AUBURN NATIONAL BANCORPORATION, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) September 30, December 31, (Dollars in thousands, except share data) 2021 2020 Assets: Cash and due from banks $ 21,363 $ 14,868 Federal funds sold 38,616 28,557 Interest-bearing bank deposits 87,405 69,150 Cash and cash equivalents 147,384 112,575 Securities available-for-sale 407,474 335,177 Loans held for sale 577 3,418 Loans, net of unearned income 453,232 461,700 Allowance for loan losses ( 5,119 ) ( 5,618 ) Loans, net 448,113 456,082 Premises and equipment, net 34,994 22,193 Bank-owned life insurance 19,534 19,232 Other assets 7,795 7,920 Total assets $ 1,065,871 $ 956,597 Liabilities: Deposits: Noninterest-bearing $ 299,150 $ 245,398 Interest-bearing 655,821 594,394 Total deposits 954,971 839,792 Federal funds purchased and securities sold under agreements to repurchase 3,310 2,392 Accrued expenses and other liabilities 2,661 6,723 Total liabilities 960,942 848,907 Stockholders' equity: Preferred stock of $ .01 par value; authorized 200,000 shares; no shares issued — — Common stock of $ .01 par value; authorized 8,500,000 shares; issued 3,957,135 shares 39 39 Additional paid-in capital 3,794 3,789 Retained earnings 109,018 105,617 Accumulated other comprehensive income, net 2,751 7,599 Less treasury stock, at cost - 427,797 shares and 390,859 at September 30, 2021 and December 31, 2020, respectively ( 10,673 ) ( 9,354 ) Total stockholders’ equity 104,929 107,690 Total liabilities and stockholders’ equity $ 1,065,871 $ 956,597 See accompanying notes to consolidated financial statements Table of Contents 4 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited) Quarter ended September 30, Nine months ended September 30, (Dollars in thousands, except share and per share data) 2021 2020 2021 2020 Interest income: Loans, including fees $ 5,127 $ 5,453 $ 15,417 $ 16,359 Securities: Taxable 1,048 913 3,006 3,080 Tax-exempt 441 461 1,337 1,390 Federal funds sold and interest-bearing bank deposits 49 26 105 332 Total interest income 6,665 6,853 19,865 21,161 Interest expense: Deposits 620 983 1,900 3,005 Short-term borrowings 4 2 12 6 Total interest expense 624 985 1,912 3,011 Net interest income 6,041 5,868 17,953 18,150 Provision for loan losses — 250 ( 600 ) 1,100 Net interest income after provision for loan losses 6,041 5,618 18,553 17,050 Noninterest income: Service charges on deposit accounts 149 139 419 437 Mortgage lending 268 702 1,241 1,615 Bank-owned life insurance 100 109 302 615 Other 397 408 1,244 1,202 Securities gains, net 15 16 15 103 Total noninterest income 929 1,374 3,221 3,972 Noninterest expense: Salaries and benefits 2,893 2,802 8,641 8,230 Net occupancy and equipment 436 457 1,292 1,974 Professional fees 232 230 814 877 Other 1,148 1,164 3,547 3,387 Total noninterest expense 4,709 4,653 14,294 14,468 Earnings before income taxes 2,261 2,339 7,480 6,554 Income tax expense 386 403 1,313 1,156 Net earnings $ 1,875 $ 1,936 $ 6,167 $ 5,398 Net earnings per share: Basic and diluted $ 0.53 $ 0.54 $ 1.74 $ 1.51 Weighted average shares outstanding: Basic and diluted 3,536,320 3,566,239 3,552,387 3,566,184 See accompanying notes to consolidated financial statements Table of Contents 5 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited) Quarter ended September 30, Nine months ended September 30, (Dollars in thousands) 2021 2020 2021 2020 Net earnings $ 1,875 $ 1,936 $ 6,167 $ 5,398 Other comprehensive (loss) income, net of tax: Unrealized net holding (loss) gain on securities ( 1,493 ) ( 5 ) ( 4,837 ) 5,387 Reclassification adjustment for net gain on securities recognized in net earnings ( 11 ) ( 12 ) ( 11 ) ( 77 ) Other comprehensive (loss) income (1,504) (17) ( 4,848 ) 5,310 Comprehensive income $ 371 $ 1,919 $ 1,319 $ 10,708 See accompanying notes to consolidated financial statements Table of Contents 6 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Unaudited) Accumulated Common Additional other Shares Common paid-in Retained comprehensive Treasury (Dollars in thousands, except share data) Outstanding Stock capital earnings income (loss) stock Total Quarter ended September 30, 2021 Balance, June 30, 2021 3,545,855 $ 39 $ 3,792 $ 108,060 $ 4,255 $ ( 10,103 ) $ 106,043 Net earnings — — — 1,875 — — 1,875 Other comprehensive loss — — — — ( 1,504 ) — ( 1,504 ) Cash dividends paid ($ .26 per share) — — — ( 917 ) — — ( 917 ) Stock repurchases ( 16,582 ) — — — — ( 570 ) ( 570 ) Sale of treasury stock 65 — 2 — — — 2 Balance, September 30, 2021 3,529,338 $ 39 $ 3,794 $ 109,018 $ 2,751 $ ( 10,673 ) $ 104,929 Quarter ended September 30, 2020 Balance, June 30, 2020 3,566,176 $ 39 $ 3,785 $ 103,444 $ 7,386 $ ( 9,355 ) $ 105,299 Net earnings — — — 1,936 — — 1,936 Other comprehensive loss — — — — ( 17 ) — ( 17 ) Cash dividends paid ($ .255 per share) — — — ( 909 ) — — ( 909 ) Sale of treasury stock 100 — 4 — — 1 5 Balance, September 30, 2020 3,566,276 $ 39 $ 3,789 $ 104,471 $ 7,369 $ ( 9,354 ) $ 106,314 Nine months ended September 30, 2021 Balance, December 31, 2020 3,566,276 $ 39 $ 3,789 $ 105,617 $ 7,599 $ ( 9,354 ) $ 107,690 Net earnings — — — 6,167 — — 6,167 Other comprehensive loss — — — — ( 4,848 ) — ( 4,848 ) Cash dividends paid ($ .78 per share) — — — ( 2,766 ) — — ( 2,766 ) Stock repurchases ( 37,093 ) — — — — ( 1,320 ) ( 1,320 ) Sale of treasury stock 155 — 5 — — 1 6 Balance, September 30, 2021 3,529,338 $ 39 $ 3,794 $ 109,018 $ 2,751 $ ( 10,673 ) $ 104,929 Nine months ended September 30, 2020 Balance, December 31, 2019 3,566,146 $ 39 $ 3,784 $ 101,801 $ 2,059 $ ( 9,355 ) $ 98,328 Net earnings — — — 5,398 — — 5,398 Other comprehensive income — — — — 5,310 — 5,310 Cash dividends paid ($ .765 per share) — — — ( 2,728 ) — — ( 2,728 ) Sale of treasury stock 130 — 5 — — 1 6 Balance, September 30, 2020 3,566,276 $ 39 $ 3,789 $ 104,471 $ 7,369 $ ( 9,354 ) $ 106,314 See accompanying notes to consolidated financial statements Table of Contents 7 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, (Dollars in thousands) 2021 2020 Cash flows from operating activities: Net earnings $ 6,167 $ 5,398 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses ( 600 ) 1,100 Depreciation and amortization 967 1,336 Premium amortization and discount accretion, net 2,954 1,950 Net gain on securities available-for-sale ( 15 ) ( 103 ) Net gain on sale of loans held for sale ( 1,168 ) ( 1,569 ) Net gain on other real estate owned — ( 52 ) Loans originated for sale ( 39,632 ) ( 60,173 ) Proceeds from sale of loans 43,234 58,707 Increase in cash surrender value of bank-owned life insurance ( 302 ) ( 334 ) Income recognized from death benefit on bank-owned life insurance — ( 282 ) Net increase in other assets ( 216 ) ( 1,235 ) Net decrease in accrued expenses and other liabilities ( 2,430 ) ( 585 ) Net cash provided by operating activities 8,959 4,158 Cash flows from investing activities: Proceeds from sales of securities available-for-sale — 21,029 Proceeds from prepayments and maturities of securities available-for-sale 53,724 39,909 Purchase of securities available-for-sale ( 135,434 ) ( 140,714 ) Decrease (increase) in loans, net 8,569 ( 11,562 ) Net purchases of premises and equipment ( 13,287 ) ( 1,527 ) Proceeds from bank-owned life insurance death benefit — 694 Decrease (increase) in FHLB stock 267 ( 9 ) Proceeds from sale of other real estate owned — 151 Net cash used in investing activities ( 86,161 ) ( 92,029 ) Cash flows from financing activities: Net increase in noninterest-bearing deposits 53,752 42,264 Net increase in interest-bearing deposits 61,427 57,564 Net increase in federal funds purchased and securities sold under agreements to repurchase 918 1,001 Stock repurchases ( 1,320 ) — Dividends paid ( 2,766 ) ( 2,728 ) Net cash provided by financing activities 112,011 98,101 Net change in cash and cash equivalents 34,809 10,230 Cash and cash equivalents at beginning of period 112,575 92,443 Cash and cash equivalents at end of period $ 147,384 $ 102,673 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,914 $ 3,011 Income taxes 2,145 1,956 Supplemental disclosure of non-cash transactions: Real estate acquired through foreclosure — 99 See accompanying notes to consolidated financial statements Table of Contents 8 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individual and corporate customers in Lee County, Alabama and surrounding counties through its wholly owned subsidiary, AuburnBank (the “Bank”). The Company does not have any segments other than banking that are considered material. Basis of Presentation and Use of Estimates The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair statement of the financial position and the results of operations for all periods presented. All such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”). Revenue Recognition On January 1, 2018, the Company implemented Accounting Standards Update (“ASU” or “updates”) 2014-09, Revenue from Contracts with Customers , codified at Accounting Standards Codification (“ASC”) 606. The Company adopted ASC 606 using the modified retrospective transition method. The majority of the Company’s revenue stream is generated from interest income on loans and securities which are outside the scope of ASC 606. The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, investment services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606: ● Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period. ● Gains on sales of OREO – A gain on sale should be recognized when a contract for sale exists and control of the asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale exists, including a determination that the institution will collect substantially all of the consideration to which it is entitled. In addition to the loan-to-value, the analysis is based on various other factors, including the credit quality of the borrower, the structure of the loan, and any other factors that may affect collectability. Table of Contents 9 Subsequent Events The Company has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to September 30, 2021. The Company does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report. Accounting Developments In the first nine months of 2021, the Company did not adopt any new accounting guidance. NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30, 2021 and 2020, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation. The basic and diluted net earnings per share computations for the respective periods are presented below Quarter ended September 30, Nine months ended September 30, (Dollars in thousands, except share and per share data) 2021 2020 2021 2020 Basic and diluted: Net earnings $ 1,875 $ 1,936 $ 6,167 $ 5,398 Weighted average common shares outstanding 3,536,320 3,566,239 3,552,387 3,566,184 Net earnings per share $ 0.53 $ 0.54 $ 1.74 $ 1.51 NOTE 3: SECURITIES At September 30, 2021 and December 31, 2020, respectively, all securities within the scope of ASC 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available- for-sale by contractual maturity at September 30, 2021 and December 31, 2020, respectively, are presented below. 1 year 1 to 5 5 to 10 After 10 Fair Gross Unrealized Amortized (Dollars in thousands) or less years years years Value Gains Losses Cost September 30, 2021 Agency obligations (a) $ 10,033 39,042 70,434 — 119,509 1,657 1,492 $ 119,344 Agency MBS (a) — 779 31,041 181,794 213,614 2,188 1,840 213,266 State and political subdivisions 381 979 14,916 58,075 74,351 3,440 280 71,191 Total available-for-sale $ 10,414 40,800 116,391 239,869 407,474 7,285 3,612 $ 403,801 December 31, 2020 Agency obligations (a) $ 5,048 24,834 55,367 12,199 97,448 3,156 98 $ 94,390 Agency MBS (a) — 1,154 20,502 141,814 163,470 3,245 133 160,358 State and political subdivisions 477 632 8,405 64,745 74,259 3,988 11 70,282 Total available-for-sale $ 5,525 26,620 84,274 218,758 335,177 10,389 242 $ 325,030 (a) Includes securities issued by U.S. government agencies or government-sponsored entities. Securities with aggregate fair values of $ 173.0 million and $ 166.9 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law. Table of Contents 10 Included in other assets on the accompanying consolidated balance sheets are non-marketable equity investments. The carrying amounts of non-marketable equity investments were $ 1.2 million and $ 1.4 million at September 30, 2021 and December 31, 2020, respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve Bank (“FRB”) stock, and stock in a privately held financial institution. Gross Unrealized Losses and Fair Value The fair values and gross unrealized losses on securities at September 30, 2021 and December 31, 2020, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below. Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) Value Losses Value Losses Value Losses September 30, 2021: Agency obligations $ 50,658 1,051 15,002 441 $ 65,660 1,492 Agency MBS 122,322 1,678 10,810 162 133,132 1,840 State and political subdivisions 10,249 177 2,104 103 12,353 280 Total $ 183,229 2,906 27,916 706 $ 211,145 3,612 December 31, 2020: Agency obligations $ 15,416 98 — — $ 15,416 98 Agency MBS 41,488 133 — — 41,488 133 State and political subdivisions 2,945 11 — — 2,945 11 Total $ 59,849 242 — — $ 59,849 242 For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the securities before recovery of the amortized cost basis, which may be maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. In determining whether a loss is temporary, the Company considers all relevant information including: ● the length of time and the extent to which the fair value has been less than the amortized cost basis; ● adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement); ● the historical and implied volatility of the fair value of the security; ● the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future; ● failure of the issuer of the security to make scheduled interest or principal payments; ● any changes to the rating of the security by a rating agency; and ● recoveries or additional declines in fair value subsequent to the balance sheet date. Table of Contents 11 Agency obligations The unrealized losses associated with agency obligations were primarily driven by declines in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support. Agency mortgage-backed securities (“MBS”) The unrealized losses associated with agency MBS were primarily driven by changes in interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support. Securities of U.S. states and political subdivisions The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by declines in interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a bond insurer, but management did not rely on the guarantee in making its investment decision. These securities will continue to be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost basis of these securities. The carrying values of the Company’s investment securities could decline in the future if the financial condition of an issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the security. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. Other-Than-Temporarily Impaired Securities Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At September 30, 2021 and December 31, 2020, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the quarters ended September 30, 2021 and 2020, respectively. Realized Gains and Losses The following table presents the gross realized gains and losses on sales of securities. Quarter ended September 30, Nine months ended September 30, (Dollars in thousands) 2021 2020 2021 2020 Gross realized gains $ 15 78 $ 15 184 Gross realized losses — ( 62 ) — ( 81 ) Realized gains, net $ 15 16 $ 15 103 Table of Contents 12 NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES September 30, December 31, (Dollars in thousands) 2021 2020 Commercial and industrial $ 79,202 $ 82,585 Construction and land development 34,890 33,514 Commercial real estate: Owner occupied 57,138 54,033 Hotel/motel 44,412 42,900 Multi-family 41,291 40,203 Other 109,957 118,000 Total commercial real estate 252,798 255,136 Residential real estate: Consumer mortgage 32,558 35,027 Investment property 47,647 49,127 Total residential real estate 80,205 84,154 Consumer installment 7,060 7,099 Total loans 454,155 462,488 Less: unearned income ( 923 ) ( 788 ) Loans, net of unearned income $ 453,232 $ 461,700 Loans secured by real estate were approximately 81.0% of the Company’s total loan portfolio at September 30, 2021. At September 30, 2021, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas. In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk. The following describes the risk characteristics relevant to each of the portfolio segments and classes. Commercial and industrial (“C&I”) — includes loans to finance business operations, equipment purchases, or other needs for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower. We participated as a lender in the Paycheck Protection Program (“PPP”), which ended May 31, 2021. PPP loans are forgivable in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. The Company had 178 and 265 PPP loans with an aggregate outstanding principal balance of $ 13.3 million and $ 19.0 million, included in this category, as of September 30, 2021 and December 31, 2020, respectively. Construction and land development (“C&D”) — includes both loans and credit lines for the purpose of purchasing, carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is dependent upon the sale or refinance of the real estate collateral. Commercial real estate (“CRE”) — includes loans disaggregated into four classes: (1) owner occupied, (2) hotel/motel, (3) multifamily and (4) other. ● Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property. Table of Contents 13 ● Hotel/motel – includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower. ● Multi-family – primarily includes loans to finance income-producing multi-family properties . Loans in this class include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower. ● Other – primarily includes loans to finance income-producing commercial properties that are not owner occupied. Loans in this class include loans for neighborhood retail centers, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local businesses. Generally , the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower. Residential real estate (“RRE”) — includes loans disaggregated into two classes: (1) consumer mortgage and (2) investment property. ● Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history , and property value. ● Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower. Consumer installment — includes loans to individuals both secured by personal property and unsecured. Loans include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and, if applicable, property value. Table of Contents 14 The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of September 30, 2021 and December 31, 2020. Accruing Accruing Total 30-89 Days Greater than Accruing Non- Total (Dollars in thousands) Current Past Due 90 days Loans Accrual Loans September 30, 2021: Commercial and industrial $ 79,134 68 — 79,202 — $ 79,202 Construction and land development 34,890 — — 34,890 — 34,890 Commercial real estate: Owner occupied 57,138 — — 57,138 — 57,138 Hotel/motel 44,412 — — 44,412 — 44,412 Multi-family 41,291 — — 41,291 — 41,291 Other 109,764 — — 109,764 193 109,957 Total commercial real estate 252,605 — — 252,605 193 252,798 Residential real estate: Consumer mortgage 32,273 16 69 32,358 200 32,558 Investment property 47,161 393 — 47,554 93 47,647 Total residential real estate 79,434 409 69 79,912 293 80,205 Consumer installment 7,035 25 — 7,060 — 7,060 Total $ 453,098 502 69 453,669 486 $ 454,155 December 31, 2020: Commercial and industrial $ 82,355 230 — 82,585 — $ 82,585 Construction and land development 33,453 61 — 33,514 — 33,514 Commercial real estate: Owner occupied 54,033 — — 54,033 — 54,033 Hotel/motel 42,900 — — 42,900 — 42,900 Multi-family 40,203 — — 40,203 — 40,203 Other 117,759 29 — 117,788 212 118,000 Total commercial real estate 254,895 29 — 254,924 212 255,136 Residential real estate: Consumer mortgage 33,169 1,503 140 34,812 215 35,027 Investment property 49,014 6 — 49,020 107 49,127 Total residential real estate 82,183 1,509 140 83,832 322 84,154 Consumer installment 7,069 29 1 7,099 — 7,099 Total $ 459,955 1,858 141 461,954 534 $ 462,488 Allowance for Loan Losses The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Table of Contents 15 The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs. The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge- offs, net of recoveries of amounts previously charged-off. In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan. As part of the Company’s quarterly assessment of the allowance, management evaluates the loan portfolio’s five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment. The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At September 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. The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors. The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of 2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the quarter ended September 30, 2021, the Company increased its look-back period to 50 quarters to continue to include losses incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look- back period to incorporate the effects of at least one economic downturn in its loss history. During 2020, the Company adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact of the 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. Table of Contents 16 The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods. September 30, 2021 (Dollars in thousands) Commercial and industrial Construction and land development Commercial real estate Residential real estate Consumer installment Total Quarter ended: Beginning balance $ 829 639 2,704 838 97 $ 5,107 Charge-offs — — — — — — Recoveries 1 — — 7 4 12 Net recoveries 1 — — 7 4 12 Provision for loan losses ( 14 ) ( 49 ) 119 ( 46 ) ( 10 ) — Ending balance $ 816 590 2,823 799 91 $ 5,119 Nine months ended: Beginning balance $ 807 594 3,169 944 104 $ 5,618 Charge-offs — — — ( 1 ) ( 5 ) ( 6 ) Recoveries 55 — — 33 19 107 Net recoveries 55 — — 32 14 101 Provision for loan losses ( 46 ) ( 4 ) ( 346 ) ( 177 ) ( 27 ) ( 600 ) Ending balance $ 816 590 2,823 799 91 $ 5,119 September 30, 2020 (Dollars in thousands) Commercial and industrial Construction and land development Commercial real estate Residential real estate Consumer installment Total Quarter ended: Beginning balance $ 679 613 2,915 954 147 $ 5,308 Charge-offs — — — — ( 4 ) ( 4 ) Recoveries 8 — — 8 5 21 Net recoveries 8 — — 8 1 17 Provision for loan losses 111 ( 31 ) 205 ( 8 ) ( 27 ) 250 Ending balance $ 798 582 3,120 954 121 $ 5,575 Nine months ended: Beginning balance $ 577 569 2,289 813 138 $ 4,386 Charge-offs ( 4 ) — — — ( 36 ) ( 40 ) Recoveries 63 — — 53 13 129 Net recoveries (charge-offs) 59 — — 53 ( 23 ) 89 Provision for loan losses 162 13 831 88 6 1,100 Ending balance $ 798 582 3,120 954 121 $ 5,575 Table of Contents 17 The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of September 30, 2021 and 2020. Collectively evaluated (1) Individually evaluated (2) Total Allowance Recorded Allowance Recorded Allowance Recorded for loan investment for loan investment for loan investment (Dollars in thousands) losses in loans losses in loans losses in loans September 30, 2021: Commercial and industrial (3) $ 816 79,202 — — 816 79,202 Construction and land development 590 34,890 — — 590 34,890 Commercial real estate 2,823 252,605 — 193 2,823 252,798 Residential real estate 799 80,112 — 93 799 80,205 Consumer installment 91 7,060 — — 91 7,060 Total $ 5,119 453,869 — 286 5,119 454,155 September 30, 2020: Commercial and industrial (4) $ 798 98,244 — — 798 98,244 Construction and land development 582 31,651 — — 582 31,651 Commercial real estate 3,120 250,776 — 216 3,120 250,992 Residential real estate 954 84,943 — 111 954 85,054 Consumer installment 121 7,731 — — 121 7,731 Total $ 5,575 473,345 — 327 5,575 473,672 (1) Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies , and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans. (2) Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables , and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans. (3) Includes $13.3 million of PPP loans for which no allowance for loan losses was allocated due to 100% SBA guarantee. (4) Includes $36.5 million of PPP loans for which no allowance for loan losses was allocated due to 100% SBA guarantee. Credit Quality Indicators The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows: ● Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral. ● Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification. ● Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected . ● Nonaccrual – includes loans where management has determined that full payment of principal and interest is not expected. Table of Contents 18 (Dollars in thousands) Pass Special Mention Substandard Accruing Nonaccrual Total loans September 30, 2021: Commercial and industrial $ 78,786 142 274 — $ 79,202 Construction and land development 34,656 3 231 — 34,890 Commercial real estate: Owner occupied 55,570 1,438 130 — 57,138 Hotel/motel 36,649 7,763 — — 44,412 Multi-family 37,765 3,526 — — 41,291 Other 107,818 1,904 42 193 109,957 Total commercial real estate 237,802 14,631 172 193 252,798 Residential real estate: Consumer mortgage 30,516 317 1,525 200 32,558 Investment property 47,095 136 323 93 47,647 Total residential real estate 77,611 453 1,848 293 80,205 Consumer installment 7,036 5 19 — 7,060 Total $ 435,891 15,234 2,544 486 $ 454,155 December 31, 2020: Commercial and industrial $ 79,984 2,383 218 — $ 82,585 Construction and land development 33,260 — 254 — 33,514 Commercial real estate: Owner occupied 51,265 2,627 141 — 54,033 Hotel/motel 35,084 7,816 — — 42,900 Multi-family 36,673 3,530 — — 40,203 Other 116,498 1,243 47 212 118,000 Total commercial real estate 239,520 15,216 188 212 255,136 Residential real estate: Consumer mortgage 32,518 397 1,897 215 35,027 Investment property 48,501 187 332 107 49,127 Total residential real estate 81,019 584 2,229 322 84,154 Consumer installment 7,069 7 23 — 7,099 Total $ 440,852 18,190 2,912 534 $ 462,488 Table of Contents 19 Impaired loans The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-off are not included in the following tables. The related allowance generally represents the following components that correspond to impaired loans: ● Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans). ● Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans). ● All troubled debt restructurings. The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at September 30, 2021 and December 31, 2020. September 30, 2021 (Dollars in thousands) Unpaid principal balance (1) Charge-offs and payments applied (2) Recorded investment (3) Related allowance With no allowance recorded: Commercial real estate: Other $ 208 ( 15 ) 193 $ — Total commercial real estate 208 ( 15 ) 193 — Residential real estate: Investment property 101 ( 8 ) 93 — Total residential real estate 101 ( 8 ) 93 — Total impaired loans $ 309 ( 23 ) 286 $ — (1) Unpaid principal balance represents the contractual obligation due from the customer. (2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status. (3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses. December 31, 2020 (Dollars in thousands) Unpaid principal balance (1) Charge-offs and payments applied (2) Recorded investment (3) Related allowance With no allowance recorded: Commercial real estate: Other $ 216 ( 4 ) 212 $ — Total commercial real estate 216 ( 4 ) 212 — Residential real estate: Investment property 109 ( 2 ) 107 — Total residential real estate 109 ( 2 ) 107 — Total impaired loans $ 325 ( 6 ) 319 $ — (1) Unpaid principal balance represents the contractual obligation due from the customer. (2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status. (3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any related allowance for loan losses. Table of Contents 20 The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the respective periods. Quarter ended September 30, 2021 Nine months ended September 30, 2021 Average Total interest Average Total interest recorded income recorded income (Dollars in thousands) investment recognized investment recognized Impaired loans: Commercial real estate: Other $ 196 — 202 — Total commercial real estate 196 — 202 — Residential real estate: Investment property 95 — 100 — Total residential real estate 95 — 100 — Total $ 291 — 302 — Quarter ended September 30, 2020 Nine months ended September 30, 2020 Average Total interest Average Total interest recorded income recorded income (Dollars in thousands) investment recognized investment recognized Impaired loans: Commercial real estate: Other $ 217 — 87 — Total commercial real estate 217 — 87 — Residential real estate: Investment property 111 — 44 — Total residential real estate 111 — 44 — Total $ 328 — 131 — Troubled Debt Restructurings Impaired loans also include troubled debt restructurings (“TDRs”). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10’s TDR classifications for a limited period of time to account for the effects of COVID-19. On April 7, 2020, the Federal Reserve and the other banking regulators issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (the “Interagency Statement on COVID-19 Loan Modifications”), to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain COVID-19-related modifications. The Interagency Statement on COVID -19 Loan Modifications was supplemented on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions. If a loan modification is eligible, a bank may elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible under section 4013, or if the bank elects not to account for the loan modification under section 4013, the Revised Statement includes criteria when a bank may presume a loan modification is not a TDR in accordance with ASC 310-40. Table of Contents 21 The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the Interagency Statement on COVID-19 Loan Modifications in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. In the normal course of business, management may grant concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date, or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect, when due, all amounts owed, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In making the determination of whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each modification. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure. Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by establishing a valuation allowance as part of the allowance for loan losses or a charge -off to the allowance for loan losses. In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment. The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of September 30, 2021 and December 31, 2020, respectively. TDRs Related (Dollars in thousands) Accruing Nonaccrual Total Allowance September 30, 2021 Commercial real estate: Other $ — 193 193 $ — Total commercial real estate — 193 193 — Residential real estate: Investment property — 93 93 $ — Total residential real estate — 93 93 — Total $ — 286 286 $ — TDRs Related (In thousands) Accruing Nonaccrual Total Allowance December 31, 2020 Commercial real estate: Other $ — 212 212 $ — Total commercial real estate — 212 212 — Investment property — 107 107 — Total residential real estate — 107 107 — Total $ — 319 319 $ — Table of Contents 22 At September 30, 2021 there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured. The following table summarizes loans modified in a TDR during the respective periods both before and after their modiciation. . Quarter ended September 30, Nine months ended September 30, Pre- Post - Pre- Post - modification modification modification modification Number outstanding outstanding Number outstanding outstanding of recorded recorded of recorded recorded (Dollars in thousands) contracts investment investment contracts investment investment 2020: Commercial real estate: Other — $ — — 1 $ 216 216 Total commercial real estate — — — 1 216 216 Residential real estate: Investment property — — — 3 111 111 Total residential real estate — — — 3 111 111 Total — $ — — 4 $ 327 327 There were no loans modified in a TDR during the quarter and nine months ended September 30, 2021. During the quarter and nine months ended September 30, 2021 and 2020, respectively, there were no loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due). NOTE 5: MORTGAGE SERVICING RIGHTS, NET Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The Company has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets. The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income. Table of Contents 23 The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods. Quarter ended September 30, Nine months ended September 30, (Dollars in thousands) 2021 2020 2021 2020 MSRs, net: Beginning balance $ 1,360 $ 1,271 $ 1,330 $ 1,299 Additions, net 93 234 407 471 Amortization expense ( 127 ) ( 183 ) ( 411 ) ( 448 ) Ending balance $ 1,326 $ 1,322 $ 1,326 $ 1,322 Valuation allowance included in MSRs, net: Beginning of period $ — $ — $ — $ — End of period — — — — Fair value of amortized MSRs: Beginning of period $ 1,833 $ 1,690 $ 1,489 $ 2,111 End of period 1,776 1,521 1,776 1,521 NOTE 6: FAIR VALUE Fair Value Hierarchy “Fair value” is defined by ASC 820, Fair Value Measurements and Disclosures , as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly. Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset or liability. Level changes in fair value measurements Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the nine months ended ended September 30, 2021, there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities. Table of Contents 24 Assets and liabilities measured at fair value on a recurring basis Securities available-for-sale Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company obtains pricing from third party pricing services. These third party pricing services consider observable data that may include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis, management reviews the pricing received from the third party pricing services for reasonableness given current market conditions. As part of its review, management may obtain non-binding third party broker quotes to validate the fair value measurements. In addition, management will periodically submit pricing provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by the third party pricing service with its own price and will review the significant assumptions and valuation methodologies used with management. The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above). Quoted Prices in Significant Active Markets Other Significant for Observable Unobservable Identical Assets Inputs Inputs (Dollars in thousands) Amount (Level 1) (Level 2) (Level 3) September 30, 2021: Securities available-for-sale: Agency obligations $ 119,509 — 119,509 — Agency RMBS 213,614 — 213,614 — State and political subdivisions 74,351 — 74,351 — Total securities available-for-sale 407,474 — 407,474 — Total assets at fair value $ 407,474 — 407,474 — December 31, 2020: Securities available-for-sale: Agency obligations $ 97,448 — 97,448 — Agency RMBS 163,470 — 163,470 — State and political subdivisions 74,259 — 74,259 — Total securities available-for-sale 335,177 — 335,177 — Total assets at fair value $ 335,177 — 335,177 — Assets and liabilities measured at fair value on a nonrecurring basis Loans held for sale Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined using quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value hierarchy. Impaired Loans Loans considered impaired under ASC 310-10-35, Receivables , are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. Table of Contents 25 The fair value of impaired loans was primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above. Mortgage servicing rights, net MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy. The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above): Quoted Prices in Active Markets Other Significant for Observable Unobservable Carrying Identical Assets Inputs Inputs (Dollars in thousands) Amount (Level 1) (Level 2) (Level 3) September 30, 2021: Loans held for sale $ 577 — 577 — Loans, net (1) 286 — — 286 Other assets (2) 1,326 — — 1,326 Total assets at fair value $ 2,189 — 577 1,612 December 31, 2020: Loans held for sale $ 3,418 — 3,418 — Loans, net (1) 319 — — 319 Other assets (2) 1,322 — — 1,322 Total assets at fair value $ 5,059 — 3,418 1,641 (1) Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses. (2) Represents MSRs, net. These are carried at lower of cost or estimated fair value. Table of Contents 26 Quantitative Disclosures for Level 3 Fair Value Measurements At September 30, 2021 and December 31, 2020, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at September 30, 2021 and December 31, 2021, the significant unobservable inputs used in the fair value measurements are presented below. Weighted Carrying Significant Average (Dollars in thousands) Amount Valuation Technique Unobservable Input Range of Input September 30, 2021: Impaired loans $ 286 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Mortgage servicing rights, net 1,326 Discounted cash flow Prepayment speed or CPR 13.0 - 15.8 15.2 Discount rate 9.5 - 11.5 9.5 December 31, 2020: Impaired loans $ 319 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Mortgage servicing rights, net 1,330 Discounted cash flow Prepayment speed or CPR 18.2 - 36.4 20.7 Discount rate 10.0 - 12.0 10.0 Fair Value of Financial Instruments ASC 825, Financial Instruments , requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Loans, net Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion. Loans held for sale Fair values of loans held for sale are determined using quoted secondary market prices for similar loans. Time Deposits Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar remaining maturities. Table of Contents 27 The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at September 30, 2021 and December 31, 2020 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits. Fair value approximates carrying value in these financial liabilities due to these products having no stated maturity. Additionally, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase. Fair Value Hierarchy Carrying Estimated Level 1 Level 2 Level 3 (Dollars in thousands) amount fair value inputs inputs Inputs September 30, 2021: Financial Assets: Loans, net (1) $ 448,113 $ 443,166 $ — $ — $ 443,166 Loans held for sale 577 595 — 595 — Financial Liabilities: Time Deposits $ 159,285 $ 160,372 $ — $ 160,372 $ — December 31, 2020: Financial Assets: Loans, net (1) $ 456,082 $ 451,816 $ — $ — $ 451,816 Loans held for sale 3,418 3,509 — 3,509 — Financial Liabilities: Time Deposits $ 160,401 $ 162,025 $ — $ 162,025 $ — (1) Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit price notion. Table of Contents 28