What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-09 compared with 2020-03-06 · 56 added, 989 removed, 30 unchanged (97% of the section changed)

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Companys Common Stock is listed on the Nasdaq Global Market, under the symbol AUBN.

As of March 5, 2020, there were

approximately 3,566,146 shares of the Companys Common Stock issued and outstanding, which were held by approximately 376 shareholders of record.

The following table sets forth, for the indicated periods, the high and low closing sale prices

for the Companys Common Stock as reported on the Nasdaq Global Market, and the cash dividends declared to shareholders during the indicated periods.

MARKET FOR REGISTRANT’S COMMON EQUITY,

RELATED STOCKHOLDER

ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock

is listed on the Nasdaq Global Market, under the symbol “AUBN”.

As of March 8, 2021,

there were approximately 3,566,326 shares of the Company’s

Common Stock issued and outstanding, which were held by

approximately 373 shareholders of record.

The following table

sets forth, for the indicated periods, the high and low closing

sale prices for the Company’s Common

Stock as reported on the Nasdaq Global Market, and

the cash dividends declared to

shareholders during the indicated periods.

Per Share (1)

10 unchanged sentences

Prior to this time, the Bank paid cash dividends since

its organization in 1907, except during the Depression years of 1932 and 1933.

Holders of Common Stock are entitled to receive such dividends as may be declared by the Companys Board of Directors.

The amount and frequency of cash dividends

will be determined in the judgment of the Board based upon a number of factors, including the Companys earnings, financial condition, capital requirements and other relevant factors.

The Board currently intends to continue its present dividend

Federal Reserve policy could restrict future dividends on our Common Stock, depending on our earnings and capital position and likely needs.

See Supervision and Regulation Payment of Dividends and Managements Discussion and Analysis of Financial Condition and Results of Operations Capital Adequacy.

The amount of dividends payable by the Bank is limited by law and regulation.

The need to maintain adequate capital in the Bank also limits dividends that may

be paid to the Company.

its organization in 1907, except during the Depression

years of 1932 and 1933.

Holders of Common Stock are entitled to

receive such dividends as may be declared by the Company’s

Board of Directors.

The amount and frequency of cash

dividends will be determined in the judgment of the Board

based upon a number of factors, including the Company’s

earnings, financial condition, capital requirements and other

relevant factors.

The Board currently intends to continue its

present dividend policies.

Federal Reserve policy could restrict future dividends on our

Common Stock, depending on our earnings and capital

position and likely needs.

See “Supervision and Regulation –

Payment of Dividends” and “Management’s

Discussion and

Analysis of Financial Condition and Results of Operations –

Capital Adequacy”.

The amount of dividends payable by the Bank is limited by law and

The need to maintain adequate capital in

the Bank also limits dividends that may be paid to the Company.

Performance Graph

The following performance graph compares the cumulative, total return on the Companys Common Stock from December 31, 2014 to December 31,

2019, with that of the Nasdaq Composite Index and SNL Southeast Bank Index (assuming a $100 investment on December 31, 2014).

Cumulative total return represents the change in stock price and the amount of dividends received over the indicated

period, assuming the reinvestment of dividends.

The following performance graph compares the cumulative, total

return on the Company’s Co

mmon Stock from

December 31, 2015 to December 31, 2020,

with that of the Nasdaq Composite Index and SNL Southeast Bank Index

(assuming a $100 investment on December 31, 2015).

Cumulative total return represents the change in stock price and the

amount of dividends received over the indicated period,

assuming the reinvestment of dividends.

Period Ending

8 unchanged sentences

Shares Purchased as

Part of Publicly

Announced Plans or

Dollar Value of Shares

that May Yet Be Under

The Approximate

October 1 – October 31, 2020

1 unchanged sentence

December 1 – December 31, 2020

The Company approved a $5 million stock repurchase program adopted on January 15, 2019.

December 31, 2019, the approximate remaining dollar value of shares that may be purchased under the program was $2.3 million.

Securities Authorized for Issuance Under Equity Compensation Plans

See the information included under Part III, Item 12, which is incorporated in response to this item by reference.

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

Securities Authorized for Issuance Under Equity Compensation

See the information included under Part III, Item 12, which is

incorporated in response to this item by reference.

Unregistered Sale of Equity Securities

1 unchanged sentence

SELECTED FINANCIAL DATA

See Table 2 Selected Financial Data and general discussion in Item 7, Managements Discussion and Analysis of Financial Condition and

Results of Operations.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

The following is a discussion of our financial condition at December 31, 2019 and 2018 and our results of operations for the years

ended December 31, 2019 and 2018.

The purpose of this discussion is to provide information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements.

The following

discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

In addition, this discussion and analysis contains forward-looking statements, so you should refer to Item 1A,

Risk Factors and Special Cautionary Notice Regarding Forward-Looking Statements.

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 Companys 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 full-service branches in Auburn, Opelika, Notasulga and Valley, Alabama.

also operates loan production offices in Auburn and Phenix City, Alabama.

Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for loan losses

Noninterest expense

Income tax expense

Basic and diluted net earnings per share

(a) Tax-equivalent.

See Table 1 -

Explanation of Non-GAAP Financial Measures.

Financial Summary

Companys net earnings were $9.7 million for the full year 2019, compared to $8.8 million for the full year 2018.

Basic and diluted net earnings per share were $2.72 per share for the full year 2019, compared to $2.42 per share for

the full year 2018.

Net interest income (tax-equivalent) was $26.6 million in 2019,

a 2% increase compared to $26.2 million in 2018.

This increase was primarily due to loan growth and increases in short-term market interest rates.

Average loans grew 4% to $474.3 million in 2019, compared to $456.3 million in 2018.

The Companys net interest margin (tax-equivalent) increased to 3.43% in 2019, compared to 3.40% in 2018 as yields on earning assets improved.

The Company recorded a negative provision for loan losses of $0.3 million in 2019 compared to no provision for loan losses during 2018.

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.

Annualized net charge-offs as a percent of average loans were 0.03% in 2019 compared to

annualized net recoveries of 0.01% in 2018.

Noninterest income was $5.5 million in 2019 compared to $3.3 million in 2018.

The increase was

primarily due to a $1.7 million payment received by the Company that resulted from the termination of a loan guarantee program operated by the State of Alabama and a $0.3 million pre-tax gain from an

insurance recovery received in the first quarter of 2019.

Mortgage lending income also increased $0.2 million, or 32%, as pricing margins improved and lower interest rates for mortgage loans positively affected refinance activity.

Noninterest expense was $19.7 million in 2019 compared to $17.9 million in 2018.

This increase in noninterest expense was primarily due to increases

in salaries and benefits expense of $1.3 million and $0.5 million of various expenses related to the planned redevelopment of the Companys headquarters in downtown Auburn, including professional fees, temporary relocation costs, and

revised depreciation estimates.

The Company expects it will incur additional expense in 2020 related to this redevelopment project.

Income tax expense

was $2.4 million in 2019 and $2.2 million in 2018 reflecting an effective tax rate of 19.57% and 19.84%, respectively.

The Company paid cash

dividends of $1.00 per share in 2019, an increase of 4.2% from 2018.

At December 31, 2019, the Banks 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 19.69%, a tier 1 leverage ratio of 11.23% and common equity tier 1 (CET1) of 18.78% at December 31, 2019.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S.

generally accepted accounting principles and with general practices within

the banking industry.

In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary impairment, recurring

and non-recurring fair value measurements, 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

Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for Loan Losses

The Company assesses the

adequacy of its allowance for loan losses prior to the end of each calendar quarter.

The level of the allowance is based upon managements 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 borrowers ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic

conditions, industry and peer bank loan loss rates and other pertinent factors, including regulatory recommendations.

This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows

expected to be received on impaired loans that may be susceptible to significant change.

Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely.

A loan may be partially charged-off after a confirming event has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due

according to the contractual terms of the loan agreement.

Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

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

The impairment is recognized through the

Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loans effective interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of

the collateral, less estimated disposal costs.

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

inherent in the portfolio at the balance sheet date.

The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal, independent loan review process.

Companys 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 Companys 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.

of the Companys 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 loans.

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 these types of loans.

The estimates for these loans are established by category and based on the Companys internal system of credit risk ratings and historical

The estimated loan loss allocation rate for the Companys 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 December 31, 2019 and 2018, and for the years 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

managements 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

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 regularly re-evaluates its practices in determining the allowance for loan losses.

Since the fourth

quarter of 2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic downturn in its loss history.

The Company believes the extension of its look-back period is appropriate due to the risks

inherent in the loan portfolio.

Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease.

ended December 31, 2019, the Company increased its look-back period to 43 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 the look-back period each quarter, the Company has not made any material changes to its methodology that would impact the calculation of the

allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

Assessment for Other-Than-Temporary Impairment of Securities

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on

which there is an unrealized loss is other-than-temporarily impaired.

For equity securities with an unrealized loss, the Company considers many factors including the severity and duration of the impairment;

the intent and ability of the Company to

hold the security for a period of time sufficient for a recovery in value;

and recent events specific to the issuer or industry.

Equity securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to

fair value with the write-down recorded as a realized loss in securities gains (losses).

For debt securities with an unrealized loss, an

other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its

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

If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell

the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt securitys 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.

loss component is recognized in earnings and is the difference between the securitys amortized cost basis and the present value of its expected future cash flows.

The remaining difference between the securitys 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

GAAP requires management

to value and disclose certain of the Companys assets and liabilities at fair value, including investments classified as available-for-sale and derivatives.

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 15, Fair Value, of the consolidated financial statements that accompany this report.

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 Companys 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 managements best estimates for appropriate discount rates, default rates, prepayments, market volatility

and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities and

the related income and expense.

As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.

Other Real Estate Owned

Other real estate owned

(OREO), consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as a charge-off through the allowance for loan losses.

Additional OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense

along with holding costs.

Any gains or losses on disposal of OREO are also reflected in noninterest expense.

Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such

estimates can be considered current is significantly shortened during periods of market volatility.

As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used

to determine the fair value of other OREO.

Deferred Tax Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is

more-likely-than-not that some portion or the entire deferred tax asset will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during

the periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Based upon the level

of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these

deductible differences at December 31, 2019.

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

Average Balance Sheet and Interest Rates

Year ended December 31

(Dollars in thousands)

Loans and loans held for sale

Securities - taxable

Securities - tax-exempt (a)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest-earning assets

Savings and money market

Certificates of deposits

Total interest-bearing deposits

Short-term borrowings

Long-term debt

Total interest-bearing liabilities

Net interest income and margin (a)

(a) Tax-equivalent.

See Table 1 - Explanation of

Non-GAAP Financial Measures.

RESULTS OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $26.6 million in 2019, compared to $26.2 million in 2018.

This increase was due to improvement in the Companys net interest margin

(tax-equivalent) and balance sheet growth.

The tax-equivalent yield on

total interest-earning assets increased by 9 basis points in 2019 from 2018 to 3.97%.

Expansion of our earning asset yields was primarily driven by loan growth and increases 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.

The cost of total interest-bearing liabilities increased 11

basis points in 2019 from 2018 to 0.80%.

The increase in our funding costs was primarily due to higher prevailing market interest rates.

continues to deploy various asset liability management strategies to manage its risk to interest rate fluctuations.

The Companys net interest margin could experience pressure due to reduced earning asset yields, increased competition for

quality loan opportunities, and possible increases in our costs of funds.

Management anticipates the Companys net interest income and margin will likely decrease in 2020 compared to 2019 as the Companys ability to lower its deposit costs

will likely continue to lag the current decrease in earning asset yields.

Provision for Loan Losses

The Company recorded a negative provision for loan losses of $0.3 million in 2019, compared to no provision for loan losses in 2018.

provision was primarily related to a decline in total loans outstanding at December 31, 2019 and more specifically the construction and land development loan portfolio segment.

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

cover probable losses in the loan portfolio.

The Companys allowance for loan losses to total loans decreased to 0.95% at December 31, 2019 from 1.00% at December 31, 2018.

Based upon our evaluation of the loan portfolio, management

believes the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at December 31, 2019.

While our policies and procedures used to estimate the allowance for loan losses, as well as

the resultant provision for loan losses charged to operations, are believed adequate by management and are reviewed from time to time by our regulators, they are based on estimates and judgment and are therefore approximate and imprecise.

beyond our control, such as conditions in the local and national economy, a local real estate market or particular industry conditions exist which may negatively and materially affect our asset quality and the adequacy of our allowance for loan

losses and, thus, the resulting provision for loan losses.

Noninterest Income

Year ended December

(Dollars in thousands)

Service charges on deposit accounts

Mortgage lending

Bank-owned life insurance

Gain from loan guarantee program

Securities losses, net

Total noninterest income

The Companys income from mortgage lending is 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 Companys normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the MSRs when the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.

Subsequent to the date of transfer,

the Company has elected to measure its MSRs under the amortization method.

Servicing fee income is reported net of any related amortization expense.

The Company evaluates MSRs 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 groups 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

The following table presents a breakdown of the Companys mortgage lending income for 2019 and 2018.

Year ended December 31

(Dollars in thousands)

Origination income

Servicing fees, net

Total mortgage lending income

The increase in mortgage lending income was primarily due to improved pricing margins and an increase in the level of

refinance activity.

The Companys income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily attributable to the origination and sale of new mortgage loans.

In 2019, the Company recognized a gain of $1.7 million resulting from the termination of a Loan Guarantee Program (the Program) operated by

the State of Alabama.

For more information regarding the Program, please refer to Note 5, Loans and Allowance for Loan Losses, of the consolidated financial statements that accompany this report.

The increase in other noninterest income was primarily due to a $0.3 million gain from an insurance recovery received in the first quarter of 2019.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

Salaries and benefits

Net occupancy and equipment

Professional fees

FDIC and other regulatory assessments

Total noninterest expense

The increase in salaries and benefits expense in 2019 over 2018 was due to a variety of factors, including an increase in the

number of employees, routine annual wage increases, incentive accrual increases, an increase in the employer matching contribution percentage under the Companys 401(k) Plan, and an increase in severance pay.

The increase in net occupancy and equipment expense and professional fees expense was primarily due to $0.5 million of various expenses related to the

planned redevelopment of the Companys headquarters in downtown Auburn.

This amount includes revised depreciation estimates of $0.2 million.

For more information regarding changes in accounting estimates, please refer to Note 1, Summary of

Significant Accounting Policies, of the consolidated financial statements that accompany this report.

The decrease in FDIC and other regulatory

assessments expense was primarily due to the Bank receiving an assessment credit of approximately $0.2 million to offset future assessments in connection with the FDIC Deposit Insurance Fund exceeding its target ratio of 1.35% as of

September 30, 2018.

The Deposit Insurance Fund ratio was 1.36% at December 31, 2018, below the 1.38% threshold required for assessment credits to be applied.

The Deposit Insurance Fund ratio was again below 1.38% at June 30, 2019, so

assessment credit were applied against our assessment due for the third and fourth quarters of 2019.

Future expense may continue to be reduced by these assessment credits depending on the level of the Deposit Insurance Fund, until they are fully

Income Tax Expense

Income tax expense was $2.4 million in 2019 compared to $2.2 million in 2018.

The Companys effective income tax rate was 19.57% in 2019,

compared to 19.84% in 2018.

BALANCE SHEET ANALYSIS

Securities available-for-sale were $235.9 million at December 31, 2019, a decrease of $3.9 million, or 2%, compared to $239.8 million as of December 31, 2018.

This decline was primarily due to a

decrease of $11.7 million in the amortized cost basis of securities available-for-sale as proceeds from sales, calls, and maturities were not reinvested.

decrease was offset by an increase in the fair value of securities available-for-sale of $7.8 million.

tax-equivalent yields earned on total securities were 2.72% in 2019 and 2.76% in 2018.

The following table shows

the carrying value and weighted average yield of securities available-for-sale as of December 31, 2019 according to contractual maturity.

Actual maturities may

differ from contractual maturities of residential mortgage-backed securities (RMBS) because the mortgages underlying the securities may be called or prepaid with or without penalty.

December 31, 2019

(Dollars in thousands)

Agency obligations

State and political subdivisions

available-for-sale

Weighted average yield:

Agency obligations

State and political subdivisions

available-for-sale

(In thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

unearned income

Loans, net of unearned income

Total loans, net of unearned income, were $460.9 million at December 31, 2019, a decrease of $16.0 million, or

3%, from $476.9 million at December 31, 2018.

Four loan categories represented the majority of the loan portfolio at December 31, 2019:

commercial real estate mortgage loans (59%), residential real estate mortgage loans (20%),

commercial and industrial loans (12%) and construction and land development loans (7%).

Approximately 23% of the Companys commercial real estate loans were classified as owner-occupied at December 31, 2019.

Within its residential real estate mortgage portfolio, the Company had junior lien mortgages of

approximately $10.8 million, or 2%, and $12.3 million, or 3%, of total loans, net of unearned income at December 31, 2019 and 2018, respectively.

For residential real estate mortgage loans with a consumer purpose, approximately

$0.8 million and $0.5 million required interest-only payments at December 31, 2019 and 2018, respectively.

The Companys 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.

Purchased loan participations included in the Companys loan portfolio were

approximately $1.4 million and $5.4 million as of December 31, 2019 and 2018, respectively.

All purchased loan participations are underwritten by the Company independent of the selling bank.

In addition, all loans, including purchased

participations, are evaluated for collectability during the course of the Companys normal loan review procedures.

If the Company deems a participation loan impaired, it applies the same accounting policies and procedures described under

Critical Accounting Policies Allowance for Loan Losses.

The average yield earned on loans and loans held for sale was 4.83% in 2019

and 4.76% in 2018.

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

economic conditions on our borrowers cash flows, real estate market sales volumes, valuations, and availability and cost of financing for properties, real estate industry concentrations, deterioration in certain credits, interest rate

fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.

The Company attempts to reduce these economic and credit risks by adhering to loan to value guidelines for collateralized loans, investigating the

creditworthiness of borrowers and monitoring borrowers financial positions.

Also, we establish and periodically review our lending policies and procedures.

Banking regulations limit a banks credit exposure by prohibiting unsecured loan

relationships that exceed 10% of its capital accounts;

or 20% of capital accounts, if loans in excess of 10% are fully secured.

Under these regulations, we are prohibited from having secured loan relationships in excess of approximately

$19.5 million.

Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $17.5 million.

Our loan policy requires that the Loan Committee of the Board of

Directors approve any loan relationships that exceed this internal limit.

At December 31, 2019, the Bank had no loan relationships exceeding our internal limit.

We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries.

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 Banks total risk-based capital at

December 31, 2019 (and related balances at December 31, 2018).

(In thousands)

Multi-family residential properties

Lessors of 1-4 family residential properties

Shopping centers

Office buildings

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Companys estimate of

probable losses in the loan portfolio.

As of December 31, 2019 and 2018, respectively, the allowance for loan losses was $4.4 million and $4.8 million, which management believed to be adequate at each of the respective dates.

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 each of the

five years in the five year period ended December 31, 2019 is presented below.

Year ended December 31

(Dollars in thousands)

Allowance for loan losses:

Balance at beginning of period

Commercial and industrial

Commercial real estate

Residential real estate

Consumer installment

Total charge-offs

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total recoveries

Net (charge-offs) recoveries

Provision for loan losses

Ending balance

as a % of loans

as a % of nonperforming loans

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

As noted 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 managements evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers 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 quality indications 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 0.95% at December 31, 2019, compared to 1.00% at December 31, 2018.

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 in their entirety either improve or weaken.

Net charge-offs were $0.2 million, or 0.03%, of

average loans in 2019, compared to net recoveries of $33 thousand, or 0.01% of average loans, in 2018.

Our regulators, as an integral part of their

examination process, periodically review the Companys allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available to them at the time

of their examinations.

Nonperforming Assets

December 31, 2019 the Company had $0.2 million in nonperforming assets compared to $0.4 million at December 31, 2018.

The table below provides information concerning total nonperforming assets and certain asset quality ratios.

(Dollars in thousands)

Nonperforming assets:

Nonperforming (nonaccrual) loans

Other real estate owned

Total nonperforming assets

as a % of loans and other real estate owned

as a % of total assets

Nonperforming loans as a % of total loans

Accruing loans 90 days or more past due

The table below provides information concerning the composition of nonaccrual loans at December 31, 2019 and 2018,

respectively.

(In thousands)

Nonaccrual loans:

Residential real estate

Total nonaccrual loans / nonperforming loans

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 more than 90 days past due, unless the loan is both well-secured and in the process of collection.

December 31, 2019 and 2018, respectively, the Company had $0.2 million in loans on nonaccrual.

Due to the weakening credit status of a

borrower, the Company may elect to formally restructure certain loans to facilitate a repayment plan that minimizes the potential losses that we might incur.

Restructured loans, or troubled debt restructurings (TDRs), are classified as

impaired loans, and if the loans are on nonaccrual status as of the date of restructuring, the loans are included in the nonaccrual loan balances noted above.

Nonaccrual loan balances do not include loans that have been restructured that were

performing as of the restructure date.

At December 31, 2019 the Company had no accruing TDRs compared to $0.2 million in accruing TDRs at December 31, 2018.

At December 31, 2019 and 2018, there were no loans 90 days past due and still accruing interest.

The table below provides information concerning the composition of OREO at December 31, 2019 and 2018, respectively.

(In thousands)

Other real estate owned:

Total other real estate owned

Potential Problem Loans

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused

management to have serious doubts about the borrowers ability to comply with present repayment terms.

This definition is believed to be substantially consistent with the standards established by the Federal Reserve, the Companys primary

regulator, for loans classified as substandard, excluding nonaccrual loans.

Potential problem loans, which are not included in nonperforming assets, amounted to $4.4 million, or 1.0% of total loans at December 31, 2019, compared to

$6.5 million, or 1.4% of total loans at December 31, 2018.

The table below provides information concerning the composition of potential problem loans at

December 31, 2019 and 2018, respectively.

(In thousands)

Potential problem loans:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total potential problem loans

At December 31, 2019, approximately $1.1 million or 26.7% of total potential problem loans were past due at least 30

but less than 90 days.

The following table is a summary of the Companys performing loans that were past due at least 30 days but less than

90 days as of December 31, 2019 and 2018, respectively.

(In thousands)

Performing loans past due 30 to 89 days:

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total performing loans past due 30 to 89 days

(In thousands)

Noninterest bearing demand

Certificates of deposit under $100,000

Certificates of deposit and other time deposits of $100,000 or more

Brokered certificates of deposit

Total deposits

Total deposits were $724.2 million at December 31, 2019 and 2018, respectively.

Decreases of $5.4 million in

noninterest-bearing deposits were offset by increases in interest-bearing deposits of $5.4 million during 2019.

Of the $5.4 million increase in interest-bearing deposits, $17.5 million was due to increases in NOW accounts and

$2.4 million in savings accounts.

These increases were partially offset by decreases of $10.4 million in brokered certificates of deposit and $3.6 million in retail certificates of deposit.

The average rates paid on total interest-bearing deposits were 0.80% in 2019 and 0.68% in 2018.

Noninterest bearing deposits were 27% and 28% of total

deposits at December 31, 2019 and 2018, respectively.

Other Borrowings

Other borrowings generally 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 of one year or less.

The Bank had available federal fund lines totaling $41.0 million with none outstanding at December 31, 2019 and 2018, respectively.

sold under agreements to repurchase totaled $1.1 million and $2.3 million at December 31, 2019 and 2018, respectively.

The average rates

paid on short-term borrowings was 0.49% and 0.68% in 2019 and 2018, respectively.

Information concerning the average balances, weighted average rates, and maximum amounts outstanding for short-term borrowings during the two-year period ended December 31, 2019 is included in Note 9 to the accompanying consolidated financial statements included in this annual report.

The Company had no long-term debt outstanding at December 31, 2019 and 2018, respectively.

On April 27, 2018, the Company formally redeemed all of

the issued and outstanding junior subordinated debentures, which were previously presented as long-term debt.

The average rate paid on long-term debt in 2018 was 4.50%.

CAPITAL ADEQUACY

The Companys consolidated

stockholders equity was $98.3 million and $89.1 million as of December 31, 2019 and 2018, respectively.

The change from December 31, 2018 was primarily driven by net earnings of $9.7 million and other comprehensive

gain due to the change in unrealized gains on securities available-for-sale, net of tax, of $5.8 million, partially offset by cash dividends paid of

$3.5 million and stock repurchases of $2.7 million, representing 77,907 shares.

The Banks Tier 1 leverage ratio was 11.23%, Common Equity

Tier 1 (CET1) risk-based capital ratio was 17.28%, Tier 1 risk-based capital ratio was 17.28%, and total risk-based capital ratio was 18.12% at December 31, 2019.

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. Based on current regulatory standards, the

Bank is classified as well capitalized.

MARKET AND LIQUIDITY RISK MANAGEMENT

Managements 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 Banks 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

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates because assets and

liabilities may mature or reprice at different times.

For example, if liabilities reprice faster than assets, and interest rates are generally rising, earnings will initially decline.

In addition, assets and liabilities may reprice at the same time

but by different amounts.

For example, when the general level of interest rates is rising, the Company may increase rates paid on interest bearing demand deposit accounts and savings deposit accounts by an amount that is less than the general

increase in market interest rates.

Also, short-term and long-term market interest rates may change by different amounts.

For example, a flattening yield curve may reduce the interest spread between new loan yields and funding costs.

remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change.

For example, if long-term mortgage interest rates decline sharply, mortgage-backed securities in the securities portfolio may prepay earlier than

anticipated, which could reduce earnings.

Interest rates may also have a direct or indirect effect on loan demand, loan losses, mortgage origination volume, the fair value of MSRs and other items affecting earnings.

ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits.

ALCO determines the most

appropriate amounts of on-balance sheet and off-balance sheet items.

Measurements used to help manage interest rate sensitivity include an earnings simulation and an

economic value of equity model.

Earnings simulation .

Management believes that interest rate risk is best estimated by our

earnings simulation modeling.

On at least a quarterly basis, the following 12 month time period is simulated to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates.

forecast assumes an unchanged or flat interest rate environment.

Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts

of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates.

To help limit interest

rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates.

For changes up or down in rates from managements 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

The following table reports the variance of net interest income over the next 12 months assuming a gradual change in interest rates up or down when compared

to the baseline net interest income forecast at December 31, 2019.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

300 basis points

200 basis points

100 basis points

(100) basis points

(200) basis points

(300) basis points

(400) basis points

NM=not meaningful

December 31, 2019, our earnings simulation model indicated that we were in compliance with the policy guidelines noted above.

Economic Value

Economic value of equity (EVE) measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate

Economic values are estimated by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case EVE.

In contrast with our earnings simulation model

which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance

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

The following table reports the variance of EVE assuming an immediate change in interest rates up or down

when compared to the baseline EVE at December 31, 2019.

Changes in Interest Rates

EVE % Variance

400 basis points

300 basis points

200 basis points

100 basis points

(100) basis points

(200) basis points

(300) basis points

(400) basis points

NM=not meaningful

December 31, 2019, 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.

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 Companys 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

one tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers.

From time to time, the Company may enter into interest rate swaps (swaps) to facilitate customer transactions and

meet their financing needs.

These swaps qualify as derivatives, but are not designated as hedging instruments.

At December 31, 2019 and 2018, the Company had no derivative contracts to assist in managing interest rate sensitivity.

Liquidity Risk Management

Liquidity is the

Companys 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 Banks 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, and 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 has participated in the FHLBs advance

program to obtain funding for its growth.

Advances include both fixed and variable terms and are taken out with varying maturities.

As of December 31, 2019, the Bank had a remaining available line of credit with the FHLB totaling

$246.7 million.

As of December 31, 2019, the Bank also had $41.0 million of federal funds lines, with none outstanding.

Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

The following table presents additional information about our contractual obligations as of December 31, 2019, which by their terms had contractual

maturity and termination dates subsequent to December 31, 2019:

Payments due by period

(Dollars in thousands)

Contractual obligations:

Deposit maturities (1)

Operating lease obligations

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented in the 1 year or

Management believes that the Company and the Bank have adequate sources of liquidity to meet all known contractual obligations and

unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next 12 months.

Off-Balance Sheet Arrangements

At December 31, 2019, the Bank had outstanding standby letters of credit of

$1.9 million and unfunded loan commitments outstanding of $60.6 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 has the ability to liquidate federal funds sold or securities

available-for-sale, or on a short-term basis to borrow and purchase federal funds from other financial institutions.

Residential mortgage lending and servicing activities

Since 2009, we have primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans.

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 December 31, 2019, the unpaid principal

balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was $271.5 million.

Although these loans are generally sold on a non-recourse basis, except for

breaches of customary seller representations and warranties, we may have to repurchase residential mortgage loans in cases where we breach such representations or warranties or the other terms of the sale, such as where we fail to deliver required

documents or the documents we deliver are defective.

Investors also may require the repurchase of a mortgage loan when an early payment default underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has

subsequently been brought current.

Repurchase demands 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 event has occurred.

reduce and manage the risks of potential repurchases or other claims by mortgage loan investors through our underwriting, quality assurance and servicing practices, including good communications with our residential mortgage investors.

The Company was not required to repurchase any loans during 2019 as a result of representation and warranty

provisions contained in the Companys sale agreements with Fannie Mae.

During 2018, the Company was required to repurchase one loan with an aggregate principal balance of $53 thousand that was current as to principal and interest at the

time of repurchase.

At December 31, 2019, the Company had no pending repurchase or make-whole requests related to representation and warranty provisions.

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

(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 to date

repurchase requests related to representation and warranty provisions, and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency if investors more aggressively pursue all means of

recovering losses on their purchased loans.

As of December 31, 2019, we believe that this exposure is not material due to the historical level of repurchase requests and loss trends, the results of our quality control reviews, and 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.

Effects of Inflation and Changing Prices

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

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 institutions performance than the effects of general

levels of inflation.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASUs have been issued by the FASB but are not yet effective.

ASU 2016-13, Financial Instruments Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments;

ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework

Changes to the Disclosure Requirements for Fair Value Measurement;

ASU 2018-15, Intangibles Goodwill and Other Internal Use

Software (Subtopic 350-40):

Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

Information about these pronouncements is described in more detail below.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

- Measurement of Credit Losses on Financial

Instruments , amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For assets held at amortized cost basis, the new standard eliminates the probable initial recognition

threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of

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.

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 Companys preliminary evaluation indicates the provisions of ASU No.

2016-13 are expected to impact the

Companys 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.

In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations,

and certain smaller reporting companies applying standards on current expected credit losses.

As a result of this delay, the Companys effective dated for ASU 2016-13 was delayed to fiscal year beginning

after December 15, 2022 including interim periods within those fiscal years.

ASU 2018-13, Fair Value

Measurement (Topic 820):

Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, improves the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the

amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;

(ii) the policy for timing of transfers between levels;

and (iii) the valuation processes for Level 3 fair value measurements.

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

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 adopted this

ASU on January 1, 2020.

Adoption of this guidance did not have a material impact on the consolidated financial statements.

ASU 2018- 15,

Intangibles Goodwill and Other Internal Use Software (Subtopic 350-40):

Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain

internal-use software (and hosting arrangements that include internal-use software license).

This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract.

This ASU also requires entities to

(i) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement;

(ii) present the expense related to the capitalized implementation costs in the same line item on

the income statement as fees associated with the hosting element of the arrangement;

(iii) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the

hosting element;

and (iv) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Early adoption

is permitted.

The Company adopted this ASU on January 1, 2020.

Adoption of this guidance did not have a material impact on the consolidated financial statements.

Table 1 Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this annual report on Form 10-K includes certain

designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation of total revenue and the calculation

of the efficiency ratio.

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

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

Although the Company believes these

non-GAAP financial measures enhance investors understanding of its business and performance, these non-GAAP financial measures should not be considered an

alternative to GAAP.

The reconciliation of these non-GAAP financial measures from GAAP to non-GAAP is presented below.

Year ended December 31

(In thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax-equivalent)

Table 2 - Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

Income statement

Tax-equivalent interest income (a)

Total interest expense

Tax equivalent net interest income (a)

Provision for loan losses

Total noninterest income

Total noninterest expense

Net earnings before income taxes and tax-equivalent

Tax-equivalent adjustment

Income tax expense

Per share data:

Basic and diluted net earnings

Cash dividends declared

Weighted average shares outstanding

Basic and diluted

Shares outstanding

Common stock price

To earnings ratio

To book value

Performance ratios:

Return on average equity

Return on average assets

Dividend payout ratio

Average equity to average assets

Asset Quality:

Allowance for loan losses as a % of:

Nonperforming loans

Nonperforming assets as a % of:

Loans and other real estate owned

Nonperforming loans as % of loans

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

Capital Adequacy (c):

CET 1 risk-based capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Tier 1 leverage ratio

Other financial data:

Net interest margin (a)

Effective income tax rate

Efficiency ratio (b)

Selected period end balances:

Loans, net of unearned income

Allowance for loan losses

Total deposits

Long-term debt

Total stockholders equity

(a) Tax-equivalent.

See Table 1 - Explanation of

Non-GAAP Financial Measures.

(b) Efficiency ratio is the result of noninterest expense divided by the sum of

noninterest income and tax-equivalent net interest income.

Companys wholly-owned subsidiary, AuburnBank.

Table 3 - Average Balance and Net Interest Income Analysis

Year ended December 31

(Dollars in thousands)

Interest-earning assets:

Loans and loans held for sale (1)

Securities - taxable

Securities - tax-exempt (2)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest-earning assets

Cash and due from banks

Interest-bearing liabilities:

Savings and money market

Certificates of deposits

Total interest-bearing deposits

Short-term borrowings

Long-term debt

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders equity

Total liabilities and and stockholders equity

Net interest income and margin

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

computation of average balances.

(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 21%.

Table 4 - Volume and Rate Variance Analysis

Years ended December 31, 2019 vs.

Years ended December 31, 2018 vs.

Due to change in

(Dollars in thousands)

Interest income:

Loans and loans held for sale

Securities - taxable

Securities - tax-exempt (1)

Total securities

Federal funds sold

Interest bearing bank deposits

Total interest income

Interest expense:

Savings and money market

Certificates of deposits

Total interest-bearing deposits

Short-term borrowings

Long-term debt

Total interest expense

Net interest income

Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 21% for 2019 and 2018 and 34% for 2017.

Changes that are not solely a result of volume or rate have been allocated to volume.

Table 5 - Loan Portfolio Composition

(In thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

unearned income

Loans, net of unearned income

allowance for loan losses

Table 6 - Loan Maturities and Sensitivities to Changes in Interest Rates

December 31, 2019

(Dollars in thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Table 7 - Allowance for Loan Losses and Nonperforming Assets

Year ended December 31

(Dollars in thousands)

Allowance for loan losses:

Balance at beginning of period

Commercial and industrial

Commercial real estate

Residential real estate

Consumer installment

Total charge-offs

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total recoveries

Net (charge-offs) recoveries

Provision for loan losses

Ending balance

as a % of loans

as a % of nonperforming loans

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

Nonperforming assets:

Nonaccrual/nonperforming loans

Other real estate owned

Total nonperforming assets

as a % of loans and other real estate owned

as a % total assets

Nonperforming loans as a % of total loans

Accruing loans 90 days or more past due

Table 8 - Allocation of Allowance for Loan Losses

(Dollars in thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Residential real estate

Consumer installment

Total allowance for loan losses

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

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

(Dollars in thousands)

December 31, 2019

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 7A is set forth in ITEM 7 under the caption Market and Liquidity Risk Management and is incorporated

herein by reference.

2 “Selected Financial Data” and general discussion in Item 7, “Management’s

Discussion and Analysis of

Financial Condition and Results of Operations”.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity