AUBURN NATIONAL BANCORPORATION, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) March 31, December 31, (Dollars in thousands, except share data) 2022 2021 Assets: Cash and due from banks $ 22,085 $ 11,210 Federal funds sold 71,249 77,420 Interest-bearing bank deposits 96,243 67,629 Cash and cash equivalents 189,577 156,259 Securities available-for-sale 417,459 421,891 Loans held for sale 977 1,376 Loans, net of unearned income 428,417 458,364 Allowance for loan losses ( 4,658 ) ( 4,939 ) Loans, net 423,759 453,425 Premises and equipment, net 42,123 41,724 Bank-owned life insurance 19,734 19,635 Other assets 16,035 10,840 Total assets $ 1,109,664 $ 1,105,150 Liabilities: Deposits: Noninterest-bearing $ 308,338 $ 316,132 Interest-bearing 709,404 678,111 Total deposits 1,017,742 994,243 Federal funds purchased and securities sold under agreements to repurchase 3,994 3,448 Accrued expenses and other liabilities 1,517 3,733 Total liabilities 1,023,253 1,001,424 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 3,795 3,794 Retained earnings 111,123 109,974 Accumulated other comprehensive (loss) income, net ( 17,455 ) 891 Less treasury stock, at cost - 440,164 shares and 436,650 at March 31, 2022 and December 31, 2021, respectively ( 11,091 ) ( 10,972 ) Total stockholders’ equity 86,411 103,726 Total liabilities and stockholders’ equity $ 1,109,664 $ 1,105,150 See accompanying notes to consolidated financial statements Table of Contents 4 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited) Quarter ended March 31, (Dollars in thousands, except share and per share data) 2022 2021 Interest income: Loans, including fees $ 4,850 $ 5,178 Securities Taxable 1,336 949 Tax-exempt 419 452 Federal funds sold and interest bearing bank deposits 63 28 Total interest income 6,668 6,607 Interest expense: Deposits 585 666 Short-term borrowings 5 4 Total interest expense 590 670 Net interest income 6,078 5,937 Provision for loan losses ( 250 ) — Net interest income after provision for loan losses 6,328 5,937 Noninterest income: Service charges on deposit accounts 142 132 Mortgage lending 253 549 Bank-owned life insurance 99 103 Other 414 398 Total noninterest income 908 1,182 Noninterest expense: Salaries and benefits 2,950 2,851 Net occupancy and equipment 434 438 Professional fees 230 256 Other 1,287 1,145 Total noninterest expense 4,901 4,690 Earnings before income taxes 2,335 2,429 Income tax expense 254 423 Net earnings $ 2,081 $ 2,006 Net earnings per share: Basic and diluted $ 0.59 $ 0.56 Weighted average shares outstanding: Basic and diluted 3,518,657 3,566,299 See accompanying notes to consolidated financial statements Table of Contents 5 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Loss (Unaudited) Quarter ended March 31, (Dollars in thousands) 2022 2021 Net earnings $ 2,081 $ 2,006 Other comprehensive loss, net of tax: Unrealized net holding loss on securities ( 18,346 ) ( 5,132 ) Other comprehensive loss ( 18,346 ) ( 5,132 ) Comprehensive loss $ ( 16,265 ) $ ( 3,126 ) 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 March 31, 2022 Balance, December 31, 2021 3,520,485 $ 39 $ 3,794 $ 109,974 $ 891 $ ( 10,972 ) $ 103,726 Net earnings — — — 2,081 — — 2,081 Other comprehensive loss — — — — ( 18,346 ) — ( 18,346 ) Cash dividends paid ($ .265 per share) — — — ( 932 ) — — ( 932 ) Stock repurchases ( 3,559 ) — — — — ( 120 ) ( 120 ) Sale of treasury stock 45 — 1 — — 1 2 Balance, March 31, 2022 3,516,971 $ 39 $ 3,795 $ 111,123 $ ( 17,455 ) $ ( 11,091 ) $ 86,411 Quarter ended March 31, 2021 Balance, December 31, 2020 3,566,276 $ 39 $ 3,789 $ 105,617 $ 7,599 $ ( 9,354 ) $ 107,690 Net earnings — — — 2,006 — — 2,006 Other comprehensive loss — — — — ( 5,132 ) — ( 5,132 ) Cash dividends paid ($ .26 per share) — — — ( 927 ) — — ( 927 ) Sale of treasury stock 50 — 2 — — — 2 Balance, March 31, 2021 3,566,326 $ 39 $ 3,791 $ 106,696 $ 2,467 $ ( 9,354 ) $ 103,639 See accompanying notes to consolidated financial statements Table of Contents 7 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Quarter ended March 31, (Dollars in thousands) 2022 2021 Cash flows from operating activities: Net earnings $ 2,081 $ 2,006 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses ( 250 ) — Depreciation and amortization 244 297 Premium amortization and discount accretion, net 909 959 Net gain on sale of loans held for sale ( 229 ) ( 537 ) Loans originated for sale ( 5,792 ) ( 17,503 ) Proceeds from sale of loans 6,366 20,036 Increase in cash surrender value of bank-owned life insurance ( 99 ) ( 103 ) Net (increase) decrease in other assets ( 5,161 ) 15 Net decrease in accrued expenses and other liabilities 3,938 694 Net cash provided by operating activities 2,007 5,864 Cash flows from investing activities: Proceeds from prepayments and maturities of securities available-for-sale 19,523 24,145 Purchase of securities available-for-sale ( 40,498 ) ( 56,409 ) Decrease (increase) in loans, net 29,916 ( 115 ) Net purchases of premises and equipment ( 549 ) ( 5,577 ) (Increase) decrease in FHLB stock ( 74 ) 267 Net cash provided by (used in) investing activities 8,318 ( 37,689 ) Cash flows from financing activities: Net (decrease) increase in noninterest-bearing deposits ( 7,794 ) 20,471 Net increase in interest-bearing deposits 31,293 20,327 Net increase in federal funds purchased and securities sold under agreements to repurchase 546 946 Stock repurchases ( 120 ) — Dividends paid ( 932 ) ( 927 ) Net cash provided by financing activities 22,993 40,817 Net change in cash and cash equivalents 33,318 8,992 Cash and cash equivalents at beginning of period 156,259 112,575 Cash and cash equivalents at end of period $ 189,577 $ 121,567 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 609 $ 687 Income taxes — 671 Supplemental disclosure of non-cash transactions: Real estate acquired through foreclosure — — 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 individuals and commercial 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, 2021. 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 March 31, 2022. 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. Reclassifications Certain amounts reported in prior periods have been reclassified to conform to the current -period presentation. These reclassifications had no effect on the Company’s previously reported net earnings or total stockholders’ equity. Accounting Developments In the first quarter of 2022, the Company did not adopt any new accounting guidance. NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for the quarters ended March 31, 2022 and 2021, respectively. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of securities or other rights for, or convertible into, shares of the Company’s common stock. At March 31, 2022 and 2021, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to consider for the diluted net earnings per share calculation. The basic and diluted net earnings per share computations for the respective periods are presented below Quarter ended March 31, (Dollars in thousands, except share and per share data) 2022 2021 Basic and diluted: Net earnings $ 2,081 $ 2,006 Weighted average common shares outstanding 3,518,657 3,566,299 Net earnings per share $ 0.59 $ 0.56 NOTE 3: VARIABLE INTEREST ENTITIES Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or other legal structure that does not have equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. At March 31, 2022, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE, discussed below. New Markets Tax Credit Investment The New Markets Tax Credit (“NMTC”) program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvement through the development of successful businesses in these communities. The NMTC is available to investors over seven years and is subject to recapture if certain events occur during such period. At March 31, 2022 and December 31, 2021, respectively, the Company had one such investment in the amount of $2.2 million, which was included in other assets in the consolidated balance sheets. The Company’s equity investment meets the definition of a VIE. While the Company’s investment exceeds 50% of the outstanding equity interests, the Company does not consolidate the VIE because it does not meet the characteristics of a primary beneficiary since the Company lacks the power to direct the activities of the VIE. Type: New Markets Tax Credit investment $ 2,158 $ 2,158 Other assets Table of Contents 10 NOTE 4: SECURITIES At March 31, 2022 and December 31, 2021, respectively, all securities within the scope of ASC 320, Investments – Debt and Equity Securities, were classified as available-for-sale. The fair value and amortized cost for securities available-for- sale by contractual maturity at March 31, 2022 and December 31, 2021, respectively, are presented below. 1 year 1 to 5 5 to 10 After 10 Fair Gross Unrealized Amortized (Dollars in thousands) or less years years years Value Gains Losses Cost March 31, 2022 Agency obligations (a) $ — 49,185 66,866 — 116,051 — 7,428 $ 123,479 Agency MBS (a) — 570 34,857 198,400 233,827 62 14,906 248,671 State and political subdivisions 170 627 14,494 52,290 67,581 902 1,937 68,616 Total available-for-sale $ 170 50,382 116,217 250,690 417,459 964 24,271 $ 440,766 December 31, 2021 Agency obligations (a) $ 5,007 49,604 69,802 — 124,413 1,080 2,079 $ 125,412 Agency MBS (a) — 680 35,855 186,836 223,371 1,527 2,680 224,524 State and political subdivisions 170 647 15,743 57,547 74,107 3,611 270 70,766 Total available-for-sale $ 5,177 50,931 121,400 244,383 421,891 6,218 5,029 $ 420,702 (a) Includes securities issued by U.S. government agencies or government-sponsored entities. Securities with aggregate fair values of $ 189.9 million and $ 172.3 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law. Included in other assets on the accompanying consolidated balance sheets are non-marketable equity investments. The carrying amounts of non-marketable equity investments were $ 1.2 million at March 31, 2022 and December 31, 2021, respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve Bank (“FRB”) stock, and stock in a privately held financial institution. Gross Unrealized Losses and Fair Value The fair values and gross unrealized losses on securities at March 31, 2022 and December 31, 2021, respectively, segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are presented below. Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized (Dollars in thousands) Value Losses Value Losses Value Losses March 31, 2022: Agency obligations $ 78,527 3,404 37,525 4,024 $ 116,052 7,428 Agency MBS 173,957 9,964 52,473 4,942 226,430 14,906 State and political subdivisions 23,712 1,484 3,556 453 27,268 1,937 Total $ 276,196 14,852 93,554 9,419 $ 369,750 24,271 December 31, 2021: Agency obligations $ 49,799 1,025 26,412 1,054 $ 76,211 2,079 Agency MBS 130,110 1,555 38,611 1,125 168,721 2,680 State and political subdivisions 7,960 109 3,114 161 11,074 270 Total $ 187,869 2,689 68,137 2,340 $ 256,006 5,029 Table of Contents 11 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. Agency obligations The unrealized losses associated with agency obligations were primarily driven by increases in market 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 increases in market interest rates and not due to the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities and did not have any credit losses given the explicit government guarantee or other government support. Securities of U.S. states and political subdivisions The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by increases in market 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 market interest rates continue to increase. If the financial condition of an issuer (other than the U.S. government or its agencies) deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the security, there is a risk that other-than-temporary impairment charges may occur in the future. The Company will evaluate whether any loss is temporary or not. Table of Contents 12 Other-Than-Temporarily Impaired Securities Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At March 31, 2022 and December 31, 2021, the Company had no credit-impaired debt securities and there were no additions or reductions in the credit loss component of credit-impaired debt securities during the quarters ended March 31, 2022 and 2021, respectively. Realized Gains and Losses The Company had no realized gains and losses on sale of securities during the first quarters ended March 31, 2022 and 2021, respectively. Table of Contents 13 NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES March 31, December 31, (Dollars in thousands) 2022 2021 Commercial and industrial $ 73,297 $ 83,977 Construction and land development 33,058 32,432 Commercial real estate: Owner occupied 59,429 63,375 Hotel/motel 37,377 43,856 Multi-family 25,253 42,587 Other 113,003 108,553 Total commercial real estate 235,062 258,371 Residential real estate: Consumer mortgage 30,182 29,781 Investment property 48,920 47,880 Total residential real estate 79,102 77,661 Consumer installment 8,412 6,682 Total loans 428,931 459,123 Less: unearned income ( 514 ) ( 759 ) Loans, net of unearned income $ 428,417 $ 458,364 Loans secured by real estate were approximately 81.0% of the Company’s total loan portfolio at March 31, 2022. At March 31, 2022, 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 included 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. As of March 31, 2022, the Company has 82 PPP loans with an aggregate outstanding principal balance of $4.1 million included in this category. The Company had 138 PPP loans with an aggregate principal balance of $8.1 million included in this category at December 31, 2021. 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 14 ● 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 other than hotels/motels and multi-family properties, and which 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 15 The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2022 and December 31, 2021. Accruing Accruing Total 30-89 Days Greater than Accruing Non- Total (Dollars in thousands) Current Past Due 90 days Loans Accrual Loans March 31, 2022: Commercial and industrial $ 73,290 7 — 73,297 — $ 73,297 Construction and land development 33,057 1 — 33,058 — 33,058 Commercial real estate: Owner occupied 59,429 — — 59,429 — 59,429 Hotel/motel 37,377 — — 37,377 — 37,377 Multi-family 25,253 — — 25,253 — 25,253 Other 112,821 — — 112,821 182 113,003 Total commercial real estate 234,880 — — 234,880 182 235,062 Residential real estate: Consumer mortgage 29,600 393 — 29,993 189 30,182 Investment property 48,817 103 — 48,920 — 48,920 Total residential real estate 78,417 496 — 78,913 189 79,102 Consumer installment 8,397 15 — 8,412 — 8,412 Total $ 428,041 519 — 428,560 371 $ 428,931 December 31, 2021: Commercial and industrial $ 83,974 3 — 83,977 — $ 83,977 Construction and land development 32,228 204 — 32,432 — 32,432 Commercial real estate: Owner occupied 63,375 — — 63,375 — 63,375 Hotel/motel 43,856 — — 43,856 — 43,856 Multi-family 42,587 — — 42,587 — 42,587 Other 108,366 — — 108,366 187 108,553 Total commercial real estate 258,184 — — 258,184 187 258,371 Residential real estate: Consumer mortgage 29,070 516 — 29,586 195 29,781 Investment property 47,818 — — 47,818 62 47,880 Total residential real estate 76,888 516 — 77,404 257 77,661 Consumer installment 6,657 25 — 6,682 — 6,682 Total $ 457,931 748 — 458,679 444 $ 459,123 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. 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. Table of Contents 16 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 March 31, 2022 and December 31, 2021, 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. The Company’s look-back period each quarter incorporates the effects of at least one economic downturn in its loss history. The Company believes this look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this look-back period, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the quarter ended March 31, 2022, the Company increased its look-back period to 52 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 the second quarter of 2021, the Company adjusted certain qualitative and economic factors, previously downgraded as a result of the COVID-19 pandemic, to reflect improvements in economic conditions in our primary market area. Further adjustments may be made from time to time in the future as a result of the COVID-19 pandemic and other changes in economic conditions. Table of Contents 17 The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods. March 31, 2022 (Dollars in thousands) Commercial and industrial Construction and land development Commercial real estate Residential real estate Consumer installment Total Quarter ended: Beginning balance $ 857 518 2,739 739 86 $ 4,939 Charge-offs — — — — ( 48 ) ( 48 ) Recoveries 2 — — 7 8 17 Net recoveries (charge-offs) 2 — — 7 ( 40 ) ( 31 ) Provision for loan losses ( 85 ) ( 10 ) ( 203 ) ( 9 ) 57 ( 250 ) Ending balance $ 774 508 2,536 737 103 $ 4,658 March 31, 2021 (Dollars in thousands) Commercial and industrial Construction and land development Commercial real estate Residential real estate Consumer installment Total Quarter ended: Beginning balance $ 807 594 3,169 944 104 $ 5,618 Charge-offs — — — — ( 5 ) ( 5 ) Recoveries 2 — 50 13 4 69 Net recoveries (charge-offs) 2 — 50 13 ( 1 ) 64 Provision for loan losses 19 ( 43 ) 40 ( 6 ) ( 10 ) — Ending balance $ 828 551 3,259 951 93 $ 5,682 Table of Contents 18 The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of March 31, 2022 and 2021. Collectively evaluated (1) Individually evaluated (2) Total Allowance Recorded Allowance Recorded Allowance Recorded for loan investment for loan investment for loan investment (Dollars in thousands) losses in loans losses in loans losses in loans March 31, 2022: Commercial and industrial (3) $ 774 73,297 — — 774 73,297 Construction and land development 508 33,058 — — 508 33,058 Commercial real estate 2,536 234,880 — 182 2,536 235,062 Residential real estate 737 79,102 — — 737 79,102 Consumer installment 103 8,412 — — 103 8,412 Total $ 4,658 428,749 — 182 4,658 428,931 March 31, 2021: Commercial and industrial (4) $ 828 88,687 — — 828 88,687 Construction and land development 551 30,332 — — 551 30,332 Commercial real estate 3,259 254,525 — 206 3,259 254,731 Residential real estate 951 82,745 — 103 951 82,848 Consumer installment 93 6,524 — — 93 6,524 Total $ 5,682 462,813 — 309 5,682 463,122 (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 $4.1 million of PPP loans for which no allowance for loan losses was allocated due to 100% SBA guarantee. (4) Includes $28.7 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 19 (Dollars in thousands) Pass Special Mention Substandard Accruing Nonaccrual Total loans March 31, 2022: Commercial and industrial $ 73,060 22 215 — $ 73,297 Construction and land development 33,044 1 13 — 33,058 Commercial real estate: Owner occupied 59,060 247 122 — 59,429 Hotel/motel 37,377 — — — 37,377 Multi-family 25,253 — — — 25,253 Other 111,785 1,008 28 182 113,003 Total commercial real estate 233,475 1,255 150 182 235,062 Residential real estate: Consumer mortgage 28,136 449 1,408 189 30,182 Investment property 48,640 96 184 — 48,920 Total residential real estate 76,776 545 1,592 189 79,102 Consumer installment 8,389 15 8 — 8,412 Total $ 424,744 1,838 1,978 371 $ 428,931 December 31, 2021: Commercial and industrial $ 83,725 26 226 — $ 83,977 Construction and land development 32,212 2 218 — 32,432 Commercial real estate: Owner occupied 61,573 1,675 127 — 63,375 Hotel/motel 36,162 7,694 — — 43,856 Multi-family 39,093 3,494 — — 42,587 Other 107,426 911 29 187 108,553 Total commercial real estate 244,254 13,774 156 187 258,371 Residential real estate: Consumer mortgage 27,647 452 1,487 195 29,781 Investment property 47,459 98 261 62 47,880 Total residential real estate 75,106 550 1,748 257 77,661 Consumer installment 6,650 20 12 — 6,682 Total $ 441,947 14,372 2,360 444 $ 459,123 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 thousand 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 thousand not secured by real estate (nonaccrual commercial and industrial and consumer installment loans). Table of Contents 20 The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at March 31, 2022 and December 31, 2021. . March 31, 2022 (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 $ 202 ( 20 ) 182 $ — Total commercial real estate 202 ( 20 ) 182 — Total impaired loans $ 202 ( 20 ) 182 $ — (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, 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 $ 205 ( 18 ) 187 $ — Total commercial real estate 205 ( 18 ) 187 — Residential real estate: Investment property 68 ( 6 ) 62 — Total residential real estate 68 ( 6 ) 62 — Total impaired loans $ 273 ( 24 ) 249 $ — (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 21 The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the respective periods. Quarter ended March 31, 2022 Quarter ended March 31, 2021 Average Total interest Average Total interest recorded income recorded income (Dollars in thousands) investment recognized investment recognized Impaired loans: Commercial real estate: Other $ 236 — 208 $ — Total commercial real estate 236 — 208 — Residential real estate: Investment property 15 — 104 — Total residential real estate 15 — 104 — Total $ 251 — 312 $ — Troubled Debt Restructurings Impaired loans also include troubled debt restructurings (“TDRs”). Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10 TDR classifications for a limited period of time to account for the effects of COVID-19. In addition, the Interagency Statement on COVID-19 Loan Modifications, encourages banks to work prudently with borrowers and describes the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain COVID-19-related modifications. The Interagency Statement on COVID-19 Loan Modifications was supplemented on June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions. If a loan modification is eligible, a bank may elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible under section 4013, or if the bank elects not to account for the loan modification under section 4013, the Revised Statement includes criteria when a bank may presume a loan modification is not a TDR in accordance with ASC 310-40. The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the Interagency Statement and related regulatory guidance 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 risk characteristics similar to 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 evaluated individually, including those that have payment defaults, for possible impairment. Table of Contents 22 The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of March 31, 2022 and December 31, 2021, respectively. TDRs Related (Dollars in thousands) Accruing Nonaccrual Total Allowance March 31, 2022 Commercial real estate: Other $ — 182 182 $ — Total commercial real estate — 182 182 — Total $ — 182 182 $ — TDRs Related (In thousands) Accruing Nonaccrual Total Allowance December 31, 2021 Commercial real estate: Other $ — 187 187 $ — Total commercial real estate — 187 187 — Investment property — 62 62 — Total residential real estate — 62 62 — Total $ — 249 249 $ — At March 31, 2022 there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured. There were no loans modified in a TDR during the quarters ended March 31, 2022 and 2021, respectively. For the same periods, the Company had no loans modified in a TDR within the previous 12 months for which there was a payment default. NOTE 6: MORTGAGE SERVICING RIGHTS, NET Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the corresponding mortgage loans are sold. An estimate of the Company’s MSRs is determined using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period of, estimated net servicing income. Increases in market interest rates generally increase the fair value of MSRs by reducing prepayments and refinancings and therefore the prepayment speed. The Company has recorded MSRs related to loans sold to Fannie Mae. The Company generally sells conforming, fixed- rate, closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the accompanying consolidated balance sheets. The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage lending income. Table of Contents 23 The change in amortized MSRs and the related valuation allowance for the quarters ended March 31, 2022 and 2021 are presented below. Quarter ended March 31, (Dollars in thousands) 2022 2021 MSRs, net: Beginning balance $ 1,309 $ 1,330 Additions, net 54 142 Amortization expense ( 78 ) ( 150 ) Ending balance $ 1,285 $ 1,322 Valuation allowance included in MSRs, net: Beginning of period $ — $ — End of period — — Fair value of amortized MSRs: Beginning of period $ 1,908 $ 1,489 End of period 2,277 1,774 NOTE 7: FAIR VALUE Fair Value Hierarchy “Fair value” is defined by ASC 820, Fair Value Measurements and Disclosures , as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the asset or liability, either directly or indirectly. Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset or liability. Level changes in fair value measurements Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such that transfers in and out of any level are expected to be infrequent. For the quarter ended March 31, 2022, 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 March 31, 2022 and December 31, 2021, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820 valuation hierarchy (as described above). Quoted Prices in Significant Active Markets Other Significant for Observable Unobservable Identical Assets Inputs Inputs (Dollars in thousands) Amount (Level 1) (Level 2) (Level 3) March 31, 2022: Securities available-for-sale: Agency obligations $ 116,051 — 116,051 — Agency RMBS 233,827 — 233,827 — State and political subdivisions 67,581 — 67,581 — Total securities available-for-sale 417,459 — 417,459 — Total assets at fair value $ 417,459 — 417,459 — December 31, 2021: Securities available-for-sale: Agency obligations $ 124,413 — 124,413 — Agency RMBS 223,371 — 223,371 — State and political subdivisions 74,107 — 74,107 — Total securities available-for-sale 421,891 — 421,891 — Total assets at fair value $ 421,891 — 421,891 — 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. Other real estate owned Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at the lower of the loan’s carrying amount or the fair value less costs to sell upon transfer of the loans to other rea. estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, a loss is recognized in noninterest expense. Mortgage servicing rights, net MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the present value of estimated future net servicing income using assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review broker surveys and other market research to validate significant assumptions used in the model. The significant unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s MSRs are classified within Level 3 of the valuation hierarchy. Table of Contents 26 The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021, respectively, by caption, on the accompanying consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above): Quoted Prices in Active Markets Other Significant for Observable Unobservable Carrying Identical Assets Inputs Inputs (Dollars in thousands) Amount (Level 1) (Level 2) (Level 3) March 31, 2022: Loans held for sale $ 977 — 977 — Loans, net (1) 182 — — 182 Other assets (2) 1,659 — — 1,659 Total assets at fair value $ 2,818 — 977 1,841 December 31, 2021: Loans held for sale $ 1,376 — 1,376 — Loans, net (1) 249 — — 249 Other assets (2) 1,683 — — 1,683 Total assets at fair value $ 3,308 — 1,376 1,932 (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 other real estate owned and MSRs, net both of which are carried at lower of cost or estimated fair value. Quantitative Disclosures for Level 3 Fair Value Measurements At March 31, 2022 and December 31, 2021, the Company had no Level 3 assets measured at fair value on a recurring basis. For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2022 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 March 31, 2022: Impaired loans $ 182 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Other real estate owned 374 Appraisal Appraisal discount 55.0 - 55.0 55.0 Mortgage servicing rights, net 1,285 Discounted cash flow Prepayment speed or CPR 7.7 - 9.4 9.3 Discount rate 9.5 - 9.5 9.5 December 31, 2021: Impaired loans $ 249 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Other real estate owned 374 Appraisal Appraisal discounts 55.0 - 55.0 55.0 Mortgage servicing rights, net 1,309 Discounted cash flow Prepayment speed or CPR 6.8 - 16.5 13.3 Discount rate 9.5 - 11.5 9.5 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. Table of Contents 27 The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Loans, net Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion. Loans held for sale Fair values of loans held for sale are determined using quoted secondary market prices for similar loans. Time Deposits Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently offered for deposits with similar remaining maturities. The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments at March 31, 2022 and December 31, 2021 are presented below. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits. Fair value approximates carrying value in these financial liabilities due to these products having no stated maturity. Additionally, financial liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased and securities sold under agreements to repurchase. Fair Value Hierarchy Carrying Estimated Level 1 Level 2 Level 3 (Dollars in thousands) amount fair value inputs inputs Inputs March 31, 2022: Financial Assets: Loans, net (1) $ 423,759 $ 417,024 $ — $ — $ 417,024 Loans held for sale 977 979 — 979 — Financial Liabilities: Time Deposits $ 158,797 $ 159,626 $ — $ 159,626 $ — December 31, 2021: Financial Assets: Loans, net (1) $ 453,425 $ 449,105 $ — $ — $ 449,105 Loans held for sale 1,376 1,410 — 1,410 — Financial Liabilities: Time Deposits $ 156,650 $ 160,581 $ — $ 160,581 $ — (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