What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-30 compared with 2021-04-30 · 528 added, 391 removed, 1395 unchanged (40% of the section changed)

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condensed consolidated financial statements and related

notes for the quarters ended March 31, 2021 and 2020,

as well as the information contained in our Annual Report on Form

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

notes for the quarters and six months ended June 30, 2021

and 2020, as well as the information contained in our Annual

Report on Form 10-K for the year ended December 31,

2020 and our Quarterly Reports on Form 10-Q.

Special Notice Regarding Forward-Looking Statements

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words such as “may,” “will,” “anticipate,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”

“estimate,” “continue,” “plan,” “point to,” “project,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expec

t,” “estimate,” “continue,” “plan,” “point to,” “project,”

“could,” “intend,” “target” and other similar words and

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See Part II, Item 1A.

“RISK FACTORS”.

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

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the Bank Holding Company Act of 1956, as amended (the

The Company was incorporated in Delaware in 1990, and

in 1994 it succeeded its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

The Company was incorporated in Delaware in

1990, and in 1994 it succeeded its Alabama predecessor as the

bank holding company controlling AuburnBank, an Alabama

state member bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since

The Company and its predecessor have controlled

the Bank since 1984.

As a bank holding

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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

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”).

Summary of Results of Operations

Quarter ended March 31,

(Dollars in thousands, except per share data)

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands, except per share amounts)

Net interest income (a)

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(a) Tax-equivalent.

See "Table 1 - Explanation

of Non-GAAP Financial Measures."

See "Table 1 - Explanation of Non-GAAP Financial Measures."

Financial Summary

The Company’s net earnings were $4.3

million for the first quarter of 2021, compared to $1.8 million for the first

Basic and diluted earnings per share were $0.56 per share for the first quarter

of 2021, compared to $0.50

for the first quarter of 2020.

million for the first six months of 2021, compared to $3.5

million for the first six

months of 2020.

Basic and diluted earnings per share were $1.21 per

share for the first six months of 2021, compared to

$0.97 per share for the first six months of 2020.

Total revenue declined

approximately 5% due to reduced net interest margin,

reduced mortgage lending income and

approximately 1% lower outstanding loans compared to

June 30, 2020.

Net interest income (tax-equivalent) was $12.2 million for the

first quarter of 2021, a 4% decrease compared to $6.3

for the first quarter of 2020.

This decrease was primarily due to net interest margin compression

resulting from the Federal

Reserve’s interest rate reductions

in response to COVID-19.

first six months of 2021, a 3% decrease compared to $12.5

million for the first six months of 2020.

This decrease was primarily due to net interest margin

compression resulting from

the Federal Reserve’s interest rate

reductions and bond purchases in response to COVID-19.

Our securities holdings,

which generally yield less than loans, increased as a percentage

of our total assets reflecting deployment of increased

Net interest margin (tax-equivalent) decreased

to 2.66% in the

first quarter of 2021, compared to 3.23% for the first quarter of

primarily due to the lower interest rate environment

and changes in our asset mix from the significant increase in

customer deposits.

At March 31, 2021, the Company’s

allowance for loan losses was $5.7 million, or 1.23%

to 2.63% in the first six months of 2021, compared to

the first six months of 2020,

primarily due to the lower interest rate environment and changes in

our asset mix resulting

from the significant increase in deposits from government stimulus

and relief programs and customers’ increased savings.

Net interest income (tax-equivalent) included $0.5 million in PPP

loan fees, net of related costs for the six months of 2021,

compared to $0.2 million for the six months of 2020.

At June 30, 2021, the Company’s allowance

for loan losses was $5.1 million, or 1.12%

of total loans, compared to $5.6

million, or 1.22%

of total loans, at December 31, 2020, and $4.9

million, or 1.10%

of total loans, at March 31, 2020.

of total loans, at December 31, 2020, and $5.3 million, or 1.1

4% of total loans, at June 30, 2020.

Excluding PPP loans, which are guaranteed by the SBA, the Company’s

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of total loans

at March 31, 2021.

The Company had no provision for loan losses during the first quarter

compared to a provision

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

The provision for loan losses during the first quarter of 2020

was related to changes in economic conditions and portfolio

trends driven by COVID-19 and resulting adverse economic

conditions, including higher unemployment in our primary market area.

The provision for loan losses is based upon

various estimates and judgements, including the absolute level of loans,

loan growth, credit

quality and the amount of net

Noninterest income was $1.2 million for the first quarter of 2021

respectively.

For the first quarter of 2021,

noninterest income included an increase in mortgage lending income

of $0.3 million.

The increase was primarily due to an

increase in mortgage lending income as lower interest rates for

mortgage loans positively affected refinance activity and

pricing margins improved.

For the first quarter of 2020, noninterest income included $0.3

million in non-taxable death

benefits from bank-owned life insurance.

Noninterest expense was $4.7 million for the first quarter of 2021

compared to $4.9 million for the first quarter of 2020.

