)	Commercial and industrial			Construction and land development		Commercial real estate			Residential real estate			Consumer installment			Total

Quarter ended:
Beginning balance	$	686			773		2,251			930			168		$	4,808
Charge-offs		—			—		—			—			(1	)		(1)
Recoveries		6			—		1			33			4			44

Net recoveries		6			—		1			33			3			43
Provision for loan losses		34			8		35			(59	)		(18	)		—

Ending balance	$	726			781		2,287			904			153		$	4,851

Six months ended:
Beginning balance	$	778			700		2,218			946			148		$	4,790
Charge-offs		—			—		—			—			(16	)		(16)
Recoveries		24			—		1			47			5			77

Net recoveries (charge-offs)		24			—		1			47			(11	)		61
Provision for loan losses		(76	)		81		68			(89	)		16			—

Ending balance	$	726			781		2,287			904			153		$	4,851


	June 30, 2018
(In thousands)	Commercial and industrial			Construction and land development		Commercial real estate			Residential real estate			Consumer installment			Total

Quarter ended:
Beginning balance	$	724			670		2,119			1,053			166		$	4,732
Charge-offs		—			—		(39	)		—			—			(39)
Recoveries		32			—		—			17			8			57

Net recoveries (charge-offs)		32			—		(39	)		17			8			18
Provision for loan losses		(156	)		117		117			(53	)		(25	)		—

Ending balance	$	600			787		2,197			1,017			149		$	4,750

Six months ended:
Beginning balance	$	653			734		2,126			1,071			173		$	4,757
Charge-offs		(52	)		—		(39	)		(4	)		(2	)		(97)
Recoveries		46			—		—			33			11			90

Net (charge-offs) recoveries		(6	)		—		(39	)		29			9			(7)
Provision for loan losses		(47	)		53		110			(83	)		(33	)		—

Ending balance	$	600			787		2,197			1,017			149		$	4,750


	Collectively evaluated (1)				Individually evaluated (2)				Total

	Allowance		Recorded		Allowance		Recorded		Allowance		Recorded

	for loan		investment		for loan		investment		for loan		investment
													Collectively evaluated (1)				Individually evaluated (2)				Total
(In thousands)	losses		in loans		losses		in loans		losses		in loans		Allowance for loan losses		Recorded investment in loans		Allowance for loan losses		Recorded investment in loans		Allowance for loan losses		Recorded investment in loans

June 30, 2019:
March 31, 2020:
Commercial and industrial	$	726		54,307		—		—		726		54,307	$	675		56,447		—		—		675		56,447
Construction and land development		781		45,395		—		—		781		45,395		582		32,302		—		—		582		32,302
Commercial real estate		2,287		268,500		—		—		2,287		268,500		2,596		256,099		—		—		2,596		256,099
Residential real estate		904		99,292		—		—		904		99,292		877		91,010		—		—		877		91,010
Consumer installment		153		9,091		—		—		153		9,091		137		8,424		—		—		137		8,424

Total	$	4,851		476,585		—		—		4,851		476,585	$	4,867		444,282		—		—		4,867		444,282


June 30, 2018:
March 31, 2019:
Commercial and industrial	$	600		52,921		—		—		600		52,921	$	686		50,898		—		—		686		50,898
Construction and land development		787		42,675		—		—		787		42,675		773		44,931		—		—		773		44,931
Commercial real estate		2,194		245,252		3		877		2,197		246,129		2,251		265,149		—		—		2,251		265,149
Residential real estate		1,017		105,705		—		—		1,017		105,705		930		103,631		—		—		930		103,631
Consumer installment		149		9,824		—		—		149		9,824		168		8,564		—		—		168		8,564

Total	$	4,747		456,377		3		877		4,750		457,254	$	4,808		473,173		—		—		4,808		473,173


(In thousands)	Pass		Special Mention		Substandard Accruing		Nonaccrual		Total loans

March 31, 2020:
Commercial and industrial	$	53,875		2,326		246		—	$	56,447
Construction and land development		31,392		—		910		—		32,302
Commercial real estate:
Owner occupied		47,646		910		149		—		48,705
Hotel/motel		43,249		—		—		—		43,249
Multi-family		33,190		—		—		—		33,190
Other		130,088		846		21		—		130,955

Total commercial real estate		254,173		1,756		170		—		256,099
Residential real estate:
Consumer mortgage		41,666		1,223		2,547		112		45,548
Investment property		44,582		514		366		—		45,462

Total residential real estate		86,248		1,737		2,913		112		91,010
Consumer installment		8,299		58		63		4		8,424

Total	$	433,987		5,877		4,302		116	$	444,282

December 31, 2019:
Commercial and industrial	$	54,340		2,176		266		—	$	56,782
Construction and land development		31,798		—		1,043		—		32,841
Commercial real estate:
Owner occupied		47,865		917		78		—		48,860
Hotel/motel		43,719		—		—		—		43,719
Multi-family		44,839		—		—		—		44,839
Other		132,030		849		21		—		132,900

Total commercial real estate		268,453		1,766		99		—		270,318
Residential real estate:
Consumer mortgage		45,247		962		2,527		187		48,923
Investment property		42,331		949		372		—		43,652

Total residential real estate		87,578		1,911		2,899		187		92,575
Consumer installment		8,742		60		64		—		8,866

Total	$	450,911		5,913		4,371		187	$	461,382


	TDRs
							Related
(In thousands)	Accruing		Nonaccrual		Total		Allowance

December 31, 2018
Commercial real estate:
Owner occupied	$	157		—		157	$	—

Total commercial real estate	$	157		—		157	$	—

Total	$	157		�� —		157	$	—


	Quarter ended June 30,				Six months ended June 30,
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		investment⁽¹⁾		Contracts		investment⁽¹⁾

2018:
Commercial real estate:
Other		—	$	—		1	$	1,259

Total commercial real estate		—		—		1		1,259

Total		—	$	—		1	$	1,259


~~(1) Amount as of applicable month end during the respective period for which there was a payment~~ default.


	2019						2018
	Second			First			Fourth			Third			Second

(In thousands)	Quarter			Quarter			Quarter			Quarter			Quarter

Commercial and industrial	$	54,307			50,898			63,467			52,430			52,921
Construction and land development		45,395			44,931			40,222			45,109			42,675
Commercial real estate		268,500			265,149			261,896			250,150			246,129
Residential real estate		99,292			103,631			102,597			103,329			105,705
Consumer installment		9,091			8,564			9,295			9,942			9,824

Total loans		476,585			473,173			477,477			460,960			457,254
Less: unearned income		(524	)		(523	)		(569	)		(633	)		(682)

Loans, net of unearned income	$	476,061			472,650			476,908			460,327			456,572


	June 30,		December 31,
					March 31,		December 31,
(In thousands)	2019		2018		2020		2019

Lessors of 1 to 4 family residential properties	$	45,612	$	46,374	$	45,462	$	43,652
Hotel/motel		44,664		47,936		43,249		43,719
Shopping centers						34,037		30,407
Multi-family residential properties		44,022		40,455		33,190		44,839
Shopping centers		37,153		25,421
Office buildings		26,836		35,789		25,552		29,548


	Portfolio Segment
(In thousands)	Commercial and industrial		Construction and land development		Commercial real estate		Total		% of Total Loans

March 31, 2020:
Hotel/motel	$	755		7,293		43,249	$	51,297		12	%
Shopping centers		25		—		34,037		34,062		8
Retail, excluding shopping centers		435		826		18,413		19,674		4
Restaurants		566		—		14,089		14,655		3

Total	$	1,781		8,119		109,788	$	119,688		27	%


(In thousands)	Balance		% of Portfolio Modified

Commercial and industrial	$	939		2	%
Construction and land development		58		—
Commercial real estate		37,639		15
Residential real estate		4,557		5
Consumer installment		118		1

Total	$	43,311		10	%


(Dollars in thousands)	~~June 30, 2019~~March 31, 2020

Maturity of:
3 months or less	$	~~20,069~~7,155
Over 3 months through 6 months		~~22,807~~21,589
Over 6 months through 12 months		~~21,211~~28,723
Over 12 months		~~43,091~~50,680

Total CDs and other time deposits of $100,000 or more	$	~~107,178~~108,147


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
April 1 - April 30, 2019		717	$	35.62		717	$	2,827,454
May 1 - May 31, 2019		6,277		37.00		6,277		2,595,205
June 1 - June 30, 2019		2,693		34.04		2,693		2,503,535
Total		9,687		36.08		9,687		2,503,535


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. **

~~10.1~~		Agreement dated July 24, 2017, by and between J. Michael King and AuburnBank. ***

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

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

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

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

101.INS		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


	~~AUBURN NATIONAL BANCORPORATION, INC.~~
	~~(Registrant)~~		AUBURN NATIONAL BANCORPORATION, INC. (Registrant)

Date: ~~August 1, 2019~~ May 8, 2020			By: /s/ Robert W. Dumas

		Robert W. Dumas
			Chairman, President and CEO

Date: ~~August 1, 2019~~ May 8, 2020			By: /s/ David A. Hedges

		David A. Hedges
	~~EVP~~		Executive Vice President and Chief Financial Officer