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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
(Mark One)
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended
March 31, 2022
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period __________ to __________
Commission File Number:
0-26486
Auburn National Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
63-0885779
(I.R.S. Employer
Identification No.)
100 N. Gay Street
Auburn
,
Alabama
36830
(
334
)
821-9200
(Address and telephone number of principal executive offices)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate
by
check
mark
whether
the
registrant
(1) has
filed
all
reports
required
to
be
filed
by
Section 13
or
15(d)
of
the
Securities
Exchange Act
of 1934
during the
preceding 12 months
(or for
such shorter
period that
the registrant
was required
to file
such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
Yes
☒
No
☐
Indicate by check
mark whether the
registrant is a
large accelerated filer,
an accelerated filer,
a non-accelerated filer,
a smaller reporting
company
or
an
emerging
growth
company.
See
the
definitions
of
“large
accelerated
filer,”
“accelerated
filer,”
“smaller
reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☐
If
an
emerging
growth
company,
indicate
by
check
mark
if
the
registrant
has
elected
not
to
use
the
extended
transition
period
for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
No
☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
AUBN
NASDAQ
Global Market
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at May 4, 2022
Common Stock, $0.01 par value per share
3,515,787
shares
Table of Contents
AUBURN NATIONAL BANCORPORATION, INC. AND
SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1
Financial Statement
Consolidated Balance Sheets (Unaudited) as of March 31, 2022 and December 31, 2021
3
Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2022 and 2021
4
Consolidated Statements of Comprehensive Loss (Unaudited) for the quarters ended March 31, 2022
and 2021
5
Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2022
and 2021
6
Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2022 and 2021
7
Notes to Consolidated Financial Statements (Unaudited
)
8
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Table 1 – Explanation of Non -GAAP Financial Measures
48
Table 2 – Selected Quarterly Financial Data
49
Table 3 – Average Balances and Net Interest Income Analysis for the quarters ended March 31, 2022
and 2021
50
Table 4 – Allocation of Allowance for Loan Losses
51
Table 5 – Estimated Uninsured Time Deposits by Maturity
52
Item 3
Quantitative and Qualitative Disclosures About Market Risk
53
Item 4
Controls and Procedures
53
PART II. OTHER INFORMATION
Item 1
Legal Proceedings
53
Item 1A
Risk Factors
53
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
54
Item 3
Defaults Upon Senior Securities
54
Item 4
Mine Safety Disclosures
54
Item 5
Other Information
54
Item 6
Exhibits
55
Table of Contents
3
PART
1.
FINANCIAL INFORMATION
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.
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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.
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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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The following discussion and analysis is designed to provide a better understanding of
various factors related to the results
of operations and financial condition of the Company and the Bank.
This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed consolidated
financial statements and related
notes for the quarters ended March 31, 2022 and 2021, as well as the information contained
in our Annual Report on Form
10-K for the year ended December 31, 2021.
Special Notice Regarding Forward-Looking Statements
Various
of the statements made herein under the captions “Management’s
Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about
Market Risk”, “Risk Factors” and elsewhere,
are “forward-looking statements” within the meaning and protections of Section
27A of the Securities Act of 1933, as
amended (the “Securities Act”) and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our
beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance, and
involve known and unknown risks,
uncertainties and other factors, which may be beyond our control, and
which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different
from future results, performance,
achievements or financial condition expressed or implied by such forward-looking
statements.
You
should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be
forward-looking statements.
You
can
identify these forward-looking statements through our use of words such as
“may,” “will,” “anticipate,”
“assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”
“estimate,” “continue,” “plan,” “point to,” “project,”
“could,” “intend,” “target” and other similar words and expressions
of the future.
These forward-looking statements may
not be realized due to a variety of factors, including, without limitation:
●
the effects of future economic, business and market conditions and
changes, foreign, domestic and locally,
including inflation, seasonality,
natural disasters or climate change, such as rising sea and water levels,
hurricanes
and tornados, COVID-19 or other epidemics or pandemics;
●
the effects of war or other conflicts, acts of terrorism, or other events that
may affect general economic conditions;
●
governmental monetary and fiscal policies, including the continuing effects
of COVID-19 fiscal and monetary
stimulus, and changes in monetary policies in response to inflations;
●
legislative and regulatory changes, including changes in banking, securities and
tax laws, regulations and rules and
their application by our regulators, including capital and liquidity requirements,
and changes in the scope and cost
of FDIC insurance;
●
the failure of assumptions and estimates, as well as differences in, and changes to,
economic, market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors
from those used in our loan
portfolio reviews;
●
the risks of changes in interest rates on the levels, composition and costs of deposits, loan
demand and mortgage
loan originations, and the values and liquidity of loan collateral, securities, and interest-sensitive
assets and
liabilities, and the risks and uncertainty of the amounts realizable;
●
changes in borrower credit risks, and savings payment behaviors;
●
changes in the availability and cost of credit and capital in the financial markets, and the types
of instruments that
may be included as capital for regulatory purposes;
●
changes in the prices, values and sales volumes of residential and commercial real estate;
Table of Contents
29
●
the effects of competition from a wide variety of local, regional, national
and other providers of financial,
investment and insurance services, including the disruption effects of
financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank;
●
the failure of assumptions and estimates underlying the establishment of allowances
for possible loan losses and
other asset impairments, losses valuations of assets and liabilities and other estimates;
●
the costs of redeveloping our headquarters and the timing and amount of rental income
upon completion of the
project;
●
the risks of mergers, acquisitions and divestitures, including,
without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions
and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
●
changes in technology or products that may be more difficult,
costly, or less effective than
anticipated;
●
cyber-attacks and data breaches that may compromise our systems,
our vendor systems
or customers’
information;
●
the risks that our deferred tax assets (“DTAs”),
if any, could be reduced
if estimates of future taxable income from
our operations and tax planning strategies are less than currently estimated, and sales
of our capital stock could
trigger a reduction in the amount of net operating loss carry-forwards that we
may be able to utilize for income tax
purposes; and
●
other factors and information in this report and other filings that we make with the SEC
under the Exchange Act,
including our Annual Report on Form 10-K for the year ended December 31,
2021 and subsequent quarterly and
current reports. See Part II, Item 1A. “RISK FACTORS”.
All written or oral forward-looking statements that are made by us or are attributable
to us are expressly qualified in their
entirety by this cautionary notice.
We have no obligation and
do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates on which
such statements otherwise are
made.
ITEM 1.
BUSINESS
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered
with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding
Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and
in 1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state
member bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled the Bank
since 1984.
As a bank holding
company, the Company
may diversify into a broader range of financial services and other business activities than currently
are permitted to the Bank under applicable laws and regulations.
The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the Bank.
The Bank has operated continuously since 1907 and currently conducts its business
primarily in East Alabama, including
Lee County and surrounding areas.
The Bank has been a member of the Federal Reserve System since April 1995.
The
Bank’s primary regulators are the Federal
Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”).
The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”)
since 1991.
Certain of the statements made in this discussion and analysis and elsewhere, including information
incorporated herein by
reference to other documents, are “forward-looking statements” within the
meaning of, and subject to, the protections of
Section 27A of the Securities
Act.
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30
Summary of Results of Operations
Quarter ended March 31,
(Dollars in thousands, except per share data)
2022
2021
Net interest income (a)
$
6,190
$
6,057
Less: tax-equivalent adjustment
112
120
Net interest income (GAAP)
6,078
5,937
Noninterest income
908
1,182
Total revenue
6,986
7,119
Provision for loan losses
(250)
—
Noninterest expense
4,901
4,690
Income tax expense
254
423
Net earnings
$
2,081
$
2,006
Basic and diluted earnings per share
$
0.59
$
0.56
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP
Financial Measures."
Financial Summary
The Company’s net earnings were $2.1
million for the first quarter of 2022, compared to $2.0 million for the first quarter of
2021.
Basic and diluted earnings per share were $0.59 per share for the first quarter of 2022, compared
to $0.56 per share
for the first quarter of 2021.
Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022,
a 2% increase compared to $6.1 million
for the first quarter of 2021.
This increase was primarily due to balance sheet growth, partially offset
by a decrease in the
Company’s net interest margin
(tax-equivalent).
Net interest margin (tax-equivalent) declined to 2.43%
in the first quarter
of 2022, compared to 2.66% for the first quarter of 2021 due to the continued lower interest
rate environment and changes
in our asset mix resulting from the continuing elevated levels of customer deposits
.
Net interest income (tax-equivalent)
included $0.1
million in PPP loan fees, net of related costs for the first quarter of 2022, compared to $0.
2
million for the
first quarter of 2021.
At March 31, 2022, the Company’s allowance
for loan losses was $4.7 million, or 1.09% of total loans, compared to $4.9
million, or 1.08% of total loans, at December 31, 2021, and $5.7
million, or 1.23% of total loans, at March 31, 2021.
The Company recorded a negative provision for loan losses of $0.3
million during the first quarter of 2022,
compared to no
provision for loan losses during the first quarter of 2021.
The negative provision for loan losses was primarily related to a
decrease in total loans, excluding PPP,
during the first quarter of 2022.
Total loans, excluding PPP,
were $424.3 million at
March 31, 2022, a decrease of $25.9 million, or 6%, compared to
December 31, 2021.
This decline was primarily due to
decreases in multi-family loans of $17.3 million and hotel loans of $6.5
million due to payoffs.
The provision for loan
losses is based upon various estimates and judgments, including the absolute level of loans,
economic conditions, credit
quality and the amount of net charge-offs.
Noninterest income was $0.9 million for the first quarter of 2022 compared to
$1.2 million for the first quarter of
2021.
The decrease in noninterest income was primarily due to a decrease
in mortgage lending income of $0.3 million as
refinance activity slowed in our primary market area, as market interest rates
on mortgage loans increased.
Noninterest expense was $4.9 million for the first quarter of 2022 compared to
$4.7 million for the first quarter of 2021.
The increase in noninterest expense was due to increases in salaries and benefits
expense and other noninterest expense.
Income tax expense was $0.3 million for the first quarter of 2022
compared to $0.4 million during the first quarter of 2021.
The Company’s effective tax
rate for the first quarter of 2022 was 10.88%, compared to 17.41% in the first quarter
of 2021.
The decrease was primarily due to an income tax benefit related to a New Markets Tax
Credit investment funded in the
fourth quarter of 2021.
The Company’s effective income
tax rate is principally impacted by tax-exempt earnings from the
Company’s investments in municipal securities,
bank-owned life insurance, and New Markets Tax
Credits.
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31
The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same
period
of 2021.
The Company’s share repurchases of $0.1
million since December 31, 2021 resulted in 3,559 fewer outstanding
common shares at March 31, 2022.
At March 31, 2022, the Bank’s regulatory capital ratios
were well above the minimum
amounts required to be “well capitalized” under current regulatory standards
with a total risk-based capital ratio of 18.08%,
a tier 1 leverage ratio of 9.09%
and a common equity tier 1 (“CET1”) ratio of 17.26%
at March 31, 2022.
COVID-19 Impact Assessment
The COVID-19 pandemic has occurred in waves of different
variants since the first quarter of 2020. Vaccines
to protect
against and/or reduce the severity of COVID-19 were widely introduced at the
beginning of 2021. At times, the pandemic
has severely restricted the level of economic activity in our markets. In response to the COVID
-19 pandemic, the State of
Alabama, and most other states, have taken preventative or protective actions to prevent
the spread of the virus, including
imposing restrictions on travel and business operations and a statewide mask mandate,
advising or requiring individuals to
limit or forego their time outside of their homes, limitations on gathering of people and
social distancing, and causing
temporary closures of businesses that have been deemed to be non-essential. Though certain
of these measures have been
relaxed or eliminated, especially as vaccination levels increased, such
measures could be reestablished in cases of new
waves, especially a wave of a COVID-19 variant that is more resistant
to existing vaccines and newly developed
treatments.
COVID-19 has significantly affected local state, national and
global health and economic activity and its future effects are
uncertain and will depend on various factors, including, among others, the duration
and scope of the pandemic, especially
new variants of the virus, effective vaccines and drug treatments, together
with governmental, regulatory and private sector
responses. COVID-19 has had continuing significant effects
on the economy, financial
markets and our employees,
customers and vendors. Our business, financial condition and results of operations
generally rely upon the ability of our
borrowers to make deposits and repay their loans, the value of collateral underlying
our secured loans, market value,
stability and liquidity and demand for loans and other products and services
we offer, all of which are affected
by the
pandemic.
We have implemented
a number of procedures in response to the pandemic to support the safety and
well-being of our
employees, customers and shareholders.
●
We believe our business continuity
plan has worked to provide essential banking services to our
communities and
customers, while protecting our employees’ health. As part of our efforts
to exercise social distancing in
accordance with the guidelines of the Centers for Disease Control and the Governor
of the State of Alabama,
starting March 23, 2020, we limited branch lobby service to appointment only
while continuing to operate our
branch drive-thru facilities and ATMs.
As permitted by state public health guidelines, on June 1, 2020, we re-
opened some of our branch lobbies. In 2021, we opened our remaining branch lobbies.
We continue to
provide
services through our online and other electronic channels. In addition,
we maintain remote work access to help
employees stay at home while providing continuity of service during outbreaks of
COVID-19 variants.
●
We serviced the financial
needs of our commercial and consumer clients with extensions and
deferrals to loan
customers effected by COVID-19, provided such customers
were not more than 30 days past due at the time of the
request; and
●
We
were an active PPP
lender. PPP loans were forgivable,
in whole or in part, if the proceeds are used for payroll
and other permitted purposes in accordance with the requirements of the PPP.
These loans carry a fixed rate of
1.00% and a term of two years (loans made before June 5, 2020) or five years (loans
made on or after June 5,
2020), if not forgiven, in whole or in part. Payments are deferred
until either the date on which the Small Business
Administration (“SBA”) remits the amount of forgiveness proceeds
to the lender or the date that is 10 months after
the last day of the covered period if the borrower does not apply for forgiveness
within that 10-month period. We
believe these loans and our participation in the program helped our customers and the communities
we serve.
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32
COVID-19 has also had various economic effects, generally.
These include supply chain disruptions and manufacturing
delays, shortages of certain goods and services, reduced consumer expenditure
on hospitality and travel, and migration from
larger urban centers to less populated areas and remote work. The
demand for single family housing has exceeded existing
supplies. When coupled with construction delays attributable to supply chain disrupti
ons and worker shortages, these
factors have caused housing prices and apartment rents to increase, generally.
Stimulative monetary and fiscal policies,
along with shortages of certain goods and services, and rising petroleum and food
prices have led to the highest inflation in
decades. Although fiscal stimulus remains under consideration by the President
and Congress, the Federal Reserve has
begun increasing its target interest rates and is considering reducing its
holdings
of securities to counteract inflation.
A summary of PPP loans extended during 2020 follows:
(Dollars in thousands)
# of SBA
Approved
Mix
$ of SBA
Approved
Mix
SBA Tier:
$2 million to $10 million
—
—
%
$
—
—
%
$350,000 to less than $2 million
23
5
14,691
40
Up to $350,000
400
95
21,784
60
Total
423
100
%
$
36,475
100
%
We collected
approximately $1.5 million in fees from the SBA related to our PPP loans during 2020.
Through December
31, 2021, we have recognized all of these fees, net of related costs. As of December
31, 2021, we had received payments
and forgiveness on all PPP loans extended during 2020.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues
Act (the “Economic Aid
Act”) was signed into law. The
Economic Aid Act provides a second $900 billion stimulus package, including
$325 billion
in additional PPP loans. The Economic Aid Act also permits the collection of
a higher amount of PPP loan fees by
participating banks.
A summary of PPP loans extended during 2021 under the Economic Aid
Act follows:
(Dollars in thousands)
# of SBA
Approved
Mix
$ of SBA
Approved
Mix
SBA Tier:
$2 million to $10 million
—
—
%
$
—
—
%
$350,000 to less than $2 million
12
5
6,494
32
Up to $350,000
242
95
13,757
68
Total
254
100
%
$
20,251
100
%
We collected
approximately $1.0 million in fees from the SBA related to PPP loans under the Economic
Aid Act. Through
March 31, 2022, we have recognized $0.8
million of these fees, net of related costs. As of March 31, 2022, we have
received payments and forgiveness on 172 PPP loans under
the Economic Aid Act, totaling $16.1 million. The outstanding
balance for the remaining 82 PPP loans under the Economic Aid Act was approximately
$4.1 million at March 31, 2022.
We continue to closely
monitor this pandemic, and are working to continue our services and to address
developments as
those occur. Our results of operations for quarter
ended March 31, 2022, and our financial condition at that date reflect only
the ongoing effects of the pandemic, and may not be indicative of
future results or financial conditions, including possible
changes in monetary or fiscal stimulus, and the possible effects of the expiration
or extension of temporary accounting and
bank regulatory relief measures in response to the COVID-19 pandemic.
As of March 31, 2022,
all of our capital ratios were in excess of all regulatory requirements to be
well capitalized.
The
continuing effects of the COVID-19 pandemic could result in adverse
changes to credit quality and our regulatory capital
ratios, and inflation will affect our costs, interest rates and the values of our assets and
liabilities, customer behaviors and
economic activity.
Continuing supply chain and supply disruptions also adversely affect
the levels and costs of economic
activities.
We continue to closely
monitor this pandemic, and are working to continue our services during the pandemic
and to address developments as those occur.
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33
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. generally accepted
accounting
principles and with general practices within the banking industry.
In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our allowance
for loan losses, our
assessment of other-than-temporary impairment, recurring and
non-recurring fair value measurements, the valuation of
other real estate owned, and the valuation of deferred tax assets, were critical to the determination
of our financial position
and results of operations. Other policies also require subjective judgment and assumptions
and may accordingly impact our
financial position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior
to the end of each calendar quarter. The
level of
the allowance is based upon 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.
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, 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
and by releases from the allowance when determined to be
appropriate to the levels of loans and probable loan losses in such loans..
In assessing the adequacy of the allowance, the Company also considers the results of its
ongoing internal, independent
loan review process. 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 that may have been conducted by bank regulatory agencies as part of their examination
process. The Company
incorporates loan review results in the determination of whether or not it is probable
that it will be able to collect all
amounts due according to the contractual terms of a loan.
As part of the Company’s quarterly assessment
of the allowance, management divides the loan portfolio into five segments:
commercial and industrial, construction and land development, commercial real estate, residential
real estate, and consumer
installment loans. The Company analyzes each segment and estimates an allowance allocation
for each loan segment.
The allocation of the allowance for loan losses begins with a process of estimating the
probable losses inherent for these
types of loans. The estimates for these loans are established by category and based
on the 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.
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34
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
influencing factors.
These qualitative and environmental factors are considered for each of the five loan segments
and the
allowance allocation, as determined by the processes noted above, is increased or
decreased based on the incremental
assessment of these factors.
The Company regularly re-evaluates its practices in determining the allowance for
loan losses. 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 quarter ended June 30, 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 economic changes.
Assessment for Other-Than-Temporary
Impairment of Securities
On a quarterly basis, management makes an assessment to determine
whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily
impaired.
For debt securities with an unrealized loss, an other-than-temporary
impairment write-down is triggered when (1) the
Company has the intent to sell a debt security,
(2) it is more likely than not that the Company will be required to sell the
debt security before recovery of its amortized cost basis, or (3) the Company does not expect
to recover the entire amortized
cost basis of the debt security.
If the Company has the intent to sell a debt security or if it is more likely than not that it will
be required to sell the debt security before recovery,
the other-than-temporary write-down is equal to the entire difference
between the debt security’s amortized cost
and its fair value.
If the Company does not intend to sell the security or it is not
more likely than not that it will be required to sell the security before recovery,
the other-than-temporary impairment write-
down is separated into the amount that is credit related (credit loss component) and the amount due to
all other factors.
The
credit loss component is recognized in earnings and is the difference between
the security’s amortized cost basis and
the
present value of its expected future cash flows.
The remaining difference between the security’s
fair value and the present
value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive
income, net of applicable taxes.
The Company is required to own certain stock as a condition of membership, such as
Federal Home Loan Bank (“FHLB”)
and Federal Reserve Bank (“FRB”).
These non-marketable equity securities are accounted for at cost
which equals par or
redemption value.
These securities do not have a readily determinable fair value as their ownership is restricted and
there is
no market for these securities.
The Company records these non-marketable equity securities as a component
of other
assets, which are periodically evaluated for impairment. Management considers
these non-marketable equity securities to
be long-term investments. Accordingly,
when evaluating these securities for impairment, management considers
the
ultimate recoverability of the par value rather than by recognizing temporary declines in
value.
Fair Value
Determination
U.S. GAAP requires management to value and disclose certain of the Company’s
assets and liabilities at fair value,
including investments classified as available-for-sale and derivatives.
ASC 820,
Fair Value
Measurements and Disclosures
,
which defines fair value, establishes a framework for measuring fair value in accordance
with U.S. GAAP and expands
disclosures about fair value measurements.
For more information regarding fair value measurements and disclosures,
please refer to Note 7, Fair Value,
of the consolidated financial statements that accompany this report.
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35
Fair values are based on active market prices of identical assets or liabilities when available.
Comparable assets or
liabilities or a composite of comparable assets in active markets are used when identical assets
or liabilities do not have
readily available active market pricing.
However, some of the Company’s
assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between
willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and
other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s
best estimates for appropriate discount rates, default rates,
prepayments,
market volatility and other factors, taking into account current observable market data and
experience.
These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions, as
well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Other Real Estate Owned
Other real estate owned (“OREO”), consists of properties obtained through foreclosure or
in satisfaction of loans and is
reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss
recognized as a
charge-off through the allowance for loan losses. Additional
OREO losses for subsequent valuation adjustments are
determined on a specific property basis and are included as a component of other noninterest
expense along with holding
costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense.
Significant judgments and
complex estimates are required in estimating the fair value of OREO, and the period of time
within which such estimates
can be considered current is significantly shortened during periods of
market volatility. As a result, the net proceeds
realized from sales transactions could differ significantly from appraisals,
comparable sales, and other estimates used to
determine the fair value of OREO.
Deferred Tax
Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available
evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be realized. The
ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of taxable income over
the last three years and
projections for future taxable income over the periods in which the deferred tax assets are
deductible, management believes
it is more likely than not that we will realize the benefits of these deductible differences
at March 31, 2022. The amount of
the deferred tax assets considered realizable, however,
could be reduced if estimates of future taxable income are reduced.
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36
RESULTS
OF OPERATIONS
Average Balance
Sheet and Interest Rates
Quarter ended March 31,
2022
2021
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
440,608
4.46%
$
466,368
4.50%
Securities - taxable
374,825
1.45%
289,981
1.33%
Securities - tax-exempt
60,272
3.57%
63,050
3.68%
Total securities
435,097
1.74%
353,031
1.75%
Federal funds sold
73,575
0.17%
32,809
0.15%
Interest bearing bank deposits
83,161
0.16%
70,350
0.09%
Total interest-earning assets
1,032,441
2.66%
922,558
2.96%
Deposits:
NOW
200,907
0.12%
172,055
0.16%
Savings and money market
345,549
0.20%
281,844
0.25%
Time Deposits
159,785
0.90%
159,466
1.09%
Total interest-bearing deposits
706,241
0.34%
613,365
0.44%
Short-term borrowings
3,943
0.50%
3,161
0.50%
Total interest-bearing liabilities
710,184
0.34%
616,526
0.44%
Net interest income and margin (tax-equivalent)
$
6,190
2.43%
$
6,057
2.66%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $6.2 million for the first quarter of 2022
,
a 2% increase compared to $6.1 million
for the first quarter of 2021.
This increase was primarily due to balance sheet growth, partially offset
by a decrease in the
Company’s net interest margin
(tax-equivalent).
The tax-equivalent yield on total interest-earning assets decreased by 30 basis points
to 2.66% in the first quarter of 2022
compared to 2.96%
in the first quarter of 2021.
This decrease was primarily due to the lower interest environment and
changes in our asset mix resulting from the significant increase in customer deposits.
The cost of total interest-bearing liabilities decreased by 10 basis points to 0.34%
in the first quarter of 2022 compared to
0.44% in the first quarter of 2021, even as interest bearing deposits increased.
The net decrease in our funding costs was
primarily due to lower prevailing market interest rates.
Our funding costs declined less than the rates earned on our interest
earning assets.
The Company continues to deploy various asset liability management strategies
to manage its risk to interest rate
fluctuations. The Company’s
net interest margin could continue to experience pressure due to
reduced earning asset yields
and increased competition for quality loan opportunities.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to provide
an allowance for loan losses that
management believes, based on its processes and estimates, should be adequate
to provide for the probable losses on
outstanding loans.
The Company recorded a negative provision for loan losses of $0.3 million for the
first quarter of 2022,
compared to no charge to provision for loan losses for the first
quarter of 2021.
The negative provision for loan losses was
primarily related to a decrease in total loans, excluding PPP,
during the first quarter of 2022. Total
loans, excluding PPP,
were $424.3 million at March 31, 2022, a decrease of $25.9 million, or 6%,
compared to December 31, 2021.
This decline
was primarily due to decreases in multi-family loans of $17.3 million and hotel loans
of $6.5 million due to payoffs.
The
provision for loan losses is based upon various factors, including the absolute level of loans,
economic conditions, credit
quality, and the amount of net
charge-offs.
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37
Based upon its assessment of the loan portfolio, management adjusts the allowance for loan
losses to an amount it believes
should be appropriate to adequately cover its estimate of probable losses in the loan portfolio.
The Company’s allowance
for loan losses as a percentage of total loans was 1.09% at March 31, 2022, compared to 1.08%
at December 31, 2021.
While the policies and procedures used to estimate the allowance for loan losses, as well as the resulting
provision for loan
losses charged to operations, are considered adequate by management and are
reviewed from time to time by our regulators,
they are based on estimates and judgments and are therefore approximate and imprecise.
Factors beyond our control (such
as conditions in the local and national economy,
local real estate markets, or industries) may have a material adverse effect
on our asset quality and the adequacy of our allowance for loan losses resulting in significant
increases in the provision for
loan losses.
Noninterest Income
Quarter ended March 31,
(Dollars in thousands)
2022
2021
Service charges on deposit accounts
$
142
$
132
Mortgage lending income
253
549
Bank-owned life insurance
99
103
Other
414
398
Total noninterest income
$
908
$
1,182
The Company’s income from mortgage lending
was primarily attributable to the (1) origination and sale of mortgage loans
and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses
from the sale of the mortgage
loans originated, origination fees, underwriting fees, and other fees associated
with the origination of loans, which are
netted against the commission expense associated with these originations. The
Company’s normal practice is to originate
mortgage loans for sale in the secondary market and to either sell or retain the associated
MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding
mortgage loan is sold.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis.
Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type.
If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair
value, a valuation allowance for that group is established.
The valuation
allowance is adjusted as the fair value changes.
An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease
in the fair value of MSRs.
The following table presents a breakdown of the Company’s
mortgage lending income.
Quarter ended March 31,
(Dollars in thousands)
2022
2021
Origination income, net
$
229
$
537
Servicing fees, net
24
12
Total mortgage lending income
$
253
$
549
The Company’s income from mortgage lending
typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of mortgage loans. Origination income decreased
in in the first quarter of 2022
compared to the first quarter of 2021 due to a decrease in refinance activity in our primary
market area, as market interest
rates on mortgage loans increased.
The decrease in origination income was partially offset by an increase in servicing
fees,
net of related amortization expense as prepayment speeds slowed during the
first quarter of 2022, resulting in decreased
amortization expense.
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38
Noninterest Expense
Quarter ended March 31,
(Dollars in thousands)
2022
2021
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
The increase in salaries and benefits was primarily due to a decrease in deferred costs related
to the PPP loan program, and
routine annual wage and benefit increases.
The increase in other noninterest expense was due to a variety of miscellaneous items
including: increased marketing costs,
ATM
and checkcard expenses, and stationary and supplies.
Income Tax
Expense
Income tax expense was $0.3 million for the first quarter of 2022
compared to $0.4 million for the first quarter of 2021.
The Company’s effective income
tax rate for the first quarter of 2022 was 10.88%, compared to 17.41%
in the first quarter
of 2021.
The decrease was primarily due to an income tax benefit related to a New Markets Tax
Credit investment funded
in the fourth quarter of 2021.
The Company’s effective
income tax rate is principally impacted by tax-exempt earnings
from the Company’s investments in
municipal securities, bank-owned life insurance, and New Markets Tax
Credits.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $417.5
million at March 31, 2022 compared to $421.9 million at December 31, 2021.
This increase reflects an increase in the amortized cost basis of securities available-for-sale
of $20.1 million, and a decrease
of $24.5 million in the fair value of securities available-for-sale.
The increase in the amortized cost basis of securities
available-for-sale was primarily attributable to management
allocating more funding to the investment portfolio following
the significant increase in customer deposits.
The decrease in the fair value of securities was primarily due to an increase
in
long-term market interest rates.
The average annualized tax-equivalent yields earned on total securities
were 1.74%
in the
first quarter of 2022 and 1.75%
in the first quarter of 2021.
Loans
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
73,297
83,977
79,202
87,933
88,687
Construction and land development
33,058
32,432
34,890
37,477
30,332
Commercial real estate
235,062
258,371
252,798
242,845
254,731
Residential real estate
79,102
77,661
80,205
82,164
82,848
Consumer installment
8,412
6,682
7,060
7,762
6,524
Total loans
428,931
459,123
454,155
458,181
463,122
Less:
unearned income
(514)
(759)
(923)
(1,197)
(1,243)
Loans, net of unearned income
$
428,417
458,364
453,232
456,984
461,879
Total loans, net of unearned income,
were $428.4 million at March 31, 2022, and $458.4 million at December 31,
2021.
Excluding PPP loans, total loans, net of unearned income, were $424.3
million, a decrease of $25.9 million, or 6% from
December 31, 2021.
This decline was primarily due to decreases in multi-family loans of $17.3
million and hotel loans of
$6.5 million.
Four loan categories represented the majority of the loan portfolio at March
31, 2022: commercial real estate
(55%), residential real estate (18%), commercial and industrial (17%)
and construction and land development (8%).
Approximately 25% of the Company’s commercial
real estate loans were classified as owner-occupied at March 31, 2022.
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39
Within the residential real estate portfolio segment, the Company
had junior lien mortgages of approximately $7.1 million,
or 2%, and $7.2 million, or 2%, of total loans, net of unearned income at March 31, 2022 and
December 31, 2021,
respectively.
For residential real estate mortgage loans with a consumer purpose, the Company
had no loans that required
interest only payments at March 31, 2022 and December 31, 2021. The Company’s
residential real estate mortgage
portfolio does not include any option ARM loans, subprime loans, or any material amount
of other high-risk consumer
mortgage products.
The average yield earned on loans and loans held for sale was 4.46% in the first quarter of
2022 and 4.50% in the first
quarter of 2021.
The specific economic and credit risks associated with our loan portfolio include,
but are not limited to, the effects of
current economic conditions, including the continuing effects from the
COVID-19 pandemic, on our borrowers’ cash flows,
real estate market sales volumes, valuations, availability and cost of financing properties,
real estate industry
concentrations, competitive pressures from a wide range of other lenders, deterioration
in certain credits, interest rate
fluctuations, reduced collateral values or non-existent collateral,
title defects, inaccurate appraisals, financial deterioration
of borrowers, fraud, and any violation of applicable laws and regulations.
The Company attempts to reduce these economic and credit risks through its loan-to-value
guidelines for collateralized
loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial
position. Also, we have
established and periodically review,
lending policies and procedures. Banking regulations limit a bank’s
credit exposure by
prohibiting unsecured loan relationships that exceed 10% of its capital; or 20%
of capital, if loans in excess of 10% of
capital are fully secured. Under these regulations, we are prohibited from having secured
loan relationships in excess of
approximately $21.2 million.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding
plus
unfunded commitments) to a single borrower of $19.1 million. Our loan policy requires
that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit.
At March 31, 2022, the Bank had no
relationships exceeding these limits.
We periodically analyze
our commercial and industrial and commercial real estate loan portfolios to determine if
a
concentration of credit risk exists in any one or more industries. We
use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers.
Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk
-based capital at March 31, 2022 and December 31, 2021.
March 31,
December 31,
(Dollars in thousands)
2022
2021
Lessors of 1-4 family residential properties
$
48,920
$
47,880
Hotel/motel
37,377
43,856
Shopping centers
29,147
29,574
In light of disruptions in economic conditions caused by COVID-19, the financial regulators
have issued guidance
encouraging banks to work constructively with borrowers affected
by the virus in our community.
This guidance, including
the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner
Guidance for Assessing Safety
and Soundness Considering the Effect of the COVID-19
Pandemic on Institutions, provides that the agencies will not
criticize financial institutions that mitigate credit risk through prudent actions
consistent with safe and sound practices.
Specifically, examiners
will not criticize institutions for working with borrowers as part of a risk
mitigation strategy
intended to improve existing loans, even if the restructured loans have or develop
weaknesses that ultimately result in
adverse credit classification.
Upon demonstrating the need for payment relief, the bank will work with qualified borrowers
that were otherwise current before the pandemic to determine the most appropriate
deferral option.
For residential
mortgage and consumer loans the borrower may elect to defer payments for up to three
months.
Interest continues to
accrue and the amount due at maturity increases.
Commercial real estate, commercial, and small business borrowers may
elect to defer payments for up to three months or pay scheduled interest payments for a
six-month period.
The bank
recognizes that a combination of the payment relief options may be prudent dependent
on a borrower’s business type.
As
of March 31, 2022, we had no COVID-19 loan deferrals, compared to one COVID-19 loan
deferral totaling $0.1 million at
December 31, 2021.
Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law
from classification as a TDR
pursuant to GAAP.
In addition, the Interagency Statement on COVID-19 Loan Modifications provides
circumstances in
which a loan modification is not subject to classification as a TDR if such loan is not eligible
for modification under
Section 4013.
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40
Allowance for Loan Losses
The Company maintains the allowance for loan losses at a level that
management believes appropriate to adequately cover
the Company’s estimate of probable
losses inherent in the loan portfolio. The allowance for loan losses was $4.7 million at
March 31, 2022 compared to $4.9 million at December 31, 2021,
which management believed to be adequate at each of the
respective dates. The judgments and estimates associated with the determination
of the allowance for loan losses are
described under “Critical Accounting Policies.”
A summary of the changes in the allowance for loan losses and certain asset quality ratios
for the first quarter of 2022 and
the previous four quarters is presented below.
2022
2021
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
4,939
5,119
5,107
5,682
5,618
Charge-offs:
Commercial real estate
—
(254)
—
—
—
Residential real estate
—
(2)
—
(1)
—
Consumer installment
(48)
(32)
—
—
(5)
Total charge
-offs
(48)
(288)
—
(1)
(5)
Recoveries
17
108
12
26
69
Net (charge-offs) recoveries
(31)
(180)
12
25
64
Provision for loan losses
(250)
—
—
(600)
—
Ending balance
$
4,658
4,939
5,119
5,107
5,682
as a % of loans
1.09
%
1.08
1.13
1.12
1.23
as a % of nonperforming loans
1,256
%
1,112
1,053
813
726
Net charge-offs (recoveries) as % of average loans (a)
0.03
%
0.16
(0.01)
(0.02)
(0.06)
(a) Net (charge-offs) recoveries are annualized.
As described under “Critical Accounting Policies,” management assesses the adequacy
of the allowance prior to the end of
each calendar quarter. The level of the allowance
is based upon management’s evaluation
of the loan portfolios, past loan
loss experience, known and inherent risks in the portfolio, adverse situations that
may affect the 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. This evaluation is
inherently subjective as it requires various material estimates and judgments, including
the amounts and timing of future
cash flows expected to be received on impaired loans that may be susceptible to
significant change. The ratio of our
allowance for loan losses to total loans outstanding was 1.09%
at March 31, 2022, compared to 1.08% at December 31,
2021.
Excluding PPP loans, which are guaranteed by the SBA,
the Company’s allowance for
loan losses was 1.10% of
total loans at both March 31, 2022 and December 31, 2021. In the future, the allowance to total
loans outstanding ratio will
increase or decrease to the extent the factors that influence our quarterly allowance assessment,
including the duration and
magnitude of COVID-19 effects, in their entirety either improve or weaken.
In addition, our regulators, as an integral part
of their examination process, will periodically review the Company’s
allowance for loan losses, and may require the
Company to make additional provisions to the allowance for loan losses based on their
judgment about information
available to them at the time of their examinations.
Nonperforming Assets
At March 31, 2022
the Company had $0.7 million in nonperforming assets compared to $0.8 million at December 31,
2021.
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41
The table below provides information concerning total nonperforming assets
and certain asset quality ratios for the first
quarter of 2022 and the previous four quarters.
2022
2021
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
371
444
486
628
783
Other real estate owned
374
374
—
—
—
Total nonperforming assets
$
745
818
486
628
783
as a % of loans and other real estate owned
0.17
%
0.18
0.11
0.14
0.17
as a % of total assets
0.07
%
0.07
0.05
0.06
0.08
Nonperforming loans as a % of total loans
0.09
%
0.10
0.11
0.14
0.17
Accruing loans 90 days or more past due
$
—
—
69
—
—
The table below provides information concerning the composition of nonaccrual
loans for the first quarter of 2022 and the
previous four quarters.
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial real estate
$
182
187
193
199
206
Residential real estate
189
257
293
429
577
Total nonaccrual loans
$
371
444
486
628
783
The Company discontinues the accrual of interest income when (1) there is a significant
deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or
(2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process of collection
.
The Company had $0.4
million in loans on nonaccrual status at March 31, 2022 and December 31,
2021, respectively.
The Company had no loans 90 days or more past due and still accruing at March 31,
2022 and December 31, 2021,
respectively.
The table below provides information concerning the composition of
OREO for the first quarter of 2022 and the previous
four quarters.
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Other real estate owned:
Commercial real estate
$
374
374
—
—
—
Total other real estate owned
$
374
374
—
—
—
Potential Problem Loans
Potential problem loans represent those loans with a well-defined weakness and
where information about possible credit
problems of a borrower has caused management to have serious doubts about the borrower’s
ability to comply with present
repayment terms.
This definition is believed to be substantially consistent with the standards
established by the Federal
Reserve, the Company’s primary regulator,
for loans classified as substandard, excluding nonaccrual loans.
Potential
problem loans, which are not included in nonperforming assets, amounted to $2.0
million, or 0.5% of total loans at March
31, 2022, and $2.4 million, or 0.5% of total loans at December 31, 2021.
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42
The table below provides information concerning the composition of potential problem
loans for the first quarter of 2022
and the previous four quarters.
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Potential problem loans:
Commercial and industrial
$
215
226
274
291
299
Construction and land development
13
218
231
239
247
Commercial real estate
150
156
172
178
173
Residential real estate
1,592
1,748
1,848
2,096
2,092
Consumer installment
8
12
19
7
9
Total potential problem loans
$
1,978
2,360
2,544
2,811
2,820
At March 31, 2022, approximately $0.2 million or 8% of total potential problem loans
were past due at least 30 days, but
less than 90 days.
The following table is a summary of the Company’s
performing loans that were past due at least 30 days,
but less than
90 days,
for the first quarter of 2022 and the previous four quarters.
2022
2021
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial
$
7
3
68
1
42
Construction and land development
1
204
—
204
10
Commercial real estate
—
—
—
205
180
Residential real estate
496
516
409
68
399
Consumer installment
15
25
25
7
36
Total
$
519
748
502
485
667
Deposits
Total deposits increased
$23.5 million, or 2%, to $1.0 billion at March 31, 2022, compared to $994.2
million at December
31, 2021.
Noninterest-bearing deposits were $308.3 million, or 30% of total deposits, at March 31,
2022, compared to
$316.1 million, or 32% of total deposits at December 31, 2021.
Estimated uninsured deposits totaled $427.3 million and $420.8 million at March 31,
2022 and December 31, 2021,
respectively.
Uninsured amounts are estimated based on the portion of account balances in excess of
FDIC insurance
limits.
The average rate paid on total interest-bearing deposits was 0.34% in the first quarter of 2022
compared to 0.44% in the
first quarter of 2021.
Other Borrowings
Other borrowings consist of short-term borrowings and long-term debt.
Short-term borrowings generally consist of federal
funds purchased and securities sold under agreements to repurchase
with an original maturity of one year or less.
The Bank
had available federal funds lines totaling $51.0 million and $41.0
million with none outstanding at March 31, 2022, and
December 31, 2021, respectively.
Securities sold under agreements to repurchase totaled $4.0
million and $3.4 million at
March 31, 2022 and December 31, 2021, respectively.
The average rate paid on short-term borrowings was 0.50% in the first quarter of 2022
and 2021,
respectively.
The Company had no long-term debt at March 31, 2022 and December 31, 2021.
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43
CAPITAL ADEQUACY
The Company’s consolidated
stockholders’ equity was $86.4 million and $103.7 million as of March 31, 2022
and
December 31, 2021, respectively.
The decrease from December 31, 2021 was primarily driven by an other comprehensive
loss due to the change in unrealized losses on securities available-for-sale,
net of tax of $18.3 million.
The increase in the
unrealized loss on securities was primarily due to an increase in long-term
market interest rates.
These unrealized losses do
not affect the Bank’s capital
for regulatory capital purposes.
The Company paid cash dividends of $0.265 per share in the first quarter of 2022, an increase of 2% from the same
period
in 2021. The Company’s share repurchases of
$0.1 million since December 31, 2021 resulted in 3,559
fewer outstanding
common shares at March 31, 2022.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III
regulatory capital framework and
related Dodd-Frank Wall
Street Reform and Consumer Protection Act changes.
The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements
for capital adequacy purposes.
The capital
conservation buffer was subject to a three year phase-in period
that began on January 1, 2016 and was fully phased-in on
January 1, 2019 at 2.5%.
A banking organization with a conservation buffer of less than the
required amount will be
subject to limitations on capital distributions, including dividend payments and certain discretionary
bonus payments to
executive officers.
At March 31, 2022, the Bank’s ratio
was sufficient to meet the fully phased-in conservation buffer.
Effective March 20, 2020, the Federal Reserve and the other
federal banking regulators adopted an interim final rule that
amended the capital conservation buffer.
The interim final rule was adopted as a final rule on August 26, 2020.
The new
rule revises the definition of “eligible retained income” for purposes of the
maximum payout ratio to allow banking
organizations to more freely use their capital buffers to
promote lending and other financial intermediation activities, by
making the limitations on capital distributions more gradual.
The eligible retained income is now the greater of (i) net
income for the four preceding quarters, net of distributions and associated
tax effects not reflected in net income; and (ii)
the average of all net income over the preceding four quarters.
The interim final rule only affects the capital buffers, and
banking organizations were encouraged to
make prudent capital distribution decisions.
The Federal Reserve has treated us as a “small bank holding company’ under the Federal
Reserve’s policy.
Accordingly,
our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated
subsidiaries.
The Bank’s
tier 1 leverage ratio was 9.09%, CET1 risk-based capital ratio was 17.26%, tier 1 risk-based
capital ratio was 17.26%, and
total risk-based capital ratio was 18.08%
at March 31, 2022. These ratios exceed the minimum regulatory capital
percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio,
8.0% for tier 1 risk-based capital ratio,
and 10.0% for total risk-based capital ratio to be considered “well capitalized.”
The Bank’s capital conservation buffer
was
10.08%
at March 31, 2022.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and
liabilities to provide a satisfactory,
consistent level of profitability within
the framework of established liquidity,
loan, investment, borrowing, and capital policies. The Bank’s
Asset Liability
Management Committee (“ALCO”) is charged with the responsibility
of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two
critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations
in interest rates. ALCO
measures and evaluates interest rate risk so that the Bank can meet customer demands
for various types of loans and
deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation
model and an economic
value of equity (“EVE”) model.
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44
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation
modeling.
Forecasted levels of earning assets, interest-bearing liabilities, and off
-balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next 12 months and other
factors in order to produce various earnings
simulations and estimates. To
help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the
variance of net interest income from gradual changes in interest rates.
For changes up or down in rates from management’s
flat interest rate forecast over the next 12 months, policy limits for net interest income variances are
as follows:
●
+/- 20% for a gradual change of 400 basis points
●
+/- 15% for a gradual change of 300 basis points
●
+/- 10% for a gradual change of 200 basis points
●
+/- 5% for a gradual change of 100 basis points
At March 31, 2022, our earnings simulation model indicated that we were in compliance
with the policy guidelines noted
above.
Economic Value
of Equity
. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic values are
estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheet items,
which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12 month timeframe,
EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance
sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding to
or anticipating changes in
interest rates, or market and competitive conditions.
To help limit interest rate risk,
we have stated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decrease from our
base case by more than
the following:
●
45% for an instantaneous change of +/- 400 basis points
●
35% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At March 31, 2022, our EVE model indicated that we were in compliance
with our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income
will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated
with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition,
the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain
assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions.
Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets
and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
Prepayments
and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of certain instruments.
The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates or economic
stress, which may
differ across industries and economic sectors. ALCO reviews each of the
above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory,
consistent levels of profitability within the framework of the
Company’s established liquidity,
loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between
interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity
while continuing to meet the credit and deposit
needs of our customers. From time to time, the Company also may enter into back-to-back
interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify
as derivatives, but are not
designated as hedging instruments. At March 31, 2022 and December 31, 2021,
the Company had no derivative contracts
designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
Table of Contents
45
Liquidity Risk Management
Liquidity is the Company’s ability to convert
assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations. Without
proper management of its liquidity,
the
Company could experience higher costs of obtaining funds due to insufficient liquidity,
while excessive liquidity could lead
to lower earnings due to the cost of foregoing alternative higher-yield
market investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the Company.
The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are
separate and distinct legal
entities with different funding needs and sources, and each are
subject to regulatory guidelines and requirements.
The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses,
debt obligations and
dividends.
The Bank’s payment of dividends depends
on its earnings, liquidity, capital
and the absence of regulatory
restrictions on such dividends.
The primary source of funding and liquidity for the Company has been dividends received
from the Bank.
If needed, the
Company could also borrow money,
or issue common stock or other securities.
Primary uses of funds by the Company
include dividends paid to stockholders, Company stock repurchases, and payment of
Company expenses.
Primary sources of funding for the Bank include customer deposits, other borrowings,
repayment and maturity of securities,
sales of securities, and the sale and repayment of loans. The Bank has access to federal
funds lines from various banks and
borrowings from the Federal Reserve discount window.
In addition to these sources, the Bank may participate in the
FHLB’s advance program to obtain funding for
its growth. Advances include both fixed and variable terms and may be
taken out with varying maturities. At March 31, 2022, the Bank had a remaining available
line of credit with the FHLB of
$331.4 million. At March 31, 2022, the Bank also had $51.0
million of available federal funds lines with no borrowings
outstanding. Primary uses of funds include repayment of maturing obligations and
growing the loan portfolio.
Management believes that the Company and the Bank have adequate sources of liquidity
to meet all their respective known
contractual obligations and unfunded commitments, including loan commitments
and reasonable borrower, depositor,
and
creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual
Obligations
At March 31, 2022, the Bank had outstanding standby letters of credit of $1.4
million and unfunded loan commitments
outstanding of $53.7 million.
Because these commitments generally have fixed expiration dates and
many will expire
without being drawn upon, the total commitment level does not necessarily represent future
cash requirements. If needed to
fund these outstanding commitments, the Bank could liquidate federal funds
sold or a portion of our securities available-
for-sale, or draw on its available credit facilities.
Mortgage lending activities
We primarily sell residential
mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these
loans. The sale agreements for these residential mortgage loans with Fannie Mae and other
investors include various
representations and warranties regarding the origination and characteristics
of the residential mortgage loans.
Although the
representations and warranties vary among investors, they typically cover ownership
of the loan, validity of the lien
securing the loan, the absence of delinquent taxes or liens against the property securing the
loan, compliance with loan
criteria set forth in the applicable agreement, compliance with applicable federal,
state, and local laws, among other
matters.
As of March 31, 2022,
the unpaid principal balance of residential mortgage loans, which we have originated
and sold, but
retained the servicing rights, was $250.3 million.
Although these loans are generally sold on a non-recourse basis, we may
be obligated to repurchase residential mortgage loans or reimburse investors for
losses incurred (make whole requests) if a
loan review reveals a potential breach of seller representations and warranties.
Upon receipt of a repurchase or make whole
request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and
make whole requests are
typically reviewed on an individual loan by loan basis to validate the claims made by the investor
and to determine if a
contractually required repurchase or make whole event has occurred. We
seek to reduce and manage the risks of potential
repurchases, make whole requests, or other claims by mortgage loan investors
through our underwriting and quality
assurance practices and by servicing mortgage loans to meet investor and secondary
market standards.
Table of Contents
46
The Company was not required to repurchase any loans during the
first quarter of 2022 as a result of representation and
warranty provisions contained in the Company’s
sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at March 31, 2022.
We service all residential
mortgage loans originated and sold by us to Fannie Mae.
As servicer, our primary duties are to:
(1) collect payments due from borrowers;
(2) advance certain delinquent payments of principal and interest;
(3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating to
the mortgage loans;
(4) maintain any
required escrow accounts for payment of taxes and insurance and administer escrow payments;
and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to investors
consistent with the agreements
governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies
standards
of responsibility for actions taken by us in such
capacity and provides protection against expenses and liabilities incurred by us when
acting in compliance with the
respective servicing agreements.
However, if we commit a material breach of our obligations
as servicer, we may be
subject to termination if the breach is not cured within a specified period following notice.
The standards governing
servicing and the possible remedies for violations of such standards are determined by servicing
guides issued by Fannie
Mae as well as the contract provisions established between Fannie Mae and the Bank.
Remedies could include repurchase
of an affected loan.
Although repurchase and make whole requests related to representation and
warranty provisions and servicing activities
have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse
investors for losses incurred
(make whole requests) may increase in frequency if investors more aggressively
pursue all means of recovering losses on
their purchased loans.
As of March 31, 2022, we do not believe that this exposure is material due to the historical level
of
repurchase requests and loss trends, in addition to the fact that 99% of our residential
mortgage loans serviced for Fannie
Mae were current as of such date.
We maintain ongoing communications
with our investors and will continue to evaluate
this exposure by monitoring the level and number of repurchase requests as well as the delinquency
rates in our investor
portfolios.
Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential
mortgage loans sold to Fannie Mae to
request forbearance to the servicer after affirming that such borrower is experiencing
financial hardships during the
COVID-19 emergency.
Except for vacant or abandoned properties, Fannie Mae servicers may not initiate
foreclosures on
similar procedures or related evictions or sales until December 31, 2020. The
forbearance period was extended, generally,
to March 31, 2021. The Bank sells mortgage loans to Fannie Mae and services these on
an actual/actual basis. As a result,
the Bank is not obligated to make any advances to Fannie Mae on principal and interest on
such mortgage loans where the
borrower is entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented
herein have been prepared in
accordance with GAAP and practices within the banking industry which require
the measurement of financial position and
operating results in terms of historical dollars without considering the changes in
the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact on a
financial institution’s performance
than the effects of general levels of inflation.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASUs have been issued by the FASB
but are not yet effective.
●
ASU 2016-13,
Financial Instruments – Credit Losses (Topic
326):
Measurement of Credit Losses on Financial
Instruments;
Table of Contents
47
Information about these pronouncements is described in more detail below.
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): - Measurement of Credit
Losses on Financial
Instruments
, amends guidance on reporting credit losses for assets held at amortized cost basis and
available for sale debt
securities.
For assets held at amortized cost basis, the new standard eliminates the probable initial recognition
threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of all expected
credit losses using a broader
range of information regarding past events, current conditions and forecasts assessing the
collectability of cash flows. The
allowance for credit losses is a valuation account that is deducted from the amortized
cost basis of the financial assets to
present the net amount expected to be collected.
For available for sale debt securities, credit losses should be measured in a
manner similar to current GAAP,
however the new standard will require that credit losses be presented as an allowance
rather than as a write-down.
The new guidance affects entities holding financial assets and
net investment in leases that are
not accounted for at fair value through net income. The amendments affect
loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables,
and any other financial assets not
excluded from the scope that have the contractual right to receive cash.
For public business entities, the new guidance was
originally effective for annual and interim periods in fiscal years
beginning after December 15, 2019.
The Company has
developed an implementation team that is following a general timeline.
The team has been working with an advisory
consultant, with whom a third-party software license has been purchased.
The Company’s preliminary evaluation
indicates
the provisions of ASU No. 2016-13 are expected to impact the Company’s
consolidated financial statements, in particular
the level of the reserve for credit losses.
The Company is continuing to evaluate the extent of the potential impact and
expects that portfolio composition and economic conditions at the time of adoption
will be a factor.
On October 16, 2019,
the FASB approved
a previously issued proposal granting smaller reporting companies a postponement of the required
implementation date for ASU 2016-13.
The Company will now be required to implement the new standard in January
2023, with early adoption permitted in any period prior to that date.
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48
Table 1
– Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles
(GAAP), this quarterly
report on Form 10-Q includes certain designated net interest income amounts
presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculation of the efficiency
ratio.
The Company believes the presentation of net interest income on a tax-equivalent
basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability
within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’
understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to
GAAP.
The reconciliations
of these non-
GAAP financial measures to their most directly comparable GAAP financial measures are
presented below.
2022
2021
First
Fourth
Third
Second
First
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,078
6,037
6,041
5,975
5,937
Tax-equivalent adjustment
112
115
117
118
120
Net interest income (Tax
-equivalent)
$
6,190
6,152
6,158
6,093
6,057
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49
Table 2
- Selected Quarterly Financial Data
2022
2021
First
Fourth
Third
Second
First
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,190
6,152
6,158
6,093
6,057
Less: tax-equivalent adjustment
112
115
117
118
120
Net interest income (GAAP)
6,078
6,037
6,041
5,975
5,937
Noninterest income
908
1,019
956
1,131
1,182
Total revenue
6,986
7,056
6,997
7,106
7,119
Provision for loan losses
(250)
—
—
(600)
—
Noninterest expense
4,901
5,092
4,736
4,916
4,690
Income tax expense
254
93
386
504
423
Net earnings
$
2,081
1,871
1,875
2,286
2,006
Per share data:
Basic and diluted net earnings
$
0.59
0.53
0.53
0.65
0.56
Cash dividends declared
0.265
0.26
0.26
0.26
0.26
Weighted average shares outstanding:
Basic and diluted
3,518,657
3,524,311
3,536,320
3,554,871
3,566,299
Shares outstanding, at period end
3,516,971
3,520,485
3,529,338
3,545,855
3,566,326
Book value
$
24.57
29.46
29.73
29.91
29.06
Common stock price
High
$
34.49
34.79
35.36
38.90
48.00
Low
31.75
31.32
33.25
34.50
37.55
Period end:
33.21
32.30
33.80
35.46
38.37
To earnings ratio
14.44
14.23
14.57
15.22
17.85
To book value
135
%
110
114
119
132
Performance ratios:
Return on average equity
7.97
%
7.07
7.01
8.74
7.37
Return on average assets
0.75
%
0.70
0.72
0.91
0.82
Dividend payout ratio
44.92
%
49.06
49.06
40.00
46.43
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.09
%
1.08
1.13
1.12
1.23
Nonperforming loans
1,256
%
1,112
1,053
813
726
Nonperforming assets as a % of:
Loans and other real estate owned
0.17
%
0.18
0.11
0.14
0.17
Total assets
0.07
%
0.07
0.05
0.06
0.08
Nonperforming loans as a % of total loans
0.09
%
0.10
0.11
0.14
0.17
Annualized net charge-offs (recoveries) as % of average loans
0.03
%
0.16
(0.01)
(0.02)
(0.06)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
17.26
%
16.23
16.82
17.03
17.21
Tier 1 risk-based capital ratio
17.26
%
16.23
16.82
17.03
17.21
Total risk-based capital ratio
18.08
%
17.06
17.72
17.94
18.25
Tier 1 leverage ratio
9.09
%
9.35
9.57
9.81
9.99
Other financial data:
Net interest margin (a)
2.43
%
2.45
2.51
2.60
2.66
Effective income tax rate
10.88
%
4.74
17.07
18.06
17.41
Efficiency ratio (b)
69.05
%
71.01
66.57
68.05
64.79
Selected average balances:
Securities available-for-sale
$
435,097
414,061
395,529
370,582
353,031
Loans, net of unearned income
439,713
455,726
452,668
460,672
463,424
Total assets
1,114,407
1,073,564
1,040,985
1,005,041
980,884
Total deposits
1,003,394
961,544
927,368
894,757
863,194
Total stockholders’ equity
104,493
105,925
106,936
104,591
108,890
Selected period end balances:
Securities available-for-sale
$
417,459
421,891
407,474
384,865
359,630
Loans, net of unearned income
428,417
458,364
453,232
456,984
461,879
Allowance for loan losses
4,658
4,939
5,119
5,107
5,682
Total assets
1,109,664
1,105,150
1,065,871
1,036,232
993,263
Total deposits
1,017,742
994,243
954,971
923,462
880,590
Total stockholders’ equity
86,411
103,726
104,929
106,043
103,639
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Efficiency ratio is the result of noninterest expense divided by
the sum of noninterest income and tax-equivalent net interest income.
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
Table of Contents
50
Table 3
- Average Balances
and Net Interest Income Analysis
Quarter ended March 31,
2022
2021
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
440,608
$
4,850
4.46%
$
466,368
$
5,178
4.50%
Securities - taxable
374,825
1,336
1.45%
289,981
949
1.33%
Securities - tax-exempt (2)
60,272
531
3.57%
63,050
572
3.68%
Total securities
435,097
1,867
1.74%
353,031
1,521
1.75%
Federal funds sold
73,575
31
0.17%
32,809
12
0.15%
Interest bearing bank deposits
83,161
32
0.16%
70,350
16
0.09%
Total interest-earning assets
1,032,441
$
6,780
2.66%
922,558
$
6,727
2.96%
Cash and due from banks
15,105
13,880
Other assets
66,861
44,446
Total assets
$
1,114,407
$
980,884
Interest-bearing liabilities:
Deposits:
NOW
$
200,907
$
57
0.12%
$
172,055
$
66
0.16%
Savings and money market
345,549
172
0.20%
281,844
172
0.25%
Time deposits
159,785
356
0.90%
159,466
428
1.09%
Total interest-bearing deposits
706,241
585
0.34%
613,365
666
0.44%
Short-term borrowings
3,943
5
0.50%
3,161
4
0.50%
Total interest-bearing liabilities
710,184
$
590
0.34%
616,526
$
670
0.44%
Noninterest-bearing deposits
297,153
249,829
Other liabilities
2,577
5,639
Stockholders' equity
104,493
108,890
Total liabilities and stockholders' equity
$
1,114,407
$
980,884
Net interest income and margin (tax-equivalent)
$
6,190
2.43%
$
6,057
2.66%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
in the computation of average balances.
(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
Table of Contents
51
Table 4
- Allocation of Allowance for Loan Losses
2022
2021
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
774
17.1
$
857
18.3
$
816
17.4
$
829
19.2
$
828
19.1
Construction and land
development
508
7.7
518
7.1
590
7.7
639
8.2
551
6.5
Commercial real estate
2,536
54.8
2,739
56.2
2,823
55.6
2,704
53.0
3,259
55.1
Residential real estate
737
18.4
739
16.9
799
17.7
838
17.9
951
17.9
Consumer installment
103
2.0
86
1.5
91
1.6
97
1.7
93
1.4
Total allowance for loan losses
$
4,658
$
4,939
$
5,119
$
5,107
$
5,682
* Loan balance in each category expressed as a percentage of total loans.
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52
Table 5
– Estimated Uninsured Time Deposits by Maturity
(Dollars in thousands)
March 31, 2022
Maturity of:
3 months or less
$
1,603
Over 3 months through 6 months
17,746
Over 6 months through 12 months
17,917
Over 12 months
4,185
Total estimated uninsured
time deposits
$
41,451
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53
ITEM 3.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is set forth in ITEM 2 under the caption
“MARKET AND LIQUIDITY RISK
MANAGEMENT” and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company, with the participation
of its management, including its Chief Executive Officer
and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the
period covered by this report. Based upon that evaluation and as of the end of the period
covered by this report, the
Company’s Chief Executive Officer
and Chief Financial Officer concluded that the Company’s
disclosure controls and
procedures were effective to allow timely decisions regarding disclosure
in its reports that the Company files or submits to
the Securities and Exchange Commission under the Securities Exchange Act of 1934,
as amended. There have been no
changes in the Company’s internal control
over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially
affect, the Company’s
internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank are, from time to
time, involved in legal proceedings. The
Company’s and Bank’s
management believe there are no pending or threatened legal, governmental, or regulatory
proceedings that, upon resolution, are expected to have a material adverse effect
upon the Company’s or the Bank’s
financial condition or results of operations. See also, Part I, Item 3 of the Company’s
Annual Report on Form 10-K for the
year ended December 31, 2021.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I,
Item 1A. “RISK FACTORS”
in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2021,
which could materially affect our business, financial condition
or future results. The risks described in our annual report on
Form 10-K are not the only the risks facing our Company.
Increases in inflation and the resulting tightening of Federal
Reserve monetary policy by increased target interest rates, has and is expected
to continue to affect mortgage originations
and income and the market values of our securities portfolio.
These could also affect our deposit, costs and mixes, and
change consumer savings and payment behaviors.
Additional risks and uncertainties not currently known to us or that
we
currently deem to be immaterial also may materially adversely affect our
business, financial condition, and/or operating
results in the future.
Table of Contents
54
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock
during the first quarter of 2022 were as follows:
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value
of Shares that
May Yet Be
Purchased Under the
Plans or Programs
(1)
January 1 - January 31, 2022
—
$
—
—
$
3,380,597
February 1 - February 28, 2022
3,559
33.33
3,559
3,261,979
March 1 - March 31, 2022
—
—
—
3,261,979
Total
3,559
33.33
3,559
3,261,979
(1)
On March 9, 2021, the Company adopted a $5 million stock repurchase program which the Company had $3.3 remaining
at March 31, 2021 when the program expired.
On April 12, 2022, the Company adopted a new $5 million stock repurchase program that
became effective April 12, 2022.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
Table of Contents
55
ITEM 6.
EXHIBITS
Exhibit
Number
Description
3.1
Certificate of Incorporation of Auburn National Bancorporation, Inc. and all amendments thereto.*
3.2
Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007. **
31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive
Officer.
31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002, by David A. Hedges, Executive Vice President and Chief
Financial Officer.
32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley
Act of 2002, by Robert W. Dumas, Chairman, President and Chief Executive Officer.***
32.2
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley
Act of 2002, by David A. Hedges, Executive Vice President and Chief Financial Officer.***
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension
Schema Document
101.CAL
XBRL Taxonomy Extension
Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension
Label Linkbase Document
101.PRE
XBRL Taxonomy Extension
Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension
Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
Incorporated by reference from Registrant’s
Form 10-Q dated June 30, 2002.
**
Incorporated by reference from Registrant’s
Form 10-K dated March 31, 2008.
***
The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q
are “furnished” to the
Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be
deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
Table of Contents
SIGNATURES
Pursuant to
the requirements
of the
Securities Exchange
Act of
1934, the
registrant has
duly caused
this report
to
be signed on its behalf by the undersigned thereunto duly authorized.
AUBURN NATIONAL
BANCORPORATION,
INC.
(Registrant)
Date:
May 5, 2022
By:
/s/ Robert W.
Dumas
Robert W.
Dumas
Chairman, President and CEO
Date:
May 5, 2022
By:
/s/ David A. Hedges
David A. Hedges
Executive Vice President and Chief Financial
Officer