The decrease was primarily due to a reduction of $0.

million in various expenses related to the redevelopment of the

Company’s headquarters in downtown

Income tax expense was $0.4 million for the first quarter of 2021

respectively, reflecting

an effective tax rate of

17.41% and 17.80%, respectively.

The Company paid cash dividends of $0.26 per share in the first quarter

of 2021, an increase of 2% from the same period of

At March 31, 2021, the Bank’s regulatory

capital ratios were well above the minimum amounts required

capitalized” under current regulatory standards with a total

risk-based capital ratio of 18.25%, a tier 1 leverage ratio

and a common equity tier 1 (“CET1”) ratio of 17.21%

at March 31, 2021.

at June 30, 2021.

The Company had a negative provision for loan losses of $0.6

million during the first six months of

compared to a provision for loan losses of $0.9

million during the first six months of 2020.

The negative provision

for loan losses was primarily related to improvements in economic conditions

in our primary market area,

improvements in our asset quality.

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 $2.3 million for the first six months

of 2021 compared to $2.6 million for the first six months of

The decrease was primarily due to a $0.3 million non-taxable

death benefit from bank-owned life insurance received

Noninterest expense was $9.6 million for the first six months

of 2021 compared to $9.8 million for the first six months of

The decrease was primarily due to a reduction of $0.7 million in various

expenses related to the redevelopment of

the Company’s headquarters in downtown

This decrease was mostly offset by increases in salaries

expense of $0.3 million and other noninterest expense of $0.2

million during the first six months of 2021.

Income tax expense was $0.9 million for the first six months

of 2021 compared to $0.8 million during the first six months

reflecting an increase in earnings before tax and effective

tax rate of 17.76% and 17.86%, respectively.

The Company paid cash dividends of $0.52 per share in the first six months

of 2021, an increase of 2% from the same

period of 2020.

Our $0.8 million of share repurchases since June 30, 2020

resulted in 20,511 fewer outstanding common

shares at June 30, 2021.

At June 30, 2021, the Bank’s regulatory capital

ratios were well above the minimum amounts

required to be “well capitalized” under current regulatory standa

rds with a total risk-based capital ratio of 17.94%, a tier

leverage ratio of 9.81%

and a common equity

tier 1 (“CET1”) ratio of 17.03%

at June 30, 2021.

For the second quarter of 2021, net earnings were $2.3

million, or $0.65 per share, compared to $1.7 million, or $0.47

share, for the second quarter of 2020.

Net interest income (tax-equivalent) was $6.1 million for the second quarter

a 2% decrease compared to $6.2 million for the second quarter

This decrease was primarily due to net interest

margin compression resulting from the Federal Reserve’s

interest rate reductions and bond purchases in response

Our securities holdings, which generally yield less than loans, increased

as a percentage of our total assets

reflecting deployment of increased deposits.

The Company’s net interest margin

(tax-equivalent) decreased to 2.60% in the

second quarter of 2021, compared to 2.95% for the second

quarter of 2020 primarily due to the lower rate environment and

changes in our asset mix resulting from the significant increase in deposits

from government stimulus and relief programs

and customers’ increased savings.

Net interest income (tax-equivalent)

included $0.2 million in PPP loan fees, net of

related costs for both the second quarter of 2021 and

The Company recorded a negative provision for loan losses of

$0.6 million during the second quarter of 2021 compared

to $0.5 million in provision for loan losses during the second

quarter 2020.

The negative provision for loan losses was primarily related to

improvements in economic conditions in our

primary market areas, and related improvements in our asset quality.

Noninterest income was $1.1 million in the second

quarter of 2021, compared to $1.4 million in the second quarter

The decrease in noninterest income was primarily

due to a decrease in mortgage lending income of $0.3 million

as refinance activity slowed in our primary market area.

Noninterest expense was $4.9 million in the second quarter of

2021 compared to $5.0 million during the second quarter of

Income tax expense was $0.5

million for the second quarter of 2021 compared to $0.4 million during second

of 2020 reflecting an increase in earnings before taxes.

The Company's effective tax rate for the second

quarter of 2021

was 18.06%, compared to 17.93% in the second quarter of 2020.

COVID-19 Impact Assessment

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Auburn University announced its guidelines for the

remainder of the 2020/2021 school year,

which involves both remote and in person instruction as well as other social

distancing measures.

The economic effects of these measures are

not presently known.

remainder of the 2021 school year, which involves

resumption of full on-site operations as well as other measures.

COVID-19 has significantly affected local state, national

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limited branch lobby service to appointment only while continuing to

operate our branch drive-thru

facilities and ATMs.

On June 1, 2020, we re-opened some of our branch lobbies as permitted

by state public health guidelines.

We continue to

provide services through our online and other electronic channels.

In addition, we established remote work access to help

employees stay at home where job duties permit.

• Our 2021 Annual Shareholders’ Meeting will, again, be

a virtual meeting.

Shareholders that wish to participate

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

operate our branch drive-thru facilities and ATMs.

As permitted by state public health guidelines, on June 1, 2020,

we re-opened some of our branch lobbies.

we opened our remaining branch lobbies.

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.

are focused on servicing the financial needs of our commercial and consumer

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time of the request;

are a participating lender in the PPP.

PPP loans are forgivable, in whole or in part, if the

proceeds are used for

payroll and other permitted purposes in accordance with the requirements

were a participating lender in the PPP.

PPP loans are forgivable, in whole or in part, if the proceeds

for payroll and other permitted purposes in accordance with

the requirements of the PPP.

These loans carry a fixed rate of

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approximately $1.5 million in fees related to our PPP loans during 2020.

which will be recognized net of

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

On December 27,

2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,

Through June 30, 2021, we have

recognized all but $16 thousand of these fees, net of related costs.

On December 27, 2020, the Economic Aid to Hard-Hit Small

Businesses, Nonprofits, and Venues

Act (the “Economic Aid

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in additional PPP loans.

A summary of PPP loans extended under the Economic Aid Act

The Economic Aid Act also permits the collection of a higher amount of PPP

participating banks.

A summary of PPP loans extended during the six months ended

June 30, 2021 under the Economic Aid Act follows:

(Dollars in thousands)

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Up to $350,000

As of March 31, 2021, we collected approximately $0.9 million

in fees related to PPP loans under the Economic Aid Act,

which will be recognized net of related costs, as a yield adjustment

over the life of the underlying PPP loans.

amended and extended, is scheduled to stop accepting applications

by May 31, 2021.

As of June 30, 2021, we collected approximately $1.0

million in fees related to PPP loans under the Economic Aid Act.

Through June 30, 2021, we have recognized $0.2 million of these fees, net

of related costs.

We continue to closely

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developments as those occur.

Our results of operations for the quarter ended March 31, 2021

and our financial condition at

that date reflect only the initial effects of the pandemic,

and may not be indicative of future results or financial conditions,

including possible additional monetary or fiscal stimulus, and

the possible effects of the expiration or extension of

temporary accounting and bank regulatory relief measures in response

to the COVID-19 pandemic.

As of March 31, 2021,

all of our capital ratios were in excess of all regulatory requirements

to be well capitalized.

Our results of operations for the six months ended June 30,

and our financial condition

at that date reflect only the initial effects of the pandemic,

and may not be indicative of future results or financial

conditions, including possible additional monetary or fiscal stimulus,

and the possible effects of the expiration or extension

of temporary accounting and bank regulatory relief measures

in response to the COVID-19 pandemic.

As of June 30, 2021,

all of our capital ratios were in excess of all regulatory requirements to

be well capitalized.

effects of the COVID-19 pandemic on our borrowers

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a critical accounting estimate because the level of the allowance

based upon management’s evaluati

on of the loan portfolio, past loan loss experience, current

based upon management’s evaluation

of the loan portfolio, past loan loss experience, current

asset quality trends, known

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A loan may be

partially charged-off after a

partially charged-off

“confirming event” has occurred, which serves to validate that

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scheduled in the loan agreement.

An impairment allowance is recognized

if the fair value of the loan is less than the recorded investment in

An impairment allowance is recognized if the fair value of the

loan is less than the recorded investment in the loan.

impairment is recognized through the allowance.

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future cash flows discounted at the loan’s

effective interest rate, or if the loan is collateral dependent,

the impairment

effective interest rate, or if the loan is collateral dependen

t, the impairment

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

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The level of allowance maintained is believed by management to

be adequate to absorb probable losses inherent in the

to absorb probable losses inherent in the

portfolio at the balance sheet date.

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may make adjustments based, in part, on loss rates of peer

At March 31, 2021 and December 31, 2020, and for the periods

then ended, the Company adjusted its historical

loss rates for the commercial real estate portfolio segment based,

At June 30, 2021 and December 31, 2020, and for the periods

then ended, the Company adjusted its historical loss

rates for the commercial real estate portfolio segment based,

in part, on loss rates of peer bank groups.

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probable losses for several “qualitative and environmental” factors.

The allocation for qualitative and environmental factors

The allocation for qualitative and environmental fact

is particularly subjective and does not lend itself to exact mathematical

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loan losses and its balance would decrease.

quarter ended March 31, 2021, the Company increased its look

-back period to 48 quarters to continue to include losses

quarter ended June 30, 2021, the Company increased its look-back

period to 49 quarters to continue to include losses

incurred by the Company beginning with the first quarter of 2009.

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economic downturn in its loss history.

During 2020, the Company

adjusted certain qualitative and economic factors related to changes in

economic conditions and portfolio trends driven by

the impact of the COVID-19 pandemic and resulting adverse

economic conditions, including higher unemployment in our

primary market area.

Further adjustments may be made in the future as a result of the continuing

COVID-19 pandemic.

economic conditions driven by the impact of the

novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse

economic conditions, including higher

unemployment in our primary market area.

During the second quarter of 2021,

the Company adjusted certain qualitative

and economic factors to reflect improvements in economic conditions

in our primary market area.

Further adjustments may

be made in the future as a result of the continuing COVID-19

Assessment for Other-Than-Temporary

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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

be required to sell the debt security before recovery,

the other-than-temporary write-down is equal to the entire

between the debt security’s amortized

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sales, and other estimates used to determine the fair value of other

At March 31, 2021 and December 31, 2020 the Company had no OREO

At June 30, 2021 and December 31, 2020 the Company had no OREO properties.

Asset Valuation

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it is more likely than not that we will realize the benefits of these

deductible differences at March 31, 2021.

deductible differences at June 30, 2021.

The amount of

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Sheet and Interest Rates

Quarter ended March 31,

Six months ended June 30,

(Dollars in thousands)

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Net interest income (tax-equivalent) was $12.2 million for the

first quarter of 2021 compared to $6.3 million for the first

quarter of 2020.

first six months of 2021 compared to $12.5 million for the

first six months of 2020.

This decrease was due to a decline in the Company’s

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The tax-equivalent yield on total interest-earning assets decreased

by 80 basis points to 2.96% in the first quarter of 2021

compared to 3.76%

in the first quarter of 2020.

This decrease was primarily due to the lower rate environment,

150 basis point reduction in the federal funds rate that occurred

in March 2020 and changes in our asset mix due to the

significant increase in customer deposits.

The cost of total interest-bearing liabilities decreased 34

basis points in the first quarter of 2021 from the first quarter of

2020 to 0.44%.

The net decrease in our funding costs was primarily due to lower

prevailing market interest rates.

costs declined less than the declines in rates earned on our interest

by 67 basis points to 2.91% in the first six months of

2021 compared to 3.58% in the first six months of 2020.

This decrease was primarily due to the lower interest rate

environment and changes in our asset mix resulting from the

significant increase in deposits from government stimulus and

relief programs and customers’ increased savings.

The cost of total interest-bearing liabilities decreased by 33 basis

points to 0.42% in the first six months of 2021 compared

to 0.75% in the first six months of 2020.

The net decrease in our funding costs was primarily due to lower prevail

market interest rates.

Our funding costs declined less than the rates earned on our interest

earning assets.

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Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary

to provide an allowance for loan losses that

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,

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outstanding loans.

There was no provision for loan losses for the first quarter

of 2021, compared to $0.4 million in

provision for loan losses for the first quarter of 2020.

The provision for loan losses during the first quarter of 2020

related to changes in economic conditions and portfolio trends

driven by the impact of COVID-19 and resulting adverse

economic conditions,

including higher unemployment in our primary market area.

The provision for loan losses is based

upon various factors, including the absolute level of loans, loan

growth, the credit quality,

and the amount of net charge-

offs or recoveries.

The Company recorded a negative provision for loan losses of $0.6

million for the first six months of

2021, compared to $0.9 million in provision for loan losses for

the first six months of 2020.

The negative provision for

loan losses was primarily related to improvements in economic conditions

in our primary market area.

The provision for

loan losses is based upon various factors, including the absolute level

of loans, loan growth, the credit quality,

amount of net charge-offs or recoveries.

Based upon its assessment of the loan portfolio, management

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for loan losses as a percentage of total loans was 1.12%

at March 31, 2021, compared to 1.22% at December 31,

March 31, 2021,

the Company’s allowance for loan losses was

of total loans, excluding PPP loans, which are

at June 30, 2021, compared to 1.22% at December 31, 2020.

June 30, 2021,

the Company’s allowance for loan losses

was 1.17% of total loans, excluding PPP loans, which are

guaranteed by the SBA.

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Noninterest Income

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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Total noninterest income

The decrease in service charges on deposit accounts

was driven by a decline in consumer spending activity as a result of

COVID-19 pandemic.

The Company’s income from mortgage

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allowance is adjusted as the fair value changes.

An increase in mortgage interest rates typically results in

an increase in the

An increase in mortgage interest rates typically results in an increase in

fair value of the MSRs while a decrease in mortgage interest rates

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mortgage lending income.

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

Origination income, net

Origination income

Servicing fees, net

Total mortgage lending income

The increase in mortgage lending income was primarily due to

an increase in mortgage refinance activity.

The Company’s

income from mortgage lending typically fluctuates as mortgage

interest rates change and is primarily attributable to the

origination and sale of new mortgage loans.

The increase in mortgage lending income was partially offset

by a decrease in

servicing fees, net of related amortization expense as prepayment

speeds increased in the first quarter of 2021, resulting in

increased amortization expense.

The Company’s income from mortgage

lending typically fluctuates as mortgage interest rates change and

attributable to the origination and sale of new mortgage loans.

Origination income decreased in the second quarter of 2021

compared to the second quarter of 2020 due to a decrease in refinance

activity in our primary market area.

Mortgage loan

origination volume also declined for the first six months of 2021

compared to the first six months of 2020, but origination

income increased due to improved pricing margins.

Income from bank-owned life insurance decreased primarily due to

$0.3 million in non-taxable death benefits received in

the first quarter of 2020.

The assets that support these policies

are administered by the life insurance carriers and the income

we receive (i.e., increases or decreases in the cash surrender

value of the policies and death benefits received) on these

policies is dependent upon the returns the insurance carriers are

able to earn on the underlying investments that support

these policies.

Earnings on these policies are generally not taxable.

The assets that support these policies are administered by the life

insurance carriers and the income we receive (i.e.,

increases or decreases in the cash surrender value of the policies

and death benefits received) on these policies is dependent

upon the returns the insurance carriers are able to earn on the

underlying investments that support these policies.

on these policies are generally not taxable.

Noninterest Expense

Quarter ended March 31,

Quarter ended June 30,

Six months ended June 30,

(Dollars in thousands)

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Total noninterest expense

The increase in salaries and benefits was primarily due to a decrease

in deferred costs related to the PPP loan program,

routine annual wage and benefit increases, and management increasing

the minimum hourly wage for banking positions to

The decrease in net occupancy and equipment expense was primarily

due to a reduction of $0.2 million in various expenses

related to the redevelopment of the Company’s

headquarters in downtown Auburn.

Income tax expense was $0.4 million for the first quarter of 2021

respectively, reflecting an effective

17.41% and 17.80%, respectively.

BALANCE SHEET ANALYSIS

due to a reduction 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 was $0.9

million for the first six months of 2021 compared to $0.8

million for the first six months of

reflecting an increase in earnings before taxes and effective tax

rate of 17.76% and 17.86%, respectively.

BALANCE SHEET ANALYSI

Securities available-for-sale were $3

59.6 million at March 31, 2021 compared to $335.2 million at December 31,

This increase reflects an increase in the amortized cost basis

of securities available-for-sale of $31.3 million, and

of $6.9 million in the fair value of securities available-for-sale.

84.9 million at June 30, 2021 compared to $335.2 million at December

increase reflects an increase in the amortized cost basis of securities

available-for-sale of $54.2 million, and a decrease

$4.5 million in the fair value of securities available-for

The increase in the amortized cost basis of securities

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securities were 1.72%

in the first six

months of 2021 and 2.45%

in the first six months of 2020.

(In thousands)

7 unchanged sentences

Total loans, net of unearned

income, were $461.9 million at March 31, 2021,

an increase of $0.2 million from $461.7

million at December 31, 2020.

income, were $457.0 million at June 30, 2021, a

decrease of $4.7 million from $461.7 million

at December 31, 2020.

Excluding PPP loans, total loans net of unearned income, were $4

$433.2 million, a decrease

of $9.5 million, or 2% from $442.7 million at December 31, 2020

This decrease was primarily due to a decrease in

commercial and industrial loans, excluding PPP loans, commercial

and land development loans and residential real estate

loans of $3.6 million, $3.2 million and $1.3 million, respectively,

as lower rates increased refinance activity and payoffs

Four loan categories represented the majority of the loan portfolio

at March 31, 2021:

commercial real estate (55%),

residential real estate (18%), commercial and industrial (19%) and

35.7 million, a decrease of $6.5

million, or 1% from $442.3 million at December 31, 2020

Four loan categories represented the majority of the loan

portfolio at June 30, 2021:

commercial real estate (53%), residential real

estate (18%), commercial and industrial (19%) and

construction and land development (8%).

Approximately 20% of the Company’s

commercial real estate loans were classified as owner

-occupied at March 31, 2021.

Approximately 21%

of the Company’s commercial

real estate loans were

classified as owner-occupied at June 30, 2021.

Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $8.1

or 2% of total loans, at March 31, 2021, compared to $8.7

million, or 2% of total loans, at December 31, 2020.

or 2% of total loans, at June 30, 2021, compared to $8.7 million,

or 2% of total loans, at December 31, 2020.

residential real estate mortgage loans with a consumer purpose,

the Company had no loans that required interest-only

payments at March 31, 2021 and December 31, 2020.

The Company’s residential real

estate mortgage portfolio does not

include any option ARM loans, subprime loans, or any mater

ial amount of other high-risk consumer mortgage products.

payments at June 30, 2021 and December 31, 2020.

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 4.47

in the first quarter of 2021 and 4.81% in the first

quarter of 2020.

The specific economic and credit risks associated with our loan portfolio

include, but are not limited to, the effects of

in the first six months of 2021 and 4.75% in the first

six months of 2020.

The specific economic and credit risks associated with our loan po

rtfolio include, but are not limited to, the effects of

current economic conditions, including the COVID-19 pandemic’s

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this internal limit.

At March 31, 2021, the Bank had no

At June 30, 2021, the Bank had no

relationships exceeding these limits.

We periodically

analyze our commercial

and industrial and commercial real estate loan portfolios to

determine if a

analyze our commercial and industrial and commercial real estate

loan portfolios to determine if a

concentration of credit risk exists in any one or more industries.

5 unchanged sentences

following classes exceeded 25% of the Bank’s

total risk-based capital at March 31, 2021 (and related

total risk-based capital at June 30, 2021 (and related

balances at December

3 unchanged sentences

Shopping centers

Supplemental COVID-19 Industry Exposure

We have identified

certain commercial sectors with enhanced risk resulting from

the impact of COVID-19.

these sectors represent 86% of the Company’s

total COVID-19 related modifications at March 31, 2021

and December 31,

The table below

summarizes the loans outstanding for these sectors at March

31, 2021 and December 31, 2020.

Portfolio Segment

Commercial and

Construction and

land development

% of Total Loans

March 31, 2021:

Shopping centers

Retail, excluding shopping centers

Portfolio Segment

Commercial and

Construction and

land development

% of Total Loans

December 31, 2020:

Shopping centers

Retail, excluding shopping centers

COVID-19 Modifications

In light of disruptions in economic conditions caused by COVID

29 unchanged sentences

prudent dependent on a borrower’s business type.

of March 31, 2021 we have granted loan payment deferrals or

payments of interest-only primarily on commercial and

industrial and commercial real estate loans totaling $32.4

million, or 7% of total loans, compared to $32.3 million, or 7%

total loans at December 31, 2020.

of June 30, 2021 and December 31, 2020, we have granted loan

payment deferrals or payments of interest-only primarily

on commercial and industrial and commercial real estate loans totaling

$32.3 million, or 7% of total loans, compared to

$112.7 million, or 24% of total loans at

June 30, 2020, the end of the first quarterly period we began loan

modifications to

assist customers through the COVID-19 pandemic.

Based on discussions with our borrowers, we expect

these to further

decline over the second half of 2021.

The tables below provide information concerning the composition

of these COVID-19 modifications as of March 31,

of these COVID-19 modifications as of June 30, 2021

and December 31, 2020.

COVID-19 Modifications

Modification Types

2 unchanged sentences

Interest Only

March 31, 2021:

June 30, 2021:

Commercial and industrial

5 unchanged sentences

Residential real estate

COVID-19 Modifications within High Exposure Commercial Real Estate Segments

COVID-19 Modifications within Commercial Real

Estate Segment

(Dollars in thousands)

Loans Modified

Segment Loans

March 31, 2021:

June 30, 2021:

December 31, 2020:

13 unchanged sentences

The allowance for loan losses was $5.

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

June 30, 2021 compared to $5.6 million at December 31,

2020, which management believed to be adequate at each of the

4 unchanged sentences

A summary of the changes in the allowance for loan losses and certain

asset quality ratios for the first quarter of 2021 and

the previous four quarters is presented below.

asset quality ratios for the second quarter of 2021

and the previous four quarters is presented below.

(Dollars in thousands)

1 unchanged sentence

Commercial and industrial

Residential real estate

Consumer installment

25 unchanged sentences

allowance for loan losses to total loans outstanding was 1.12

at March 31, 2021, compared to 1.22% at December 31,

At March 31, 2021, the Company’s allowance

at June 30, 2021, compared to 1.22% at December 31,

At June 30, 2021, the Company’s allowance

for loan losses was 1.17% of total loans, excluding PPP

future, the allowance to total loans outstanding ratio will increase

or decrease to the extent the factors that influence our

quarterly allowance assessment, including the duration and magnitude

of COVID-19 effects, in their entirety either improve

In addition, our regulators, as an integral part of their examination process,

will periodically review the

In the future,

the allowance to total loans outstanding ratio will increase or

decrease to the extent the factors that influence our quarterly

allowance assessment, including the duration and magnitude of COVID

-19 effects, in their entirety either improve or

In addition, our regulators, as an integral part of their examination

process, will periodically review the

Company’s allowance for loan

6 unchanged sentences

million and $0.5

million in nonperforming assets at March 31, 2021 and December

million in nonperforming assets at June 30, 2021 and December 31,

respectively.

The table below provides information concerning total nonperforming

assets and certain asset quality ratios for the first

assets and certain asset quality ratios for the second

quarter of 2021 and the previous four quarters.

2 unchanged sentences

Nonaccrual loans

Other real estate owned

Total nonperforming assets

3 unchanged sentences

The table below provides information concerning the composition

of nonaccrual loans for the first quarter of 2021

previous four quarters.

of nonaccrual loans for the second quarter of 2021

the previous four quarters.

(In thousands)

10 unchanged sentences

and in the process of collection.

At March 31, 2021, the

At June 30, 2021, the

Company had $0.6

1 unchanged sentence

The Company had no loans 90 days or more past due and still

accruing at March 31, 2021 compared to $0.1 million at

accruing at June 30, 2021 compared to $0.1 million at

December 31, 2020.

The table below provides information concerning the composition

of OREO for the first quarter of 2021 and the previous

four quarters.

(In thousands)

Other real estate owned:

Total other real estate

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

Potential Problem Loans

6 unchanged sentences

standards established by the Federal

Reserve, the Company’s primary regulator,

for loans classified as substandard, excluding nonaccrual loans.

Reserve, the Company’s pri

mary regulator, for loans classified as

substandard, excluding nonaccrual loans.

problem loans, which are not included in nonperforming assets,

amounted to $2.8 million, or 0.6% of total loans at March

31, 2021, and $2.9 million, or 0.6%

of total loans at December 31, 2020.

amounted to $2.8 million, or 0.6% of total loans at June 30,

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

The table below provides information concerning the composition

of potential problem loans for the first quarter of 2021

of potential problem loans for the second quarter of 2021

and the previous four quarters.

7 unchanged sentences

Total potential problem loans

At March 31, 2021 the Company had $0.2 million in potential

problem loans that were past due at least 30 days, but less

than 90 days.

At June 30, 2021 the Company had $0.1 million in potential problem

loans that were past due at least 30 days, but less than

The following table is a summary of the Company’s

1 unchanged sentence

but less than

for the first quarter of 2021 and the previous four quarters

for the second quarter of 2021 and the previous four quarters

(In thousands)

6 unchanged sentences

Total deposits increased

$40.8 million, or 5% to $880.6 million at March 31,

2021, compared to $839.8 million at

December 31, 2020.

Noninterest-bearing deposits were $265.9 million, or 30

of total deposits, at March 31, 2021,

compared to $245.4 million, or 29%

$83.7 million, or 10% to $923.5 million at June 30, 2021,

compared to $839.8 million at December

Noninterest-bearing deposits were $283.4 million, or 31% of total

deposits, at June 30, 2021, compared to

$245.4 million, or 29%

of total deposits at December 31, 2020.

These increases reflect deposits from

customers who received PPP loans, the impact of government stimulus

checks, delayed tax payments

and less customer

spending during the COVID-19 pandemic.

These increases reflect deposits from customers who

received PPP loans, the impact of government stimulus checks, delayed

and less customer spending during

the COVID-19 pandemic.

The average rate paid on total interest-bearing deposits was 0.42

in the first quarter of 2021 compared to 0.78% in the

first quarter of 2020.

in the first six months of 2021 compared to 0.75% in the

first six months of 2020.

The decline in average rates paid on total interest-bearing deposits

was largely driven by generally

lower market interest rates.

Other Borrowings

6 unchanged sentences

million with none

outstanding at March 31, 2021, and at December 31,

outstanding at June 30, 2021, and at December 31, 2020,

respectively.

Securities sold under

agreements to repurchase

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

Securities sold

under agreements to repurchase

totaled $3.5 million at June 30, 2021, compared to $2.4

million at December 31, 2020.

The average rate paid on short-term borrowings was 0.50% in the first quarter

of 2021 and 2020.

The Company had no long-term debt at March 31, 2021

and December 31, 2020.

The average rate paid on short-term borrowings was 0.50% in the first six

months of 2021 compared to 0.75% in the first

six months of 2020.

The Company had no long-term debt at June 30, 2021 and

December 31, 2020.

CAPITAL ADEQUACY

The Company’s consolidated stockholders’

equity was $103.6 million and $107.7 million as of March 31,

equity was $106.0 million and $107.7 million as of June 30,

December 31, 2020, respectively.

2 unchanged sentences

loss due to the change in unrealized gains (losses) on securities

available-for-sale, net of tax of $5.1 million and

dividends paid of $0.9 million, partially offset by net

earnings of $2.0 million.

available-for-sale, net of tax of $3.3 million, cash dividends

paid of $1.8 million, and repurchases of the Company’s

stock of $0.8 million.

During the first six months of 2021, the

Company repurchased 20,511 shares under the

Company’s current stock repurchase program.

These shares were

repurchased at an average cost per share of $36.56 and

a total cost of $0.8 million.

These decreases in the Company’s

consolidated stockholders’ equity were partially offset

by net earnings of $4.3 million.

On January 1, 2015, the Company and Bank became subject

3 unchanged sentences

The rules included the implementation of a

capital conservation buffer that is added

to the minimum requirements for capital adequacy purposes.

capital conservation buffer that is added to

the minimum requirements for capital adequacy purposes.

conservation buffer was subject to a three year phase

6 unchanged sentences

executive officers.

At March 31, 2021, the Bank’s

ratio was sufficient to meet the fully phased-in conservation

At June 30, 2021,

the Bank’s ratio was sufficient to

meet the fully phased-in conservation buffer.

Effective March 20, 2020, the Federal Reserve and

21 unchanged sentences

total risk-based capital ratio was 17.94%

at March 31, 2021.

These ratios exceed the minimum regulatory capital

percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1

risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio,

and 10.0% for total risk-based capital ratio to be considered

“well capitalized.”

The Bank’s capital conservation buffer

at March 31, 2021.

at June 30, 2021.

These ratios exceed the minimum regulatory capital percentages

of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0%

for total risk-based capital ratio to be considered “well capitalized.”

The Bank’s capital conservation

buffer was 9.94%

June 30, 2021.

MARKET AND LIQUIDITY RISK MANAGEMENT

12 unchanged sentences

In the normal course of business, the Company is exposed to

market risk arising from fluctuations in interest rates.

market risk arising

from fluctuations in interest rates.

measures and evaluates interest rate risk so that the Bank can meet customer

9 unchanged sentences

with ALCO forecasts of market interest rates for the next

months and other factors in order to produce various earnings

12 months and other factors in order to produce

various earnings

simulations and estimates.

9 unchanged sentences

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

At March 31, 2021, our earnings simulation model indicated

that we were in compliance with the policy guidelines noted

At June 30, 2021, our earnings simulation model indicated that

we were in compliance with the policy guidelines noted

Economic Value

27 unchanged sentences

100 basis points

At March 31, 2021, our EVE model indicated that we were in

compliance with the policy guidelines noted above.

At June 30, 2021, our EVE model indicated that we were in compliance

with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate

41 unchanged sentences

hedging instruments.

At March 31, 2021 and December 31,

2020, the Company had no derivative contracts designated as

part of a hedging relationship to assist in managing its interest

rate sensitivity.

At June 30, 2021 and December 31,

2020, the Company had no derivative contracts designated as part

of a hedging relationship to assist in managing its interest rate

Liquidity Risk Management

37 unchanged sentences

funding for its growth.

Advances include both fixed and

variable terms and may be

Advances include

both fixed and variable terms and may be

taken out with varying maturities.

At March 31, 2021,

the Bank had a remaining available line of credit with the FHLB of

At June 30, 2021, the Bank had

a remaining available line of credit with the FHLB of

$297.9 million.

At March 31, 2021, the Bank also had $41.0

At June 30, 2021, the Bank also had $41.0

million of available federal funds lines with no borrowings

9 unchanged sentences

and Contractual Obligations

At March 31, 2021, the Bank had outstanding standby letters of credit

At June 30, 2021, the Bank had outstanding standby letters of credit

million and unfunded loan commitments

21 unchanged sentences

applicable federal, state, and local laws, among other

As of March 31, 2021,

the unpaid principal balance of residential mortgage loans, which we

have originated and sold, but

As of June 30, 2021,

the unpaid principal balance of residential mortgage loans, which we have originated

and sold, but

retained the servicing rights was $260.8 million.

16 unchanged sentences

The Company was not required to repurchase any loans during the first

quarter of 2021 as a result of representation and

six months of 2021 as a result of representation and

warranty provisions contained in the Company’s

sale agreements with Fannie Mae, and had no pending repurchase

make-whole requests at March 31, 2021.

make-whole requests at June 30, 2021.

We service all residential

35 unchanged sentences

their purchased loans.

As of March 31, 2021,

As of June 30, 2021,

we do not believe that this exposure is material due to the historical level of

23 unchanged sentences

make any advances to Fannie Mae on principal and interest

on such mortgage loans where the borrower is entitled to forbeara

on such mortgage loans where the borrower is entitled to forbearance.

Effects of Inflation and Changing Prices

93 unchanged sentences

Net interest income (Tax

Six months ended June 30,

(In thousands)

Net interest income (GAAP)

Tax-equivalent adjustment

Net interest income (Tax

- Selected Quarterly Financial Data

14 unchanged sentences

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

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 a % of total loans

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

Capital Adequacy:

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 average balances:

Loans, net of unearned income

Total deposits

Total stockholders’ equity

Selected period end balances:

Loans, net of unearned income

Allowance for loan losses

Total deposits

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.

wholly-owned subsidiary, AuburnBank.

- Selected Financial Data

Six months ended June 30,

(Dollars in thousands, except per share amounts)

Results of Operations

Net interest income (a)

tax-equivalent adjustment

Net interest income (GAAP)

Noninterest income

Total revenue

Provision for loan losses

Noninterest expense

Income tax expense

Per share data:

Basic and diluted net earnings

Cash dividends declared

Weighted average shares outstanding:

Basic and diluted

Shares outstanding, at period end

12 unchanged sentences

Nonperforming loans as a % of total loans

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

Annualized net recoveries as a % of average loans

Capital Adequacy:

18 unchanged sentences

See "Table 1 - Explanation of Non-GAAP Financial Measures."

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

noninterest income and tax-equivalent net interest income.

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

sum of noninterest income and tax-equivalent net interest income.

1 unchanged sentence

Balances and Net Interest Income Analysis

Quarter ended March 31,

Quarter ended June 30,

(Dollars in thousands)

27 unchanged sentences

tax rate of 21%.

Balances and Net Interest Income Analysis

Six months ended June 30,

(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

Time deposits

Total interest-bearing deposits

Short-term borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders' equity

Total liabilities and

stockholders' equity

Net interest income and margin (tax-equivalent)

(1) Average loan balances

are shown net of unearned income and loans on nonaccrual stat

us have been included

in the computation of average balances.

(2) Yields on tax-exempt securities

have been computed on a tax-equivalent basis using a federal income

tax rate of 21%.

- Loan Portfolio Composition

13 unchanged sentences

Commercial and industrial

Residential real estate

Consumer installment

3 unchanged sentences

as a % of loans

as a % of loans (excluding PPP loans)

as a % of nonperforming loans

2 unchanged sentences

Nonaccrual loans

Other real estate owned

Total nonperforming assets

5 unchanged sentences

- Allocation of Allowance for Loan Losses

Second Quarter

First Quarter

2 unchanged sentences

Second Quarter

First Quarter

(Dollars in thousands)

8 unchanged sentences

(Dollars in thousands)

March 31, 2021

June 30, 2021

3 months or less

10 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis