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) 2023 2022 Assets: Cash and due from banks $ 17,083 $ 11,608 Federal funds sold 1,951 9,300 Interest-bearing bank deposits 6,822 6,346 Cash and cash equivalents 25,856 27,254 Securities available-for-sale 405,692 405,304 Loans 505,041 504,458 Allowance for credit losses ( 6,821 ) ( 5,765 ) Loans, net 498,220 498,693 Premises and equipment, net 46,222 46,575 Bank-owned life insurance 19,893 19,952 Other assets 21,863 26,110 Total assets $ 1,017,746 $ 1,023,888 Liabilities: Deposits: Noninterest-bearing $ 304,164 $ 311,371 Interest-bearing 635,026 638,966 Total deposits 939,190 950,337 Federal funds purchased and securities sold under agreements to repurchase 2,457 2,551 Accrued expenses and other liabilities 2,459 2,959 Total liabilities 944,106 955,847 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 3,798 3,797 Retained earnings 116,798 116,600 Accumulated other comprehensive loss, net ( 35,457 ) ( 40,920 ) Less treasury stock, at cost - 456,256 shares and 453,683 at March 31, 2023 and December 31, 2022, respectively ( 11,538 ) ( 11,475 ) Total stockholders’ equity 73,640 68,041 Total liabilities and stockholders’ equity $ 1,017,746 $ 1,023,888 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) 2023 2022 Interest income: Loans, including fees $ 5,754 $ 4,850 Securities Taxable 1,865 1,336 Tax-exempt 403 419 Federal funds sold and interest bearing bank deposits 213 63 Total interest income 8,235 6,668 Interest expense: Deposits 1,118 585 Short-term borrowings 8 5 Total interest expense 1,126 590 Net interest income 7,109 6,078 Provision for (recoveries of) credit losses 66 ( 250 ) Net interest income after provision for credit losses 7,043 6,328 Noninterest income: Service charges on deposit accounts 154 142 Mortgage lending 93 253 Bank-owned life insurance 156 99 Other 389 414 Total noninterest income 792 908 Noninterest expense: Salaries and benefits 2,927 2,950 Net occupancy and equipment 799 434 Professional fees 338 230 Other 1,540 1,287 Total noninterest expense 5,604 4,901 Earnings before income taxes 2,231 2,335 Income tax expense 267 254 Net earnings $ 1,964 $ 2,081 Net earnings per share: Basic and diluted $ 0.56 $ 0.59 Weighted average shares outstanding: Basic and diluted 3,502,143 3,518,657 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 March 31, (Dollars in thousands) 2023 2022 Net earnings $ 1,964 $ 2,081 Other comprehensive income (loss), net of tax: Unrealized net holding gain (loss) on securities 5,463 ( 18,346 ) Other comprehensive income (loss) 5,463 ( 18,346 ) Comprehensive income (loss) $ 7,427 $ ( 16,265 ) 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, 2023 Balance, December 31, 2022 3,503,452 $ 39 $ 3,797 $ 116,600 $ ( 40,920 ) $ ( 11,475 ) $ 68,041 Cumulative effect of change in accounting standard — — — ( 821 ) — — ( 821 ) Net earnings — — — 1,964 — — 1,964 Other comprehensive income — — — — 5,463 — 5,463 Cash dividends paid ($ .27 per share) — — — ( 945 ) — — ( 945 ) Stock repurchases ( 2,648 ) — — — — ( 64 ) ( 64 ) Sale of treasury stock 75 — 1 — — 1 2 Balance, March 31, 2023 3,500,879 $ 39 $ 3,798 $ 116,798 $ ( 35,457 ) $ ( 11,538 ) $ 73,640 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 See accompanying notes to consolidated financial statements Table of Contents 7 AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, (Dollars in thousands) 2023 2022 Cash flows from operating activities: Net earnings $ 1,964 $ 2,081 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for (reversal of) credit losses 66 ( 250 ) Depreciation and amortization 423 244 Premium amortization and discount accretion, net 612 909 Net gain on sale of loans held for sale ( 4 ) ( 229 ) Loans originated for sale — ( 5,792 ) Proceeds from sale of loans — 6,366 Increase in cash surrender value of bank-owned life insurance ( 104 ) ( 99 ) Income recognized from death benefit on bank-owned life insurance ( 52 ) — Net decrease (increase) in other assets 4,420 ( 5,161 ) Net (decrease) increase in accrued expenses and other liabilities ( 2,434 ) 3,938 Net cash provided by operating activities 4,891 2,007 Cash flows from investing activities: Proceeds from prepayments and maturities of securities available-for-sale 6,296 19,523 Purchase of securities available-for-sale — ( 40,498 ) (Increase) decrease in loans, net ( 586 ) 29,916 Net purchases of premises and equipment ( 5 ) ( 549 ) Proceeds from bank-owned life insurance death benefit 215 — Decrease (increase) in FHLB stock 41 ( 74 ) Net cash provided by investing activities 5,961 8,318 Cash flows from financing activities: Net decrease in noninterest-bearing deposits ( 7,207 ) ( 7,794 ) Net (decrease) increase in interest-bearing deposits ( 3,940 ) 31,293 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ( 94 ) 546 Stock repurchases ( 64 ) ( 120 ) Dividends paid ( 945 ) ( 932 ) Net cash (used in) provided by financing activities ( 12,250 ) 22,993 Net change in cash and cash equivalents ( 1,398 ) 33,318 Cash and cash equivalents at beginning of period 27,254 156,259 Cash and cash equivalents at end of period $ 25,856 $ 189,577 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 877 $ 609 Income taxes — — 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 areas 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, 2022. 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 the determination of allowance for credit losses investment securities, the determination of the allowance for credit losses on loans, 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, 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 ratio, 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 we believe 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, 2023. 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 except as reported in Note 8, Subsequent Events. Reclassifications Certain amounts reported in prior periods have been reclassified to conform to the current -period presentation. These reclassifications had no material effect on the Company’s previously reported net earnings or total stockholders’ equity. Accounting Standards Adopted in 2023 On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off -balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment upon the adoption of CECL on January 1, 2023 included an increase in the allowance for credit losses on loans of $ 1.0 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $ 0.1 million, which is recorded within other liabilities. The Company recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards. The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than- temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” on January 1, 2023, the effective date of the guidance, on a prospective basis. ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements. Table of Contents 10 Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans is recorded in other assets on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments. The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date. All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured. Allowance for Credit Losses – Loans The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s loan loss estimation process includes procedures to appropriately consider the unique characteristics of its loan segments (commercial and industrial, construction and land development, commercial real estate, multifamily, residential real estate, and consumer loans). These segments are further disaggregated into loan classes, the level at which credit quality is monitored. See Note 5, Loans and Allowance for Credit Losses for additional information about our loan portfolio. Credit loss assumptions are estimated using a discounted cash flow ("DCF") model for each loan segment, except consumer loans. The weighted average remaining life method is used to estimate credit loss assumptions for consumer loans. The DCF model calculates an expected life-of-loan loss percentage by considering the forecasted probability that a borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic factors, and LGD, which is the estimate of the amount of net loss in the event of default. This model utilizes historical correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. The forecasted Alabama unemployment rate is considered in the model for commercial and industrial, construction and land development, commercial real estate, multifamily, and residential real estate loans. In addition, forecasted changes in the Alabama home price index is considered in the model for construction and land development and residential real estate loans; forecasted changes in the national commercial real estate (“CRE”) price index is considered in the model for commercial real estate and multifamily loans; and forecasted changes in the Alabama gross state product is considered in the model for multifamily loans. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default based on the statistical PD models. Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments and principal payments (“curtailments”) when appropriate. Management's determination of the contract term excludes expected extensions, renewals, and modifications unless the extension or renewal option is included in the contract at the reporting date and is not unconditionally cancellable by the Company. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made (which is 4 quarters for the Company), the Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion period. Table of Contents 11 The weighted average remaining life method was deemed most appropriate for the consumer loan segment because consumer loans contain many different payment structures, payment streams and collateral. The weighted average remaining life method uses an annual charge-off rate over several vintages to estimate credit losses. The average annual charge-off rate is applied to the contractual term adjusted for prepayments. Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are believed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the estimated fair value of collateral held at the reporting date, adjusted for selling costs as appropriate. Allowance for Credit Losses – Unfunded Commitments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s consolidated statements of earnings. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77 thousand for the adoption of ASC 326. For the quarter ended March 31, 2023, the Company recorded a provision for credit losses for unfunded commitments of $ 26 thousand. At March 31, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $ 0.3 million. 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, 2023 and 2022, 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, 2023 and 2022, 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) 2023 2022 Basic and diluted: Net earnings $ 1,964 $ 2,081 Weighted average common shares outstanding 3,502,143 3,518,657 Net earnings per share $ 0.56 $ 0.59 Table of Contents 12 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, 2023, 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, 2023 and December 31, 2022, respectively, the Company had one such investment in the amounts of $2.0 million and $2.1 million, respectively, which was included in other assets in the consolidated balance sheets. The Company’s equity investment in the NMTC entity 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. (Dollars in thousands) Maximum Loss Exposure Asset Recognized Classification Type: New Markets Tax Credit investment $ 2,006 $ 2,006 Other assets NOTE 4: SECURITIES At March 31, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, 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, 2023 Agency obligations (a) $ 5,300 59,997 61,883 — 127,180 — 13,574 $ 140,754 Agency MBS (a) — 6,984 27,601 181,114 215,699 — 29,522 245,221 State and political subdivisions 300 1,032 15,581 45,900 62,813 49 4,300 67,064 Total available-for-sale $ 5,600 68,013 105,065 227,014 405,692 49 47,396 $ 453,039 December 31, 2022 Agency obligations (a) $ 4,935 50,746 69,936 — 125,617 — 15,826 $ 141,443 Agency MBS (a) — 7,130 27,153 183,877 218,160 — 33,146 251,306 State and political subdivisions 300 642 15,130 45,455 61,527 11 5,681 67,197 Total available-for-sale $ 5,235 58,518 112,219 229,332 405,304 11 54,653 $ 459,946 (a) Includes securities issued by U.S. government agencies or government-sponsored entities. Securities with aggregate fair values of $ 207.6 million and $ 208.3 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank of Atlanta (“FHLB of Atlanta”) 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, 2023 and December 31, 2022, respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve Bank of Atlanta (“FRB”) stock, and stock in a privately held financial institution. Table of Contents 13 Gross Unrealized Losses and Fair Value The fair values and gross unrealized losses on securities at March 31, 2023 and December 31, 2022, 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, 2023: Agency obligations $ 18,263 950 108,917 12,624 $ 127,180 13,574 Agency MBS 23,127 1,047 192,572 28,475 215,699 29,522 State and political subdivisions 19,186 278 35,741 4,022 54,927 4,300 Total $ 60,576 2,275 337,230 45,121 $ 397,806 47,396 December 31, 2022: Agency obligations $ 55,931 4,161 69,686 11,665 $ 125,617 15,826 Agency MBS 70,293 5,842 147,867 27,304 218,160 33,146 State and political subdivisions 44,777 2,176 13,043 3,505 57,820 5,681 Total $ 171,001 12,179 230,596 42,474 $ 401,597 54,653 For the securities in the previous table, the Company assesses whether or not it intends to sell or is 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. Because the Company currently does not intend to sell those securities that have an unrealized loss at March 31, 2023 and it is not more-likely-than-not that the Company will be required to sell the security before recovery of their amortized cost bases, which may be maturity, the Company has determined that no credit loss is necessary. In addition, the Company evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit deterioration, which would require the recognition of a provision to increase the allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with available-for-sale securities at March 31, 2023 are driven by changes in market interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at March 31, 2023. These securities will continue to be monitored as a part of the Company's ongoing evaluation of credit quality. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. Realized Gains and Losses The Company had no realized gains and losses on sale of securities during the quarters ended March 31, 2023 and 2022, respectively. Table of Contents 14 NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES March 31, December 31, (Dollars in thousands) 2023 2022 Commercial and industrial $ 59,602 $ 66,212 Construction and land development 66,500 66,479 Commercial real estate: Owner occupied 67,280 61,125 Hotel/motel 32,959 33,378 Multi-family 40,974 41,084 Other 126,749 128,986 Total commercial real estate 267,962 264,573 Residential real estate: Consumer mortgage 48,513 45,370 Investment property 53,462 52,278 Total residential real estate 101,975 97,648 Consumer installment 9,002 9,546 Total Loans $ 505,041 $ 504,458 Loans secured by real estate were approximately 86.4% of the Company’s total loan portfolio at March 31, 2023. At March 31, 2023, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas. The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit 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. 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 in these classes: ● 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. ● Hotel/motel – includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon income generated from the hotel/motel securing the loan. 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 . These include loans for 5 or more unit residential properties 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 respective borrowers. Table of Contents 15 ● 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 and other 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 in these two classes: ● 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 values, as well as the financial health of the borrowers. Consumer installment — includes loans to individuals, which may be secured by personal property or are 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 values. Table of Contents 16 The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of March 31, 2023 and December 31, 2022. Accruing Accruing Total 30-89 Days Greater than Accruing Non- Total (Dollars in thousands) Current Past Due 90 days Loans Accrual Loans March 31, 2023: Commercial and industrial $ 59,141 29 — 59,170 432 $ 59,602 Construction and land development 66,500 — — 66,500 — 66,500 Commercial real estate: Owner occupied 65,177 — — 65,177 2,103 67,280 Hotel/motel 32,959 — — 32,959 — 32,959 Multi-family 40,974 — — 40,974 — 40,974 Other 126,749 — — 126,749 — 126,749 Total commercial real estate 265,859 — — 265,859 2,103 267,962 Residential real estate: Consumer mortgage 48,162 216 — 48,378 135 48,513 Investment property 53,184 278 — 53,462 — 53,462 Total residential real estate 101,346 494 — 101,840 135 101,975 Consumer installment 8,922 70 — 8,992 10 9,002 Total $ 501,768 593 — 502,361 2,680 $ 505,041 December 31, 2022: Commercial and industrial $ 65,764 5 — 65,769 443 $ 66,212 Construction and land development 66,479 — — 66,479 — 66,479 Commercial real estate: Owner occupied 61,125 — — 61,125 — 61,125 Hotel/motel 33,378 — — 33,378 — 33,378 Multi-family 41,084 — — 41,084 — 41,084 Other 126,870 — — 126,870 2,116 128,986 Total commercial real estate 262,457 — — 262,457 2,116 264,573 Residential real estate: Consumer mortgage 45,160 38 — 45,198 172 45,370 Investment property 52,278 — — 52,278 — 52,278 Total residential real estate 97,438 38 — 97,476 172 97,648 Consumer installment 9,506 40 — 9,546 — 9,546 Total $ 501,644 83 — 501,727 2,731 $ 504,458 Table of Contents 17 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 by year of origination as of March 31, 2023. These categories are utilized to develop the associated allowance for credit 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. (Dollars in thousands) 2023 2022 2021 2020 2019 Prior to 2019 Revolving Loans Total loans March 31, 2023: Commercial and industrial Pass $ 4,106 10,873 14,985 6,152 7,787 8,630 6,536 $ 59,069 Special mention — — — — — — — — Substandard 59 — 28 3 11 — — 101 Nonaccrual — — — — 432 — — 432 Total commercial and industrial 4,165 10,873 15,013 6,155 8,230 8,630 6,536 59,602 Current period gross charge-offs — — — — — — — — Construction and land development Pass 9,319 51,422 3,226 1,670 151 234 478 66,500 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total construction and land development 9,319 51,422 3,226 1,670 151 234 478 66,500 Current period gross charge-offs — — — — — — — — Commercial real estate: Owner occupied Pass 4,294 10,250 19,309 11,652 5,194 11,372 2,711 64,782 Special mention — — 235 — — — — 235 Substandard — 105 — — 55 — — 160 Nonaccrual — — — — 2,103 — — 2,103 Total owner occupied 4,294 10,355 19,544 11,652 7,352 11,372 2,711 67,280 Current period gross charge-offs — — — — — — — — Hotel/motel Pass — 10,191 3,294 1,633 4,090 13,751 — 32,959 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total hotel/motel — 10,191 3,294 1,633 4,090 13,751 — 32,959 Current period gross charge-offs — — — — — — — — Table of Contents 18 (Dollars in thousands) 2023 2022 2021 2020 2019 Prior to 2019 Revolving Loans Total loans March 31, 2023: Multifamily Pass 3,666 19,375 2,009 7,158 3,889 3,299 1,578 40,974 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total multifamily 3,666 19,375 2,009 7,158 3,889 3,299 1,578 40,974 Current period gross charge-offs — — — — — — — — Other Pass 5,546 38,002 33,006 15,834 11,241 21,706 1,253 126,588 Special mention — — — — — — — — Substandard — — — 161 — — — 161 Nonaccrual — — — — — — — — Total other 5,546 38,002 33,006 15,995 11,241 21,706 1,253 126,749 Current period gross charge-offs — — — — — — — — Residential real estate: Consumer mortgage Pass 4,375 22,234 2,783 2,874 1,531 13,584 94 47,475 Special mention — — — — — 381 — 381 Substandard — — — — — 522 — 522 Nonaccrual — — — — — 135 — 135 Total consumer mortgage 4,375 22,234 2,783 2,874 1,531 14,622 94 48,513 Current period gross charge-offs — — — — — — — — Investment property Pass 2,400 15,316 10,569 14,231 6,221 3,561 877 53,175 Special mention — — — — — 43 — 43 Substandard — — — 244 — — — 244 Nonaccrual — — — — — — — — Total investment property 2,400 15,316 10,569 14,475 6,221 3,604 877 53,462 Current period gross charge-offs — — — — — — — — Consumer installment Pass 1,216 5,565 1,285 440 196 234 — 8,936 Special mention — — — 5 — — — 5 Substandard 15 20 12 — 4 — — 51 Nonaccrual — — 10 — — — — 10 Total consumer installment 1,231 5,585 1,307 445 200 234 — 9,002 Current period gross charge-offs — 6 5 — — — — 11 Total loans Pass 34,922 183,228 90,466 61,644 40,300 76,371 13,527 500,458 Special mention — — 235 5 — 424 — 664 Substandard 74 125 40 408 70 522 — 1,239 Nonaccrual — — 10 — 2,535 135 — 2,680 Total loans $ 34,996 183,353 90,751 62,057 42,905 77,452 13,527 $ 505,041 Total current period gross charge-offs $ — 6 5 — — — — $ 11 Table of Contents 19 (Dollars in thousands) Pass Special Mention Substandard Accruing Nonaccrual Total loans December 31, 2022: Commercial and industrial $ 65,550 7 212 443 $ 66,212 Construction and land development 66,479 — — — 66,479 Commercial real estate: Owner occupied 60,726 238 161 — 61,125 Hotel/motel 33,378 — — — 33,378 Multi-family 41,084 — — — 41,084 Other 126,700 170 — 2,116 128,986 Total commercial real estate 261,888 408 161 2,116 264,573 Residential real estate: Consumer mortgage 44,172 439 587 172 45,370 Investment property 51,987 43 248 — 52,278 Total residential real estate 96,159 482 835 172 97,648 Consumer installment 9,498 1 47 — 9,546 Total $ 499,574 898 1,255 2,731 $ 504,458 The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated. CECL Incurred Loss March 31, 2023 December 31, 2022 Nonaccrual Nonaccrual Total Loans with Loans with an Nonaccrual Nonaccrual (Dollars in thousands) No Allowance Allowance Loans Loans Commercial and industrial $ 194 238 432 $ 443 Commercial real estate 837 1,266 2,103 2,116 Residential real estate 135 — 135 172 Consumer 10 — 10 — Total $ 1,176 1,504 2,680 $ 2,731 The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses: (Dollars in thousands) Real Estate Business Assets Total Loans March 31, 2023: Commercial and industrial $ — 432 $ 432 Commercial real estate 2,103 — 2,103 Total $ 2,103 432 $ 2,535 Allowance for Credit Losses The Company adopted ASC 326 on January 1, 2023, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. Under the CECL methodology, the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. Table of Contents 20 The following table details the changes in the allowance for credit losses by portfolio segment for the respective periods. March 31, 2023 (Dollars in thousands) Commercial and industrial Construction and land development Commercial real estate Residential real estate Consumer installment Total Quarter ended: Beginning balance, prior to the adoption of ASC 326 $ 747 949 3,109 828 132 $ 5,765 Impact from the adoption of ASC 326 532 ( 17 ) 873 ( 347 ) ( 22 ) 1,019 Charge-offs — — — — ( 11 ) ( 11 ) Recoveries 2 — — 5 1 8 Net recoveries (charge-offs) 2 — — 5 ( 10 ) ( 3 ) Provision for credit losses ( 49 ) 89 ( 16 ) 11 5 40 Ending balance $ 1,232 1,021 3,966 497 105 $ 6,821 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 (charge-offs) recoveries 2 — — 7 ( 40 ) ( 31 ) Provision for loan losses ( 85 ) ( 10 ) ( 203 ) ( 9 ) 57 ( 250 ) Ending balance $ 774 508 2,536 737 103 $ 4,658 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 as determined, prior to the adoption of ASC 326. Collectively evaluated (1) Individually evaluated (2) Total Allowance Recorded Allowance Recorded Allowance Recorded for loan investment for loan investment for loan investment (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 (1) Represents loans collectively evaluated for impairment, prior to the adopton of ASC 326, 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, prior to the adoption of ASC 326, in accordance with ASC 310-30, Receivables, and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans. Impaired loans The following tables present impaired loans at December 31, 2022 as determined under ASC 310 prior to the adoption of ASC 326. 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: Table of Contents 21 ● 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). The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at December 31, 2022. December 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 and industrial $ 210 ( 1 ) 209 $ — Commercial real estate: Owner occupied 858 ( 3 ) 855 Total commercial real estate 858 ( 3 ) 855 — Total 1,068 ( 4 ) 1,064 — With allowance recorded: Commercial and industrial 234 — 234 $ 59 Owner occupied 1,261 — 1,261 446 Total commercial real estate 1,261 — 1,261 446 Total 1,495 — 1,495 505 Total impaired loans $ 2,563 ( 4 ) 2,559 $ 505 (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 22 Pursuant to the adoption of ASU 2022-02, effective January 1, 2023, the Company prospectively discontinued the recognition and measurement guidance previously required for troubled debt restructures. As of March 31, 2023, the Company had no loans that would have previously required disclosure as troubled debt restructures. 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 quarter ended March 31, 2022 as determined under ASC 310 prior to the adoption of ASC 326. Quarter ended March 31, 2022 Average Total interest recorded income (Dollars in thousands) investment recognized Impaired loans: Commercial real estate: Other 236 $ — Total commercial real estate 236 — Residential real estate: Investment property 15 — Total residential real estate 15 — Total 251 $ — 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 reducing 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, 2023 and 2022 are presented below. Quarter ended March 31, (Dollars in thousands) 2023 2022 MSRs, net: Beginning balance $ 1,151 $ 1,309 Additions, net — 54 Amortization expense ( 55 ) ( 78 ) Ending balance $ 1,096 $ 1,285 Valuation allowance included in MSRs, net: Beginning of period $ — $ — End of period — — Fair value of amortized MSRs: Beginning of period $ 2,369 $ 1,908 End of period 2,419 2,277 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 three months ended March 31, 2023, 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 data 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 data 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/dealer quotes to validate the fair value measurements. In addition, management will periodically submit pricing information provided by the third party pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the prices provided by the third party pricing service with its own prices 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, 2023 and December 31, 2022, 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, 2023: Securities available-for-sale: Agency obligations $ 127,180 — 127,180 — Agency MBS 215,699 — 215,699 — State and political subdivisions 62,813 — 62,813 — Total securities available-for-sale 405,692 — 405,692 — Total assets at fair value $ 405,692 — 405,692 — December 31, 2022: Securities available-for-sale: Agency obligations $ 125,617 — 125,617 — Agency MBS 218,160 — 218,160 — State and political subdivisions 61,527 — 61,527 — Total securities available-for-sale 405,304 — 405,304 — Total assets at fair value $ 405,304 — 405,304 — Assets and liabilities measured at fair value on a nonrecurring basis Collateral Dependent Loans Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of comparable properties which are then adjusted for property specific factors. Non real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition. Table of Contents 25 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 March 31, 2023 and December 31, 2022, 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, 2023: Loans, net (1) 2,021 — — 2,021 Other assets (2) 1,096 — — 1,096 Total assets at fair value $ 3,117 — — 3,117 December 31, 2022: Loans, net (3) 2,054 — — 2,054 Other assets (2) 1,151 — — 1,151 Total assets at fair value $ 3,205 — - 3,205 (1) Loans considered collateral dependent under ASC 326. (2) Represents MSRs, net, carried at lower of cost or estimated fair value. (3) Loans considered impaired under ASC 310-10-35 Receivables, prior to the adoption of ASC 326. This amount reflects the recorded investment in impaired loans, net of any related allowance for loan losses. Quantitative Disclosures for Level 3 Fair Value Measurements At March 31, 2023 and December 31, 2022, 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, 2023 and and December 31, 2022, the significant unobservable inputs used in the fair value measurements and the range of such inputs with respect to such assets are presented below. Range of Weighted Carrying Significant Unobservable Average (Dollars in thousands) Amount Valuation Technique Unobservable Input Inputs of Input March 31, 2023: Collateral dependent loans $ 2,021 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Mortgage servicing rights, net 1,096 Discounted cash flow Prepayment speed or CPR 7.2 - 30.1 7.6 Discount rate 9.5 - 11.5 9.5 December 31, 2022: Impaired loans $ 2,054 Appraisal Appraisal discounts 10.0 - 10.0 % 10.0 % Mortgage servicing rights, net 1,151 Discounted cash flow Prepayment speed or CPR 5.2 - 18.6 7.5 Discount rate 9.5 - 11.5 9.5 Table of Contents 26 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 good-faith estimates 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. 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, 2023 and December 31, 2022 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, 2023: Financial Assets: Loans, net (1) $ 498,220 $ 482,454 $ — $ — $ 482,454 Financial Liabilities: Time Deposits $ 161,104 $ 157,919 $ — $ 157,919 $ — December 31, 2022: Financial Assets: Loans, net (1) $ 498,693 $ 484,007 $ — $ — $ 484,007 Financial Liabilities: Time Deposits $ 150,375 $ 150,146 $ — $ 150,146 $ — (1) Represents loans, net of allowance for credit losses. The fair value of loans was measured using an exit price notion. NOTE 8: SUBSEQUENT EVENTS Subsequent to March 31, 2023, one of the Company’s collateral dependent loans, with a recorded investment of $ 1.3 million and a corresponding valuation allowance of $ 0.5 million, at March 31, 2023, was paid in full . Table of Contents 27