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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
September 30, 2023
☐
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.
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 November 6, 2023
Common Stock, $0.01 par value per share
3,493,614
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 September 30, 2023 and December 31, 2022
3
Consolidated Statements of Earnings (Unaudited) for the quarter and nine months ended September 30,
2023 and 2022
4
Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and nine months ended
September 30, 2023 and 2022
5
Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarter and nine months ended
September 30, 2023 and 2022
6
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and
2022
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
45
Table 2 – Selected Quarterly Financial Data
46
Table 3 – Selected Financial Data
47
Table 4 – Average Balances and Net Interest Income Analysis – for the quarter ended September 30,
2023 and 2022
48
Table 5 – Average Balances and Net Interest Income Analysis – for the nine months ended September
30, 2023 and 2022
49
Table 6 – Allocation of Allowance for Loan Losses
50
Table 7 – Estimated Uninsured Time Deposits by Maturity
51
Item 3
Quantitative and Qualitative Disclosures About Market Risk
52
Item 4
Controls and Procedures
52
PART II. OTHER INFORMATION
Item 1
Legal Proceedings
52
Item 1A
Risk Factors
52
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
53
Item 3
Defaults Upon Senior Securities
53
Item 4
Mine Safety Disclosures
53
Item 5
Other Information
53
Item 6
Exhibits
54
Table of Contents
3
PART
1.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30,
December 31,
(Dollars in thousands, except share data)
2023
2022
Assets:
Cash and due from banks
$
16,350
$
11,608
Federal funds sold
416
9,300
Interest-bearing bank deposits
12,845
6,346
Cash and cash equivalents
29,611
27,254
Securities available-for-sale
373,286
405,304
Loans
545,610
504,458
Allowance for credit losses
(6,778)
(5,765)
Loans, net
538,832
498,693
Premises and equipment, net
45,666
46,575
Bank-owned life insurance
17,010
19,952
Other assets
26,319
26,110
Total assets
$
1,030,724
$
1,023,888
Liabilities:
Deposits:
Noninterest-bearing
$
279,458
$
311,371
Interest-bearing
685,143
638,966
Total deposits
964,601
950,337
Federal funds purchased and securities sold under agreements to repurchase
1,741
2,551
Accrued expenses and other liabilities
2,931
2,959
Total liabilities
969,273
955,847
Stockholders' equity:
Preferred stock of $
.01
par value; authorized
200,000
shares;
no shares issued
—
—
Common stock of $
.01
par value; authorized
8,500,000
shares;
issued
3,957,135
shares
39
39
Additional paid-in capital
3,801
3,797
Retained earnings
118,326
116,600
Accumulated other comprehensive loss, net
(49,013)
(40,920)
Less treasury stock, at cost -
463,521
shares and
453,683
at September 30, 2023
and December 31, 2022, respectively
(11,702)
(11,475)
Total stockholders’ equity
61,451
68,041
Total liabilities and stockholders’
equity
$
1,030,724
$
1,023,888
See accompanying notes to consolidated financial statements
Table of Contents
4
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Interest income:
Loans, including fees
$
6,373
$
5,097
$
18,146
$
14,638
Securities:
Taxable
1,783
1,808
5,474
4,691
Tax-exempt
402
441
1,209
1,275
Federal funds sold and interest-bearing bank deposits
85
426
442
767
Total interest income
8,643
7,772
25,271
21,371
Interest expense:
Deposits
2,334
524
4,934
1,661
Short-term borrowings
37
5
68
15
Total interest expense
2,371
529
5,002
1,676
Net interest income
6,272
7,243
20,269
19,695
Provision for credit losses
105
250
(191)
—
Net interest income after provision for credit
losses
6,167
6,993
20,460
19,695
Noninterest income:
Service charges on deposit accounts
148
158
456
446
Mortgage lending
110
126
345
566
Bank-owned life insurance
87
97
311
293
Other
520
427
1,336
1,259
Securities gains, net
—
44
—
44
Total noninterest income
865
852
2,448
2,608
Noninterest expense:
Salaries and benefits
2,844
2,975
8,809
8,901
Net occupancy and equipment
755
794
2,341
1,955
Professional fees
261
235
898
704
Other
1,502
1,411
4,743
3,814
Total noninterest expense
5,362
5,415
16,791
15,374
Earnings before income taxes
1,670
2,430
6,117
6,929
Income tax expense
182
432
737
1,049
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Net earnings per share:
Basic and diluted
$
0.43
$
0.57
$
1.54
$
1.67
Weighted average shares
outstanding:
Basic and diluted
3,496,411
3,507,318
3,499,518
3,513,068
See accompanying notes to consolidated financial statements
Table of Contents
5
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Other comprehensive loss, net of tax:
Unrealized net loss on securities
(9,941)
(17,223)
(8,093)
(46,533)
Reclassification adjustment for net gain on securities
recognized in net earnings
—
(33)
—
(33)
Other comprehensive loss
(9,941)
(17,256)
(8,093)
(46,566)
Comprehensive loss
$
(8,453)
$
(15,258)
$
(2,713)
$
(40,686)
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
(loss) income
stock
Total
Quarter ended September 30, 2023
Balance, June 30, 2023
3,499,412
$
39
$
3,800
$
117,781
$
(39,072)
$
(11,572)
$
70,976
Net earnings
—
—
—
1,488
—
—
1,488
Other comprehensive loss
—
—
—
—
(9,941)
—
(9,941)
Cash dividends paid ($
.27
per share)
—
—
—
(943)
—
—
(943)
Stock repurchases
(5,883)
—
—
—
—
(130)
(130)
Sale of treasury stock
85
—
1
—
—
—
1
Balance, September 30, 2023
3,493,614
$
39
$
3,801
$
118,326
$
(49,013)
$
(11,702)
$
61,451
Quarter ended September 30, 2022
Balance, June 30, 2022
3,509,940
$
39
$
3,796
$
111,994
$
(28,419)
$
(11,303)
$
76,107
Net earnings
—
—
—
1,998
—
—
1,998
Other comprehensive loss
—
—
—
—
(17,256)
—
(17,256)
Cash dividends paid ($
.265
per share)
—
—
—
(929)
—
—
(929)
Stock repurchases
(4,640)
—
—
—
—
(128)
(128)
Sale of treasury stock
55
—
1
—
—
—
1
Balance, September 30, 2022
3,505,355
$
39
$
3,797
$
113,063
$
(45,675)
$
(11,431)
$
59,793
Nine months ended September 30, 2023
Balance, December 31, 2022
3,503,452
$
39
$
3,797
$
116,600
$
(40,920)
$
(11,475)
$
68,041
Cumulative effect of change in accounting
standard
—
—
—
(821)
—
—
(821)
Net earnings
—
—
—
5,380
—
—
5,380
Other comprehensive loss
—
—
—
—
(8,093)
—
(8,093)
Cash dividends paid ($
.81
per share)
—
—
—
(2,833)
—
—
(2,833)
Stock repurchases
(10,108)
—
—
—
—
(229)
(229)
Sale of treasury stock
270
—
4
—
—
2
6
Balance, September 30, 2023
3,493,614
$
39
$
3,801
$
118,326
$
(49,013)
$
(11,702)
$
61,451
Nine months ended September 30, 2022
Balance, December 31, 2021
3,520,485
$
39
$
3,794
$
109,974
$
891
$
(10,972)
$
103,726
Net earnings
—
—
—
5,880
—
—
5,880
Other comprehensive loss
—
—
—
—
(46,566)
—
(46,566)
Cash dividends paid ($
.795
per share)
—
—
—
(2,791)
—
—
(2,791)
Stock repurchases
(15,280)
—
—
—
—
(460)
(460)
Sale of treasury stock
150
—
3
—
—
1
4
Balance, September 30, 2022
3,505,355
$
39
$
3,797
$
113,063
$
(45,675)
$
(11,431)
$
59,793
See accompanying notes to consolidated financial statements
Table of Contents
7
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(Dollars in thousands)
2023
2022
Cash flows from operating activities:
Net earnings
$
5,380
$
5,880
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
(191)
—
Depreciation and amortization
1,278
1,098
Premium amortization and discount accretion, net
1,834
2,450
Net gain on securities available-for-sale
—
(44)
Net gain on sale of loans held for sale
(81)
(315)
Net gain on other real estate owned
—
(162)
Loans originated for sale
(3,417)
(8,711)
Proceeds from sale of loans
3,482
10,292
Increase in cash surrender value of bank-owned life insurance
(259)
(294)
Income recognized from death benefit on bank-owned life insurance
(52)
—
Net decrease (increase) in other assets
47
(15,570)
Net increase in accrued expenses and other liabilities
2,672
14,102
Net cash provided by operating activities
10,693
8,726
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
19,377
38,871
Purchase of securities available-for-sale
—
(93,106)
Increase in loans, net
(41,025)
(15,644)
Net purchases of premises and equipment
(170)
(5,540)
Proceeds from bank-owned life insurance death benefit
216
—
Proceeds from surrender of bank-owned life insurance
3,037
—
Increase in FHLB stock
(164)
(74)
Proceeds from sale of other real estate owned
—
536
Net cash used in investing activities
(18,729)
(74,957)
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
(32,717)
5,570
Net increase (decrease) in interest-bearing deposits
46,982
(21,875)
Net decrease in federal funds purchased and securities sold
under agreements to repurchase
(810)
(835)
Stock repurchases
(229)
(460)
Dividends paid
(2,833)
(2,791)
Net cash provided by (used in) financing activities
10,393
(20,391)
Net change in cash and cash equivalents
2,357
(86,622)
Cash and cash equivalents at beginning of period
27,254
156,259
Cash and cash equivalents at end of period
$
29,611
$
69,637
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
4,384
$
1,705
Income taxes
800
1,031
See accompanying notes to consolidated financial statements
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8
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services
to individuals and
commercial customers in Lee County,
Alabama and surrounding areas through its wholly owned subsidiary,
AuburnBank
(the “Bank”). The Company does not have any segments other than banking that are considered
material.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have been prepared
in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information.
Accordingly, these financial statements
do not
include all of the information and footnotes required by U.S. GAAP for complete financial
statements.
The unaudited
consolidated financial statements include, in the opinion of management, all adjustments
necessary to present a fair
statement of the financial position and the results of operations for all periods
presented. All such adjustments are of a
normal recurring nature. The results of operations in the interim statements are not necessarily
indicative of the results of
operations that the Company and its subsidiaries may achieve for future interim periods
or the entire year. For further
information, refer to the consolidated financial statements and footnotes included in the Company's
Annual Report on Form
10-K for the year ended December 31, 2022.
The unaudited consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries.
Significant intercompany transactions and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the reporting period.
Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term
include the determination of allowance for credit losses on investment securities
and loans, fair value of financial
instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update
(“ASU”
or “updates”) 2014-09,
Revenue
from Contracts with Customers
, codified at
Accounting Standards Codification
(“ASC”)
606. The Company adopted ASC
606 using the modified retrospective transition method.
The majority of the Company’s revenue stream
is generated from
interest income on loans and securities which are outside the scope of ASC 606.
The Company’s sources of income that
fall within the scope of ASC 606 include service charges on deposits, interchange
fees and gains and losses on sales of other real estate, all of which are presented as components of
noninterest income. The
following is a summary of the revenue streams that fall within the scope of ASC 606:
●
Service charges on deposits, investment services, ATM
and interchange fees – Fees from these services are either
(i) transaction-based, for which the performance obligations are satisfied
when the individual transaction is
processed, or (ii) set periodic service charges, for which the performance
obligations are satisfied over the period
the service is provided. Transaction-based
fees are recognized at the time the transaction is processed, and periodic
service charges are recognized over the service period.
●
Gains on sales of OREO
–
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer.
ASC 606 lists several criteria required to conclude that a contract for sale
exists, including a determination that the institution will collect substantially all of the consideration
to which it is
entitled.
In addition to the loan-to-value ratio, where the seller provides
the purchaser with financing, the analysis
is based on various other factors,
including the credit quality of the purchaser,
the structure of the loan, and any
other factors that we believe may affect collectability.
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9
Subsequent Events
The Company has evaluated the effects of events and transactions through
the date of this filing that have occurred
subsequent to September 30, 2023.
The Company does not believe there were any material subsequent events during
this
period that would have required further recognition or disclosure in the unaudited
consolidated financial statements
included in this report.
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current
-period presentation. These
reclassifications had no material effect on the Company’s
previously reported net earnings or total stockholders’ equity.
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit
Losses (Topic 326):
Measurement
of Credit Losses on Financial Instruments (ASC 326). This standard replaced
the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit loss (“CECL”)
methodology. CECL requires
an
estimate of credit losses for the remaining estimated life of the financial asset using
historical experience, current
conditions, and reasonable and supportable forecasts and generally applies to
financial assets measured at amortized cost,
including loan receivables and held-to-maturity debt securities, and some off
-balance sheet credit exposures such as
unfunded commitments to extend credit. Financial assets measured at amortized
cost will be presented at the net amount
expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for available for sale debt
securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt
securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required
to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto
effective January 1, 2023 using the
modified retrospective approach for all financial assets measured at amortized
cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of CECL on January 1, 2023 included
an increase in the allowance for credit
losses on loans of $
1.0
million, which is presented as a reduction to net loans outstanding, and an increase in the allowance
for credit losses on unfunded loan commitments of $
0.1
million, which is recorded within other liabilities. The Company
recorded a net decrease to retained earnings of $
0.8
million as of January 1, 2023 for the cumulative effect of adopting
CECL, which reflects the transition adjustments noted above, net of the applicable deferred
tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior
period amounts continue to be
reported in accordance with previously applicable accounting standards.
The Company adopted ASC 326 using the prospective transition approach for debt
securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023.
As of December 31, 2022, the Company did not have
any other-than-temporarily impaired investment securities. Therefore,
upon adoption of ASC 326, the Company determined
that an allowance for credit losses on available for sale securities was not deemed
material.
The Company elected not to measure an allowance for credit losses for accrued interest receivable
and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status,
which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company
has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic
326): Troubled Debt
Restructurings and Vintage Disclosures”
on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements
for certain loan
refinancings and restructurings by creditors when a borrower is experiencing
financial difficulty.
Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity
must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new loan or a
continuation of an existing loan. Additionally,
ASU
2022-02 requires an entity to disclose current-period gross write-offs
by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at
Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated
financial statements.
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10
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums
and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded
in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a
level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and
is not well collateralized and in
the process of collection, or when management believes, after considering economic and
business conditions and collection
efforts, that the principal or interest will not be collectible in the normal
course of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has
not been received 30 days
after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual
status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual.
Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero.
Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there is a
sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized
cost basis to present the net
amount expected to be collected on the loans. Loans are charged off
against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate
of amounts previously
charged-off and expected to be charged-off.
Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s
estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management using relevant
available information, from
both internal and external sources, relating to past events, current conditions, and reasonable and
supportable forecasts.
The Company’s loan loss estimation process
includes procedures to appropriately consider the unique characteristics of
its
respective loan segments (commercial and industrial, construction and land development,
commercial real estate,
residential real estate, and consumer loans).
These segments are further disaggregated into loan classes, the level at
which
credit quality is monitored.
See Note 5, Loans and Allowance for Credit Losses, for additional information about our
loan
portfolio.
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model
for each loan segment,
except consumer
loans.
The weighted average remaining life method is used to estimate credit loss assumptions
for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering the
forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic
factors, and LGD, which is the estimate
of the amount of net loss in the event of default.
This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis.
The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial, construction
and land development,
commercial real estate,
and residential real estate loans.
In addition, forecasted changes in the Alabama home price index
is considered in the model for construction and land development and residential real
estate loans; forecasted changes in the
national commercial real estate (“CRE”) price index is considered
in the model for commercial real estate and multifamily
loans; and forecasted changes in the Alabama gross state product is considered
in the model for multifamily loans.
Projections of these macroeconomic factors, obtained from an independent third
party, are utilized to predict
quarterly rates
of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the loan, adjusted
for expected prepayments and principal
payments (“curtailments”) when appropriate. Management's
determination of the contract term excludes expected
extensions, renewals, and modifications unless the extension or
renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company.
To the extent the lives of the
loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be
made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion
period.
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11
The weighted average remaining life method was deemed most appropriate
for the consumer loan segment because
consumer loans contain many different payment structures,
payment streams and collateral.
The weighted average
remaining life method uses an annual charge-off rate over several vintages
to estimate credit losses.
The average annual
charge-off rate is applied to the contractual term adjusted for
prepayments.
Additionally, the allowance
for credit losses calculation includes subjective adjustments for qualitative risk
factors that are
believed likely to cause estimated credit losses to differ from
historical experience. These qualitative adjustments may
increase reserve levels and include adjustments for lending management experience and
risk tolerance, loan review and
audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,
trends in underlying
collateral, external factors and economic conditions not already captured.
Loans secured by real estate with balances equal to or greater than $500 thousand and loans not secured
by real estate with
balances equal to or greater than $250 thousand that do not share risk characteristics
are evaluated on an individual basis.
When management determines that foreclosure is probable and the borrower
is experiencing financial difficulty,
the
expected credit losses are based on the estimated fair value of collateral held at the reporting
date, adjusted for selling costs
as appropriate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s
exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off-balance sheet
loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are
recorded when they are funded.
The Company records an allowance for credit losses on off-balance
sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge to provision
for credit losses in the Company’s consolidated
statements of earnings.
The allowance for credit losses on off-balance sheet credit exposures
is estimated by loan segment
at each balance sheet date under the current expected credit loss model using the same
methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party
guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s
consolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of
$77 thousand upon the adoption of
ASC 326.
At September 30, 2023,
the liability for credit losses on off-balance-sheet credit exposures included in other
liabilities was $
0.2
million.
Provision for Credit Losses
The composition of the provision for (recoveries of) credit losses for the respective periods
is presented below.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Provision for credit losses:
Loans
$
158
$
250
$
(133)
$
—
Reserve for unfunded commitments (1)
(53)
70
(58)
35
Total provision for credit
losses
$
105
$
320
$
(191)
$
35
(1)
Reserve requirements for unfunded commitments were reported as a component of other
noninterest expense prior
to the adoption of ASC 326.
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12
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average
common shares outstanding for
the respective period.
Diluted net earnings per share reflect the potential dilution that could occur
upon exercise of
securities or other rights for, or convertible into, shares of the
Company’s common stock.
At September 30, 2023 and
2022, respectively, the Company
had no such securities or rights issued or outstanding, and therefore, no dilutive effect
to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods are
presented below
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Basic and diluted:
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Weighted average common
shares outstanding
3,496,411
3,507,318
3,499,518
3,513,068
Net earnings per share
$
0.43
$
0.57
$
1.54
$
1.67
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 September 30, 2023, the Company did not have any consolidated VIEs to
disclose but did have one nonconsolidated
VIE, discussed below.
New Markets Tax
Credit Investment
The New Markets Tax Credit
(“NMTC”) program provides federal tax incentives to investors to make investments
in
distressed communities and promotes economic improvement through the development
of successful businesses in these
communities.
The NMTC is available to investors over seven years and is subject to recapture if certain events occur
during such period.
At September 30, 2023 and December 31, 2022, respectively,
the Company had one such investment in
the amounts of $1.8 million and $2.1 million, respectively,
which was included in other assets in the consolidated balance
sheets.
The Company’s equity investment in the
NMTC entity meets the definition of a VIE. While the Company’s
investment exceeds 50% of the outstanding equity interests, the Company does not consolidate
the VIE because it does not
meet the characteristics of a primary beneficiary since the Company lacks the power to direct
the activities of the VIE.
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
1,807
$
1,807
Other assets
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13
NOTE 4: SECURITIES
At September 30, 2023 and December 31, 2022, respectively,
all securities within the scope of ASC 320,
Investments –
Debt and Equity Securities,
were classified as available-for-sale.
The fair value and amortized cost for securities available-
for-sale by contractual maturity at September 30, 2023 and December
31, 2022, respectively, are
presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
September 30, 2023
Agency obligations (a)
$
15,063
49,036
58,651
—
122,750
—
17,152
$
139,902
Agency MBS (a)
—
10,095
26,845
155,517
192,457
—
39,581
232,038
State and political subdivisions
300
981
15,488
41,310
58,079
—
8,717
66,796
Total available-for-sale
$
15,363
60,112
100,984
196,827
373,286
—
65,450
$
438,736
December 31, 2022
Agency obligations (a)
$
4,935
50,746
69,936
—
125,617
—
15,826
$
141,443
Agency MBS (a)
—
7,130
27,153
183,877
218,160
—
33,146
251,306
State and political subdivisions
300
642
15,130
45,455
61,527
11
5,681
67,197
Total available-for-sale
$
5,235
58,518
112,219
229,332
405,304
11
54,653
$
459,946
(a) Includes securities issued by U.S. government agencies or government-sponsored
entities.
Securities with aggregate fair values of $
224.6
million and $
208.3
million at September 30, 2023 and December 31, 2022,
respectively, were pledged to
secure public deposits, securities sold under agreements to repurchase, Federal Home
Loan
Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required
or permitted by law.
Other assets on the accompanying consolidated balance sheets include non-marketable
equity investments.
The carrying
amounts of non-marketable equity investments were $
1.4
million at September 30, 2023 and $
1.2
million at December 31,
2022.
Non-marketable equity investments include FHLB of Atlanta tock, Federal Reserve
Bank of Atlanta (“FRB”) stock,
and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at September 30,
2023 and December 31, 2022, respectively,
segregated by those securities that have been in an unrealized
loss position for less than 12 months and 12 months or
longer, are presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
September 30, 2023:
Agency obligations
$
—
—
122,750
17,152
$
122,750
17,152
Agency MBS
84
3
192,373
39,578
192,457
39,581
State and political subdivisions
12,726
755
44,313
7,962
57,039
8,717
Total
$
12,810
758
359,436
64,692
$
372,246
65,450
December 31, 2022:
Agency obligations
$
55,931
4,161
69,686
11,665
$
125,617
15,826
Agency MBS
70,293
5,842
147,867
27,304
218,160
33,146
State and political subdivisions
44,777
2,176
13,043
3,505
57,820
5,681
Total
$
171,001
12,179
230,596
42,474
$
401,597
54,653
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14
For the securities in the previous table, the Company assesses whether or not it intends to
sell or is more likely than not that
the Company will be required to sell the securities before recovery of the amortized
cost basis, which may be maturity.
Because the Company currently does not intend to sell those securities that have an
unrealized loss at September 30, 2023
and it is not more-likely-than-not that the Company will be required to sell the security before
recovery of their amortized
cost bases, which may be maturity,
the Company has determined that no provision for credit loss is necessary.
In addition,
the Company evaluates whether any portion of the decline in fair value of available-for-sale
securities is the result of credit
deterioration, which would require the recognition of a provision to increase
the allowance for credit losses. Such
evaluations consider the extent to which the amortized cost of the security exceeds its
fair value, changes in credit ratings
and any other known adverse conditions related to the specific security.
The unrealized losses associated with available-for-
sale securities at September 30, 2023 are driven by changes in market interest rates and
are not due to the credit quality of
the securities, and accordingly,
no allowance for credit losses is considered necessary for available-for-sale
securities at
September 30, 2023. These securities will continue to be monitored as a part
of the Company's ongoing evaluation of credit
quality. Management evaluates
the financial performance of the issuers on a quarterly basis to determine if it is probable
that the issuers can make all contractual principal and interest payments.
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Gross realized gains
$
—
44
$
—
44
Realized gains, net
$
—
44
$
—
44
NOTE 5: LOANS AND ALLOWANCE
FOR CREDIT LOSSES
September 30,
December 31,
(Dollars in thousands)
2023
2022
Commercial and industrial
$
66,014
$
66,212
Construction and land development
70,129
66,479
Commercial real estate:
Owner occupied
66,237
61,125
Hotel/motel
36,992
33,378
Multi-family
47,634
41,084
Other
131,101
128,986
Total commercial real estate
281,964
264,573
Residential real estate:
Consumer mortgage
60,024
45,370
Investment property
57,126
52,278
Total residential real estate
117,150
97,648
Consumer installment
10,353
9,546
Total Loans
$
545,610
$
504,458
Loans secured by real estate were approximately 86.0% of the Company’s
total loan portfolio at September 30, 2023.
At
September 30, 2023, the Company’s
geographic loan distribution was concentrated primarily in Lee County,
Alabama, and
surrounding areas.
The loan portfolio segment is defined as the level at which an entity develops and documents a
systematic method for
determining its allowance for credit losses. As part of the Company’s
quarterly assessment of the allowance, the loan
portfolio included the following portfolio segments: commercial and industrial,
construction and land development,
commercial real estate, residential real estate, and consumer installment. Where appropriate,
the Company’s loan portfolio
segments are further disaggregated into classes. A class is generally determined based
on the initial measurement attribute,
risk characteristics of the loan, and an entity’s
method for monitoring and determining credit risk.
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15
The following describes
the risk characteristics relevant to each of the portfolio segments
and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or
other needs
for small and medium-sized commercial customers. Also included
in this category are loans to finance agricultural
production.
Generally,
the primary source of repayment is the cash flow from business operations and activities
of the
borrower.
Construction and land development (“C&D”) —
includes both loans and credit lines for the purpose of purchasing,
carrying,
and developing land into commercial developments or residential subdivisions.
Also included are loans and credit
lines for construction of residential, multi-family,
and commercial buildings. Generally,
the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate
(“CRE”) —
includes loans in these classes:
●
Owner occupied
– includes loans secured by business facilities to finance business operations, equipment and
owner-occupied facilities primarily for small and medium-sized
commercial customers.
Generally,
the primary
source of repayment is the cash flow from business operations and activities of the borrower,
who owns the
property.
●
Hotel/motel
– includes loans for hotels and motels.
Generally, the primary source of repayment
is dependent upon
income generated from the hotel/motel securing the loan.
The underwriting of these loans takes into consideration
the occupancy and rental rates, as well as the financial health of the borrower.
●
Multi-family
– primarily includes loans to finance income-producing multi-family properties
.
These include loans
for 5 or more unit residential properties and apartments leased to residents. Generally
,
the primary source of
repayment is dependent upon income generated from the real estate collateral.
The underwriting of these loans
takes into consideration the occupancy and rental rates,
as well as the financial health of the respective borrowers.
●
Other
– primarily includes loans to finance income-producing commercial properties
other than hotels/motels and
multi-family properties, and which
are not owner occupied.
Loans in this class include loans for neighborhood
retail centers, medical and professional offices, single retail stores,
industrial buildings, and warehouses leased to
local and other businesses.
Generally,
the primary source of repayment is dependent upon income generated
from
the real estate collateral. The underwriting of these loans takes into consideration
the occupancy and rental rates,
as well as the financial health of the borrower.
Residential real estate (“RRE”) —
includes loans in these two classes:
●
Consumer mortgage
– primarily includes first or second lien mortgages and home equity lines of credit
to
consumers that are secured by a primary residence or second home. These loans are underwritten in
accordance
with the Bank’s general loan policies and
procedures which require, among other things, proper documentation of
each borrower’s financial condition, satisfactory credit history
,
and property value.
●
Investment property
– primarily includes loans to finance income-producing 1-4 family residential properties.
Generally,
the primary source of repayment is dependent upon income generated
from leasing the property
securing the loan. The underwriting of these loans takes into consideration the rental rates and
property values, as
well as the financial health of the borrowers.
Consumer installment —
includes loans to individuals,
which may be secured by personal property or are unsecured.
Loans
include personal lines of credit, automobile loans, and other retail loans.
These loans are underwritten in accordance with
the Bank’s general loan policies and procedures
which require, among other things, proper documentation of each
borrower’s financial condition, satisfactory credit history,
and, if applicable, property values.
Table of Contents
16
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio
segment and class as of
September 30, 2023 and December 31, 2022.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
September 30, 2023:
Commercial and industrial
$
65,813
39
—
65,852
162
$
66,014
Construction and land development
70,129
—
—
70,129
—
70,129
Commercial real estate:
Owner occupied
65,230
206
—
65,436
801
66,237
Hotel/motel
36,992
—
—
36,992
—
36,992
Multi-family
47,634
—
—
47,634
—
47,634
Other
131,101
—
—
131,101
—
131,101
Total commercial real estate
280,957
206
—
281,163
801
281,964
Residential real estate:
Consumer mortgage
59,799
—
—
59,799
225
60,024
Investment property
57,087
14
—
57,101
25
57,126
Total residential real estate
116,886
14
—
116,900
250
117,150
Consumer installment
10,297
56
—
10,353
—
10,353
Total
$
544,082
315
—
544,397
1,213
$
545,610
December 31, 2022:
Commercial and industrial
$
65,764
5
—
65,769
443
$
66,212
Construction and land development
66,479
—
—
66,479
—
66,479
Commercial real estate:
Owner occupied
61,125
—
—
61,125
—
61,125
Hotel/motel
33,378
—
—
33,378
—
33,378
Multi-family
41,084
—
—
41,084
—
41,084
Other
126,870
—
—
126,870
2,116
128,986
Total commercial real estate
262,457
—
—
262,457
2,116
264,573
Residential real estate:
Consumer mortgage
45,160
38
—
45,198
172
45,370
Investment property
52,278
—
—
52,278
—
52,278
Total residential real estate
97,438
38
—
97,476
172
97,648
Consumer installment
9,506
40
—
9,546
—
9,546
Total
$
501,644
83
—
501,727
2,731
$
504,458
Table of Contents
17
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories
similar to the
standard asset classification system used by the federal banking agencies.
The following table presents credit quality
indicators for the loan portfolio segments and classes by year of origination as of September
30, 2023.
These categories are
utilized to develop the associated allowance for credit losses using historical losses adjusted
for qualitative and
environmental factors and are defined as follows:
●
Pass – loans which are well protected by the current net worth and paying capacity of the
obligor (or guarantors, if
any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
●
Special Mention – loans with potential weakness that may,
if not reversed or corrected, weaken the credit or
inadequately protect the Company’s position
at some future date. These loans are not adversely classified and do
not expose an institution to sufficient risk to warrant an adverse classification.
●
Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes
debt repayment,
even though they are currently performing. These loans are characterized by the distinct possibility
that the
Company may incur a loss in the future if these weaknesses are not corrected
.
●
Nonaccrual – includes loans where management has determined that full payment
of principal and interest is not
expected.
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
September 30, 2023:
Commercial and industrial
Pass
$
8,403
15,220
14,164
5,760
7,447
8,138
6,283
$
65,415
Special mention
—
—
—
—
—
—
348
348
Substandard
56
—
27
—
6
—
—
89
Nonaccrual
—
—
—
—
162
—
—
162
Total commercial and industrial
8,459
15,220
14,191
5,760
7,615
8,138
6,631
66,014
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
Pass
34,977
30,923
1,735
1,562
131
162
639
70,129
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
34,977
30,923
1,735
1,562
131
162
639
70,129
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
10,489
7,476
18,785
10,639
4,359
9,965
3,408
65,121
Special mention
263
—
—
—
—
—
—
263
Substandard
—
—
—
—
52
—
—
52
Nonaccrual
—
—
—
—
801
—
—
801
Total owner occupied
10,752
7,476
18,785
10,639
5,212
9,965
3,408
66,237
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
6,437
9,981
3,234
1,539
3,952
11,849
—
36,992
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
6,437
9,981
3,234
1,539
3,952
11,849
—
36,992
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
18
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
September 30, 2023:
Multi-family
Pass
12,436
18,185
1,972
6,163
3,825
3,126
1,927
47,634
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
12,436
18,185
1,972
6,163
3,825
3,126
1,927
47,634
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
16,532
36,560
32,107
14,053
10,902
19,004
914
130,072
Special mention
—
—
—
873
—
—
—
873
Substandard
—
—
—
156
—
—
—
156
Nonaccrual
—
—
—
—
—
—
—
—
Total other
16,532
36,560
32,107
15,082
10,902
19,004
914
131,101
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
18,918
20,284
2,731
2,694
1,492
12,771
79
58,969
Special mention
—
—
—
—
—
250
—
250
Substandard
—
—
—
—
—
580
—
580
Nonaccrual
—
—
—
118
—
107
—
225
Total consumer mortgage
18,918
20,284
2,731
2,812
1,492
13,708
79
60,024
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
11,594
12,822
9,564
12,984
5,763
2,373
1,473
56,573
Special mention
42
—
—
—
—
—
—
42
Substandard
—
249
—
237
—
—
—
486
Nonaccrual
—
—
—
—
—
25
—
25
Total investment property
11,636
13,071
9,564
13,221
5,763
2,398
1,473
57,126
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
4,699
4,189
861
251
126
167
—
10,293
Special mention
—
—
1
2
—
—
—
3
Substandard
12
24
8
13
—
—
—
57
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
4,711
4,213
870
266
126
167
—
10,353
Current period gross charge-offs
34
37
13
1
—
—
—
85
Total loans
Pass
124,485
155,640
85,153
55,645
37,997
67,555
14,723
541,198
Special mention
305
—
1
875
—
250
348
1,779
Substandard
68
273
35
406
58
580
—
1,420
Nonaccrual
—
—
—
118
963
132
—
1,213
Total loans
$
124,858
155,913
85,189
57,044
39,018
68,517
15,071
$
545,610
Total current period gross charge-offs
$
34
37
13
1
—
—
—
85
Table of Contents
19
(Dollars in thousands)
Pass
Special
Mention
Substandard
Accruing
Nonaccrual
Total loans
December 31, 2022:
Commercial and industrial
$
65,550
7
212
443
$
66,212
Construction and land development
66,479
—
—
—
66,479
Commercial real estate:
Owner occupied
60,726
238
161
—
61,125
Hotel/motel
33,378
—
—
—
33,378
Multi-family
41,084
—
—
—
41,084
Other
126,700
170
—
2,116
128,986
Total commercial real estate
261,888
408
161
2,116
264,573
Residential real estate:
Consumer mortgage
44,172
439
587
172
45,370
Investment property
51,987
43
248
—
52,278
Total residential real estate
96,159
482
835
172
97,648
Consumer installment
9,498
1
47
—
9,546
Total
$
499,574
898
1,255
2,731
$
504,458
The following table is a summary of the Company’s
nonaccrual loans by major categories as of September 30, 2023
and
December 31, 2022.
CECL
Incurred Loss
September 30, 2023
December 31, 2022
Nonaccrual
Nonaccrual
Total
Loans with
Loans with an
Nonaccrual
Nonaccrual
(Dollars in thousands)
No Allowance
Allowance
Loans
Loans
Commercial and industrial
$
162
—
162
$
443
Commercial real estate
801
—
801
2,116
Residential real estate
250
—
250
172
Total
$
1,213
—
1,213
$
2,731
The following table presents the amortized cost basis of collateral dependent loans, which
are individually evaluated to
determine expected credit losses:
(Dollars in thousands)
Real Estate
Business Assets
Total Loans
September 30, 2023:
Commercial and industrial
$
—
162
$
162
Commercial real estate
801
—
801
Total
$
801
162
$
963
Allowance for Credit Losses
The Company adopted ASC 326
on January 1, 2023, which introduced the CECL methodology for estimating all expected
losses over the life of a financial asset. Under the CECL methodology,
the allowance for credit losses is measured on a
collective basis for pools of loans with similar risk characteristics, and for loans that do
not share similar risk characteristics
with the collectively evaluated pools, evaluations are performed on an individual
basis.
Table of Contents
20
The following table details the changes in the allowance for credit losses by portfolio segment for
the respective periods.
September 30, 2023
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
1,198
1,005
3,788
529
114
$
6,634
Charge-offs
—
—
—
—
(18)
(18)
Recoveries
1
—
—
2
1
4
Net recoveries (charge-offs)
1
—
—
2
(17)
(14)
Provision for credit losses
16
68
15
20
39
158
Ending balance
$
1,215
1,073
3,803
551
136
$
6,778
Nine months ended:
Beginning balance
$
747
949
3,109
828
132
$
5,765
Impact of adopting ASC 326
532
(17)
873
(347)
(22)
1,019
Charge-offs
—
—
—
—
(85)
(85)
Recoveries
197
—
—
12
3
212
Net recoveries (charge-offs)
197
—
—
12
(82)
127
Provision for credit losses
(261)
141
(179)
58
108
(133)
Ending balance
$
1,215
1,073
3,803
551
136
$
6,778
September 30, 2022
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
761
576
2,523
753
103
$
4,716
Charge-offs
(13)
—
—
—
(3)
(16)
Recoveries
2
—
—
8
6
16
Net (charge-offs) recoveries
(11)
—
—
8
3
—
Provision for loan losses
(18)
213
38
22
(5)
250
Ending balance
$
732
789
2,561
783
101
$
4,966
Nine months ended:
Beginning balance
$
857
518
2,739
739
86
$
4,939
Charge-offs
(17)
—
—
—
(67)
(84)
Recoveries
6
—
22
22
61
111
Net (charge-offs) recoveries
(11)
—
22
22
(6)
27
Provision for loan losses
(114)
271
(200)
22
21
—
Ending balance
$
732
789
2,561
783
101
$
4,966
Table of Contents
21
The following table presents an analysis of the allowance for loan losses and recorded
investment in loans by portfolio
segment and impairment methodology as of September 30, 2022 as determined, prior
to the adoption of ASC 326.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(In thousands)
losses
in loans
losses
in loans
losses
in loans
September 30, 2022:
Commercial and industrial
$
732
70,685
—
—
732
70,685
Construction and land development
789
54,773
—
—
789
54,773
Commercial real estate
2,561
249,860
—
170
2,561
250,030
Residential real estate
783
91,598
—
—
783
91,598
Consumer installment
101
7,551
—
—
101
7,551
Total
$
4,966
474,467
—
170
4,966
474,637
(1)
Represents loans collectively evaluated for impairment,
prior to the adopton of ASC 326, in accordance with ASC
450-20,
Loss
Contingencies, and pursuant to amendments by ASU 2010-20
regarding allowance for non-impaired loans.
(2)
Represents loans individually evaluated for impairment, prior
to the adoption of ASC 326, in accordance with ASC
310-30,
Receivables, and pursuant to amendments by ASU 2010-20 regarding
allowance for impaired loans.
Table of Contents
22
Impaired loans
The following tables present impaired loans at December 31, 2022 as determined under
ASC 310 prior to the adoption of
ASC 326.
Loans that have been fully charged-off are not included in the following
tables. The related allowance generally
represents the following components that correspond to impaired loans:
●
Individually evaluated impaired loans equal to or greater than $500 thousand secured
by real estate (nonaccrual
construction and land development, commercial real estate, and residential real estate
loans).
●
Individually evaluated impaired loans equal to or greater than $250 thousand not secured
by real estate
(nonaccrual commercial and industrial and consumer installment loans).
The following tables set forth certain information regarding the Company’s
impaired loans that were individually evaluated
for impairment at December 31, 2022.
December 31, 2022
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial and industrial
$
210
(1)
209
$
—
Commercial real estate:
Owner occupied
858
(3)
855
Total commercial real estate
858
(3)
855
—
Total
1,068
(4)
1,064
—
With allowance recorded:
Commercial and industrial
234
—
234
$
59
Commercial real estate:
Owner occupied
1,261
—
1,261
446
Total commercial real estate
1,261
—
1,261
446
Total
1,495
—
1,495
505
Total
impaired loans
$
2,563
(4)
2,559
$
505
(1) Unpaid principal balance represents the contractual obligation
due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well
as interest payments that have been
applied against the outstanding principal balance subsequent
to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance
less charge-offs and payments applied; it is shown before
any related allowance for loan losses.
Table of Contents
23
Pursuant to the adoption of ASU 2022-02, effective January 1, 2023,
the Company prospectively discontinued the
recognition and measurement guidance previously required for
troubled debt restructurings (TDRs).
As of September 30,
2023, the Company had no loans that would have previously required
disclosure as TDRs.
The following table provides the average recorded investment in impaired loans, if
any, by portfolio
segment, and the
amount of interest income recognized on impaired loans after impairment by portfolio
segment and class during the quarter
and nine months ended September 30, 2022 as determined under ASC 310
prior to the adoption of ASC 326.
Quarter ended September 30, 2022
Nine months ended September 30, 2022
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
173
—
$
199
—
Total commercial real estate
173
—
199
—
Residential real estate:
Investment property
—
—
6
—
Total residential real estate
—
—
6
—
Total
$
173
—
$
205
—
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 fair value of the Company’s MSRs is
determined using
assumptions that market participants would use in estimating future net servicing
income, including estimates of
prepayment speeds, discount rates, default rates, costs to service, escrow account earnings,
contractual servicing fee
income, ancillary income, and late fees.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs
under the amortization method.
Under the amortization method, MSRs are amortized in proportion to, and over
the period
of, estimated net servicing income.
The Company generally sells, without recourse, conforming, fixed-rate, closed-end,
residential mortgages to Fannie Mae,
where the Company services the mortgages sold and records MSRs.
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
24
The following table details the changes in amortized MSRs and the related valuation allowance for
the respective periods.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
MSRs, net:
Beginning balance
$
1,050
$
1,259
$
1,151
$
1,309
Additions, net
7
13
16
110
Amortization expense
(46)
(64)
(156)
(211)
Ending balance
$
1,011
$
1,208
$
1,011
$
1,208
Valuation
allowance included in MSRs, net:
Beginning of period
$
—
$
—
$
—
$
—
End of period
—
—
—
—
Fair value of amortized MSRs:
Beginning of period
$
2,312
$
2,547
$
2,369
$
1,908
End of period
2,351
2,478
2,351
2,478
NOTE 7: FAIR VALUE
Fair Value
Hierarchy
“Fair value” is defined by ASC 820,
Fair Value
Measurements and Disclosures
, and focuses on the exit price, i.e., the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring
in the principal
market (or most advantageous market in the absence of a principal
market) for an asset or liability at the measurement date.
GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority
to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as
follows:
Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical
assets or liabilities in active
markets.
Level 2—inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that
are observable for the
asset or liability, either directly or
indirectly.
Level 3—inputs to the valuation methodology are unobservable and reflect the
Company’s own assumptions about the
inputs market participants would use in pricing the asset or liability.
Level changes in fair value measurements
Transfers between levels of the fair value hierarchy are generally
recognized at the end of each reporting period.
The
Company monitors the valuation techniques utilized for each category of
financial assets and liabilities to ascertain when
transfers between levels have been affected.
The nature of the Company’s financial assets
and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For the nine
months ended September 30, 2023, there
were no transfers between levels and no changes in valuation techniques for the Company’s
financial assets and liabilities.
Table of Contents
25
Assets and liabilities measured at fair value on a recurring
basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using
Level 2 inputs.
For these securities, the Company
obtains pricing data from third party pricing services.
These third party pricing services consider observable data that
may
include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported
trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and
conditions.
On a quarterly basis,
management reviews the pricing data received from the third party pricing services
for reasonableness given current market
conditions.
As part of its review, management
may obtain non-binding third party broker/dealer quotes to validate the fair
value measurements.
In addition, management will periodically submit pricing information
provided by the third party
pricing services to another independent valuation firm on a sample basis.
This independent valuation firm will compare the
prices
provided by the third party pricing service with its own prices
and will review the significant assumptions and
valuation methodologies used with management.
The following table presents the balances of the assets and liabilities measured at fair value
on a recurring basis as of
September 30, 2023 and December 31, 2022, respectively,
by caption, on the accompanying consolidated balance sheets by
ASC 820 valuation hierarchy (as described above).
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
September 30, 2023:
Securities available-for-sale:
Agency obligations
$
122,750
—
122,750
—
Agency MBS
192,457
—
192,457
—
State and political subdivisions
58,079
—
58,079
—
Total securities available-for-sale
373,286
—
373,286
—
Total
assets at fair value
$
373,286
—
373,286
—
December 31, 2022:
Securities available-for-sale:
Agency obligations
$
125,617
—
125,617
—
Agency MBS
218,160
—
218,160
—
State and political subdivisions
61,527
—
61,527
—
Total securities available-for-sale
405,304
—
405,304
—
Total
assets at fair value
$
405,304
—
405,304
—
Assets and liabilities measured at fair value on a nonrecurring
basis
Collateral Dependent Loans
Collateral dependent loans are measured at the fair value of the collateral securing the loan
less estimated selling costs. The
fair value of real estate collateral is determined based on real estate appraisals
which are generally based on recent sales of
comparable properties which are then adjusted for property specific factors.
Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determined
values based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral
dependent loans are classified within Level 3 of
the hierarchy due to the unobservable inputs used in determining their fair value such as collateral
values and the borrower's
underlying financial condition.
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26
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 mortgage prepayment speeds,
discount rates, default rates, costs 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 mortgage prepayment speeds or
the constant prepayment rate (“CPR”) and the
weighted average discount rate.
Because the valuation of MSRs requires the use of significant unobservable inputs, all of
the Company’s MSRs are classified
within Level 3 of the valuation hierarchy.
The following table presents the balances of the assets and liabilities measured at fair value
on a nonrecurring basis as of
September 30, 2023 and December 31, 2022, respectively,
by caption, on the accompanying consolidated balance sheets
and by FASB ASC 820
valuation hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
September 30, 2023:
Loans, net
(1)
963
—
—
963
Other assets
(2)
1,011
—
—
1,011
Total assets at fair value
$
1,974
—
—
1,974
December 31, 2022:
Loans, net
(3)
2,054
—
—
2,054
Other assets
(2)
1,151
—
—
1,151
Total assets at fair value
$
3,205
—
—
3,205
(1)
Loans considered collateral dependent under ASC 326.
(2)
Represents MSRs, net, carried at lower of cost or
estimated fair value.
(3)
Loans considered impaired under ASC 310-10-35 Receivables,
prior to the adoption of ASC 326.
This amount reflects the recorded
investment in impaired loans, net of any related allowance
for loan losses.
Quantitative Disclosures for Level 3 Fair Value
Measurements
At September 30, 2023 and December 31, 2022, the Company had no Level 3 assets
measured at fair value on a recurring
basis.
For Level 3 assets measured at fair value on a non-recurring basis at September
30, 2023 and and December 31,
2022, the significant unobservable inputs used in the fair value measurements and
the range of such inputs with respect to
such assets are presented below.
Range of
Weighted
Carrying
Significant
Unobservable
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Inputs
of Input
September 30, 2023:
Collateral dependent loans
$
963
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,011
Discounted cash flow
Prepayment speed or CPR
7.1
-
19.7
7.3
Discount rate
9.5
-
11.5
9.5
December 31, 2022:
Impaired loans
$
2,054
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
1,151
Discounted cash flow
Prepayment speed or CPR
5.2
-
18.6
7.5
Discount rate
9.5
-
11.5
9.5
Table of Contents
27
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, where it is practicable to
estimate that value. The assumptions used in the
estimation of the fair value of the Company’s
financial instruments are explained below.
Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow analyses.
Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent
markets and should not be considered
representative of the liquidation value of the Company’s
financial instruments, but rather are good-faith estimates
of the fair
value of financial instruments held by the Company.
ASC 825 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair
value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected
current rates at which similar
loans would be made for the same remaining maturities. Expected future cash
flows were projected based on contractual
cash flows, adjusted for estimated prepayments.
The fair value of loans was measured using an exit price notion.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The
discount rates were based on rates currently
offered for deposits with similar remaining maturities.
The carrying value,
related estimated fair value, and placement in the fair value hierarchy of the Company’s
financial
instruments at September 30, 2023 and December 31, 2022 are presented below.
This table excludes financial instruments
for which the carrying amount approximates fair value.
Financial assets for which fair value approximates carrying value
included cash and cash equivalents.
Financial liabilities for which fair value approximates carrying value included
noninterest-bearing demand deposits,
interest-bearing demand deposits, and savings deposits.
Fair value approximates
carrying value in these financial liabilities due to these products having no stated
maturity.
Additionally, financial
liabilities for which fair value approximates carrying value included overnight
borrowings such as federal funds purchased
and securities sold under agreements to repurchase.
The following table summarizes our fair value estimates:
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
September 30, 2023:
Financial Assets:
Loans, net (1)
$
538,832
$
501,725
$
—
$
—
$
501,725
Financial Liabilities:
Time Deposits
$
193,575
$
189,310
$
—
$
189,310
$
—
December 31, 2022:
Financial Assets:
Loans, net (1)
$
498,693
$
484,007
$
—
$
—
$
484,007
Financial Liabilities:
Time Deposits
$
150,375
$
150,146
$
—
$
150,146
$
—
(1) Represents loans, net of allowance for credit losses.
The fair value of loans was measured using an
exit price notion.
Table of Contents
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
General
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 FHLB of Atlanta 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” as more fully described under “Special
Cautionary Notice Regarding Forward-Looking
Statements” below.
The following discussion and analysis is intended 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 and nine months ended September 30, 2023 and 2022,
as well as the information contained in our
annual report on Form 10-K for the year ended December 31, 2022 and our
interim reports on Form 10-Q for the quarters
ended March 31, 2023 and June 30, 2023.
Special Cautionary 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” “Description of
Property” and elsewhere, are “forward-looking statements” within the
meaning and protections of Section 27A of the
Securities Act of 1933 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,” “designed”, “plan,” “point to,”
“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target”,
“view”, 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 local, 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 including supply chain disruptions,
inventory volatility, and
changes in consumer behaviors;
●
the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or
other events that may affect
general economic conditions;
Table of Contents
29
●
governmental monetary and fiscal policies, including the continuing effects
of fiscal and monetary stimuli in
response to the COVID-19 crisis, followed by changes in monetary policies beginning in
March 2022 in response
to inflation, including increases in the Federal Reserve’s
target federal funds rate and reductions in the Federal
Reserve’s holdings of securities;
●
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, including changes in various capital, liquidity and other rule proposals,
as well as changes in
supervisory and examination focus, in light of three regional bank failures in California and
New York in
March
and May 2023;
●
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 inflation, changes in market interest rates and the shape of the yield curve on the levels,
composition
and costs of deposits and borrowings, the values of our securities and loans, 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 on collateral;
●
the risks of further increases in market interest rates creating additional unrealized
losses on our securities
available for sale, which adversely affect our stockholders’ equity (including
tangible stockholders’ equity) for
financial reporting purposes;
●
changes in borrower liquidity and credit risks, and savings, deposit and 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;
●
the effects of competition from a wide variety of local, regional, national
and other providers of financial,
investment and insurance services, including the disruptive effects
of financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank and credit unions,
which are not subject
to federal income taxation;
●
the failure of assumptions and estimates underlying the establishment of allowances
for credit losses, including
asset impairments, losses valuations of assets and liabilities and other estimates;
●
the timing and amount of rental income from third parties following the June 2022
opening of our new
headquarters;
●
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
vendors’ systems or customers’
information;
●
the risks that our deferred tax assets (“DTAs”)
included in “other assets” on our consolidated balance sheets, 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
Table of Contents
30
●
other factors and risks described herein and under “Risk Factors” in our annual report
on Commission Form 10-K
as of and for the year ended December 31, 2022 or in any of our subsequent reports that
we make with the
Securities and Exchange Commission (the “Commission” or “SEC”) under
the Exchange Act.
All written or oral forward-looking statements that are we make 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.
Summary of Results of Operations
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2023
2022
2023
2022
Net interest income (a)
$
6,380
$
7,360
$
20,591
$
20,034
Less: tax-equivalent adjustment
108
117
322
339
Net interest income (GAAP)
6,272
7,243
20,269
19,695
Noninterest income
865
852
2,448
2,608
Total revenue
7,137
8,095
22,717
22,303
Provision for credit losses
105
250
(191)
—
Noninterest expense
5,362
5,415
16,791
15,374
Income tax expense
182
432
737
1,049
Net earnings
$
1,488
$
1,998
$
5,380
$
5,880
Basic and diluted earnings per share
$
0.43
$
0.57
$
1.54
$
1.67
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP
Financial Measures."
Financial Summary
The Company’s net earnings were $5.4
million for the first nine months of 2023,
compared to $5.9 million for the first nine
months of 2022.
Basic and diluted earnings per share were $1.54 per share for the first nine
months of 2023, compared to
$1.67 per share for the first nine months of 2022.
Net interest income (tax-equivalent) was $20.6 million for the first
nine months of 2023, a 3% increase compared to $20.0
million for the first nine months of 2022.
This increase was primarily due to improvements in the Company’s
net interest
margin.
The Company’s net interest
margin (tax-equivalent) was 2.97%
for the first nine months of 2023 compared to
2.67% for the first nine months of 2022.
This increase was primarily due to a more favorable asset mix and higher
yields
on interest earning assets.
These higher yields on interest earning assets were partially offset
by increased cost of funds.
Average loans for the first nine
months of 2023 were $514.7 million, a 16% increase from the first nine months of 2022.
See “Results of Operations – Average
Balance Sheet and Interest Rates” and “Net Interest Income and Margin”
below.
At September 30, 2023, the Company’s allowance
for credit losses was $6.8
million, or 1.24% of total loans, compared to
$5.8 million, or 1.14% of total loans, at December 31, 2022, and $5.0 million, or
1.05% of total loans, at September 30,
2022.
The implementation of CECL required pursuant to Accounting Standards
Codification (“ASC”) 326, which was
effective January 1, 2023, increased our allowance for credit losses by $1.0
million, or 0.20% of total loans, as a day one
transition adjustment.
The Company recorded a negative provision for credit losses during the first
nine months of 2023 of $0.2
million,
compared to none during the first nine months of 2022.
The provision for credit losses under CECL is reflective of the
Company’s credit risk profile and the future economic
outlook and forecasts.
Our CECL model is largely influenced by
economic factors including, most notably,
the anticipated unemployment rate.
The negative provision for credit losses
during the first nine months of 2023 was primarily related to the resolution of a collateral
dependent nonperforming loan,
with a recorded investment of $1.3 million and a corresponding allowance of $0.5
million, that was collected in full during
the second quarter of 2023.
This was partially offset by an increase in the calculation of current expected
credit losses due
to loan growth during the first nine months of 2023.
Table of Contents
31
Noninterest income was $2.4 million in the first nine months of 2023,
compared to $2.6 million in the first nine months of
2022.
The decrease in noninterest income was primarily due to a decrease in mortgage lending
income of $0.2
million as a
result of higher market interest rates for mortgage loans.
Noninterest expense was $16.8 million in the first nine months of 2023,
compared to $15.4 million for the first nine months
of 2022.
The increase in noninterest expense was primarily due to an increase in net occupancy
and equipment expense of
$0.4
million related to the Company’s new headquarters,
which opened in June 2022, professional fees expense of $0.2
million, and other noninterest expense of $0.9
million.
Income tax expense was $0.7
million for the first nine months of 2023 compared to $1.0 million for the first nine months of
2022.
This decrease was due to a decline in the level of earnings before taxes and the Company’s
effective tax rate.
The
Company's effective tax rate for the first nine months of 2023
was 12.05%, compared to 15.14% in the first nine months of
2022.
The Company’s effective income
tax rate is principally affected by tax-exempt earnings from the Company’s
investment in municipal securities, bank-owned life insurance (“BOLI”),
and New Markets Tax Credits
(“NMTCs”).
The Company paid cash dividends of $0.81 per share in the first nine months of 2023,
an increase of 2% from the same
period of 2022.
The Company repurchased 10,108 shares for $0.2 million during the first nine
months of 2023.
At
September 30, 2023, 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 15.98%, a tier 1 leverage ratio of
10.26% and a common equity tier 1 (“CET1”) ratio of 15.01% at September 30,
2023.
At September 30,
2023, the
Company’s equity to total assets ratio
was 5.96%, compared to 6.65% at December 31, 2022, and 5.74% at September 30,
2022.
For the third quarter of 2023, net earnings were $1.5 million, or $0.43 per
share, compared to $2.0 million, or $0.57 per
share, for the third quarter of 2022.
Net interest income (tax-equivalent) was $6.4 million for the third quarter of 2023
compared to $7.4 million for the third quarter of 2022.
This decrease was primarily due to decline in the Company’s
net
interest margin.
The Company’s net interest
margin (tax-equivalent) was 2.73%
in the third quarter of 2023 compared to
3.00%
in the third quarter of 2022.
The decrease was primarily due to increased cost of funds and changes in our deposit
mix, which was partially offset by a more favorable asset
mix and higher yields on interest earning assets.
The Company
recorded a provision for credit losses during the third quarter of 2023
of $0.1
million, compared to $0.3 million for the third
quarter 2022.
Noninterest income was $0.9 million for both the third quarter of 2023 and 2022.
Noninterest expense was
$5.4 million in the third quarter of 2023 and 2022.
Income tax expense was $0.2
million for the third quarter of 2023,
compared to $0.4 million for the third quarter of 2022.
This decrease was due to a decline in the level of earnings before
taxes and the Company’s effective
tax rate.
The Company's effective tax rate for the third quarter of 2023 was 10.90%,
compared to 17.78% in the third quarter of 2022.
The Company’s effective income
tax rate is principally impacted by tax-
exempt earnings from the Company’s investment
in municipal securities, bank-owned life insurance, and New Markets Tax
Credits.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these principles
conform with U.S. GAAP and with
general practices within the banking industry.
The accounting policies which we believe to be most critical in preparing our
Consolidated Financial Statements are presented in the section titled
“Critical Accounting Policies” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations included
in the Company’s Annual
Report on
Form 10-K for the year ended December 31, 2022.
On January 1, 2023, we adopted FASB
ASU 2016-13
Financial
Instruments - Credit Losses
(Topic
326) which significantly changes our methodology for determining our allowance
for
credit losses, and ASU 2022-02
, Financial Instruments – Credit Losses (Topic
326): Troubled
Debt Restructurings and
Vintage Disclosures
which eliminated the accounting guidance for TDRs, while enhancing disclosure requirements
for
certain loan refinancings and restructurings by creditors when a borrower is experiencing
financial difficulty.
See
Note 1.
Summary of Significant Accounting Policies
in the Notes to our Consolidated Financial Statements elsewhere in this Form
10-Q for further information related to these changes. There have been no other significant
changes to our Critical
Accounting Estimates as described in our Form 10-K.
Table of Contents
32
RESULTS
OF OPERATIONS
Average
Balance Sheet and Interest Rates
Nine months ended September 30,
2023
2022
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
514,706
4.71%
$
442,613
4.42%
Securities - taxable
344,136
2.13%
371,595
1.69%
Securities - tax-exempt
54,615
3.75%
60,034
3.59%
Total securities
398,751
2.35%
431,629
1.95%
Federal funds sold
4,372
4.86%
54,924
0.76%
Interest bearing bank deposits
8,118
4.66%
73,630
0.82%
Total interest-earning assets
925,947
3.70%
1,002,796
2.89%
Deposits:
NOW
189,586
0.75%
201,792
0.13%
Savings and money market
291,988
0.63%
335,005
0.20%
Time deposits
168,000
1.99%
155,824
0.84%
Total interest-bearing deposits
649,574
1.02%
692,621
0.32%
Short-term borrowings
3,748
2.43%
3,969
0.50%
Total interest-bearing liabilities
653,322
1.02%
696,590
0.32%
Net interest income and margin (tax-equivalent)
$
20,591
2.97%
$
20,034
2.67%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $20.6 million for the first nine months
of 2023, a 3% increase compared to $20.0
million for the first nine months of 2022.
This increase was primarily due to improvements in the Company’s
net interest
margin (tax-equivalent).
The Company’s net interest
margin (tax-equivalent) was 2.97% in the first nine months of 2023
compared to 2.67% in the first nine months of 2022.
This increase was primarily due to a more favorable asset mix and
higher yields on interest earning assets.
These higher yields on interest earning assets were partially offset by
increased
cost of funds.
The cost of funds increased to 102 basis points, compared to 32 basis points in the first
nine months of 2022.
Since March of 2022, the Federal Reserve increased the target federal
funds range from 0 – 0.25% to 5.25 – 5.50%.
The tax-equivalent yield on total interest-earning assets increased by 81 basis points
to 3.70% in the first nine months of
2023 compared to 2.89% in the first nine months of 2022.
This increase was primarily due to changes in our asset mix and
higher market interest rates on interest earning assets.
The cost of total interest-bearing liabilities increased by 70 basis points to
1.02% in the first nine months of 2023 compared
to 0.32% in the first nine months of 2022.
Our deposit costs may continue to increase as the Federal Reserve maintains or
increases its target federal funds rate, market interest rates increase,
and as customer behaviors change as a result of
inflation and higher market interest rates, and we compete for deposits against other banks,
money market mutual funds,
Treasury securities and other interest bearing alternative investments.
The Company continues to deploy various asset liability management strategies
to manage its risks from interest rate
fluctuations. Deposit and loan pricing remain competitive in our
markets.
We believe this challenging
rate environment
will continue throughout 2023.
Our ability to compete and manage our deposit costs until our interest-earning assets
reprice and we generate new fixed rate loans with current market interest rates
will be important to our net interest margin
during the monetary tightening cycle that we believe will continue throughout
2023 and into 2024.
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33
Provision for Credit Losses
On January 1, 2023, we adopted ASC 326,
which introduces the current expected credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loans.
Accordingly, the provision for credit
losses represents a charge to earnings necessary to establish an allowance
for credit losses that, in management's evaluation,
is adequate to provide coverage for all expected credit losses. The Company recorded
a negative provision for credit losses
during the first nine months of 2023 of $0.2
million, compared to none during the first nine months of 2022.
Provision
expense is affected by organic loan growth in our loan portfolio,
our internal assessment of the credit quality of the loan
portfolio, our expectations about future economic conditions and net charge-offs.
Our CECL model is largely influenced
by economic factors including, most notably,
the anticipated
unemployment rate, which may be affected by monetary
policy.
The negative provision for credit losses during the first nine months of 2023
was primarily related to the resolution
of a collateral dependent nonperforming loan, with a recorded investment of $1.3
million and a corresponding allowance of
$0.5 million, that was collected in full during the second quarter of 2023.
This was partially offset by an increase in the
calculation of current expected credit losses due to loan growth during the first nine
months of 2023.
Our allowance for credit losses reflects an amount we believe appropriate,
based on our allowance assessment
methodology, to adequately cover
all expected credit losses as of the date the allowance is determined.
At September 30,
2023, the Company’s allowance
for credit losses was $6.8 million, or 1.24% of total loans, compared to $5.8
million, or
1.14% of total loans, at December 31, 2022, and $5.0 million, or 1.05% of total loans, at September
30, 2022.
The
implementation of CECL, as of January 1, 2023, increased our allowance for credit
losses by $1.0 million, or 0.20% of total
loans, as a day one transition adjustment to ASC 326.
Noninterest Income
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Service charges on deposit accounts
$
148
$
158
$
456
$
446
Mortgage lending income
110
126
345
566
Bank-owned life insurance
87
97
311
293
Securities gains, net
—
44
—
44
Other
520
427
1,336
1,259
Total noninterest income
$
865
$
852
$
2,448
$
2,608
The Company’s income from mortgage lending
is 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 September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Origination income
$
20
$
39
$
81
$
315
Servicing fees, net
90
87
264
251
Total mortgage lending income
$
110
$
126
$
345
$
566
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34
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
as market interest rates on
mortgage loans increased and mortgage loan volumes also decreased.
The decrease in origination income was partially
offset by an increase in mortgage servicing fees, net of related
amortization expense as mortgage prepayment speeds
slowed, resulting in decreased amortization expense.
Income from bank-owned life insurance was $311
thousand and $293 thousand for the nine months ended September 30,
2023 and 2022, respectively.
Excluding a $52 thousand non-taxable death benefit received during 2023, income from
bank-owned life insurance would have been $259 thousand and $293
thousand for the nine months ended September 30,
2023 and 2022, respectively.
Noninterest Expense
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2023
2022
2023
2022
Salaries and benefits
$
2,844
$
2,975
$
8,809
$
8,901
Net occupancy and equipment
755
794
2,341
1,955
Professional fees
261
235
898
704
Other
1,502
1,411
4,743
3,814
Total noninterest expense
$
5,362
$
5,415
$
16,791
$
15,374
Salaries and benefits decreased for both the quarter and nine months ended September
30, 2023.
A decrease in the number
of full-time equivalents was partially offset by routine annual
increases in salaries and wages.
The increase in net occupancy and equipment expenses was primarily due to increased
expenses related to the Company’s
new headquarters in downtown Auburn.
This amount includes depreciation expense and other costs associated
with
operating the new headquarters.
The Company relocated its main office branch and bank operations into its
newly
constructed headquarters during June 2022.
The increase in other noninterest expense was due to various items including
FDIC assessments, software costs, ATM
and
checkcard expenses, impairment related to a new market tax credit investment, due to the
remaining tax credit being less
than the Company’s investment,
and a gain on sale of other real estate owned that was realized in the 2022.
Income Tax
Expense
Income tax expense was $0.7 million for the first nine months of 2023
compared to $1.0 million for the the first nine
months of 2022.
This decrease was due to a decline in the level of earnings before taxes and the Company’s
effective tax
rate.
The Company’s effective
income tax rate for the first nine months of 2023 was 12.05%, compared to
15.14% in the
first nine months of 2022.
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 $373.3
million at September 30, 2023, compared to $405.3 million at December 31,
2022.
This decrease reflects a $21.2 million decrease in the amortized cost basis of securities
available-for-sale and a
decrease in the fair value of securities available-for-sale of $10.8 million.
The average annualized tax-equivalent yields
earned on total securities were 2.35%
in the first nine months of 2023 and 1.95% in the first nine months of 2022.
Table of Contents
35
Loans
2023
2022
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
66,014
61,880
59,602
66,212
70,715
Construction and land development
70,129
63,874
66,500
66,479
54,773
Commercial real estate
281,964
275,801
267,962
264,573
249,527
Residential real estate
117,150
109,834
101,975
97,648
91,469
Consumer installment
10,353
9,022
9,002
9,546
7,551
Total loans
$
545,610
520,411
505,041
504,458
474,035
Total loans
were $545.6 million at September 30, 2023, an 8% increase compared to $504.5 million at December 31,
2022.
Four loan categories represented the majority of the loan portfolio at September 30,
2023: commercial real estate (52%),
residential real estate (21%), commercial and industrial (12%) and construction and
land development (13%).
Approximately 23% of the Company’s commercial
real estate loans were classified as owner-occupied at September 30,
2023.
Within the residential real estate portfolio segment, the Company
had junior lien mortgages of approximately $8.7 million,
or 2% of total loans, and $7.4
million, or 1%, of total loans at September 30, 2023 and December 31, 2022, respectively.
For residential real estate mortgage loans with a consumer purpose, the Company had
no loans that required interest only
payments at September 30, 2023 and December 31, 2022. The Company’s
residential real estate mortgage portfolio does
not include any option or hybrid ARM loans, subprime loans, or any material amount of other
consumer mortgage products
which are generally viewed as high risk.
The average yield earned on loans and loans held for sale was 4.71% in the first nine months of
2023 and 4.42% in the first
nine months of 2022.
The specific economic and credit risks associated with our loan portfolio include,
but are not limited to, the effects of
current economic conditions, including inflation and the continuing increases in
market interest rates, remaining COVID-19
pandemic effects including supply chain disruptions, reduced
commercial office occupancy levels, housing supply
shortages and inflation on our borrowers’ cash flows, real estate
market sales volumes and liquidity,
valuations used in
making loans and evaluating collateral, reduced credit availability
,
(especially for commercial real estate) generally and
higher costs of financing properties, which reduce the transaction and dollar
volumes of commercial real estate property
sales.
Other risks we face include, among other things, 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. Various
projects financed earlier that were based on lower interest rate assumptions than
currently in effect may not be as profitable or successful at the higher
interest rate currently in effect and currently expected
in the future.
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 $23.2 million.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding
plus
unfunded commitments) to a single borrower of $20.8 million. Our loan policy requires
that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit.
At September 30, 2023, the Bank had one
loan relationship exceeding our internal limit.
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36
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 September 30, 2023 and December 31, 2022.
September 30,
December 31,
(Dollars in thousands)
2023
2022
Lessors of 1-4 family residential properties
$
57,126
$
52,278
Multi-family residential properties
47,634
41,084
Hotel/motel
36,992
33,378
Allowance for Credit Losses
The Company maintains the allowance for credit losses at a level that management believes
appropriate to adequately cover
the Company’s estimate of expected
losses in the loan portfolio. The allowance for credit losses was $6.8 million at
September 30, 2023 compared to $5.8 million at December 31, 2022,
which management believed to be adequate at each of
the respective dates. The assumptions, judgments and estimates,
as well as the methodologies and models associated with
the determination of the allowance for credit losses are described under “Critical
Accounting Policies.”
On January 1, 2023, we adopted ASC 326, which introduces the current expected credit
losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loan portfolio.
Accordingly, beginning in
2023, the allowance for credit losses represents an amount that, in management's evaluation,
is adequate to provide
coverage for all expected future credit losses on outstanding loans. As of September
30, 2023 and December 31, 2022, our
allowance for credit losses was approximately $6.8 million and $5.8
million, respectively, which our
management believes
to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total
loans was 1.24% at
September 30, 2023, compared to 1.14% at December 31, 2022.
The increase in the allowance for credit losses is largely the result of the implementation
of ASC
326 on January 1, 2023,
which resulted in an adjustment to the opening balance of the allowance for credit losses of
$1.0 million. Our CECL models
rely largely on projections of macroeconomic conditions to estimate
future credit losses. Macroeconomic factors used in the
model include the Alabama unemployment rate, the Alabama home price index, the
national commercial real estate price
index and the Alabama gross state product. Projections of these
macroeconomic factors, obtained from an independent third
party, are utilized to predict
quarterly rates of default.
See Note 1 to our Financial Statements, above.
Under the CECL methodology the allowance for credit losses is measured
on a collective basis for pools of loans with
similar risk characteristics, and for loans that do not share similar risk characteristics
with the collectively evaluated pools,
evaluations are performed on an individual basis. Losses are predicted
over a period of time determined to be reasonable
and supportable, and at the end of the reasonable and supportable period
losses are reverted to long term historical averages.
At September 30, 2023, reasonable and supportable periods of 4 quarters
were utilized followed by an 8 quarter straight line
reversion period to long term averages.
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37
A summary of the changes in the allowance for credit losses and certain asset
quality ratios for the third quarter of 2023 and
the previous four quarters is presented below.
2023
2022
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,634
6,821
5,765
4,966
4,716
Impact of adopting ASC 326
—
—
1,019
—
—
Charge-offs:
Commercial and industrial
—
—
—
(205)
(13)
Consumer installment
(18)
(56)
(11)
(3)
(3)
Total charge
-offs
(18)
(56)
(11)
(208)
(16)
Recoveries
4
200
8
7
16
Net recoveries (charge-offs)
(14)
144
(3)
(201)
—
Provision for credit losses
158
(331)
40
1,000
250
Ending balance
$
6,778
6,634
6,821
5,765
4,966
as a % of loans
1.24
%
1.27
1.35
1.14
1.05
as a % of nonperforming loans
559
%
577
255
211
1,431
Net charge-offs (recoveries) as % of average loans (a)
0.01
%
(0.06)
—
0.04
—
(a) Net charge-offs (recoveries) are annualized.
Nonperforming Assets
At September 30, 2023 the Company had $1.2 million in nonperforming assets compared
to $2.7 million at December 31,
2022.
The decrease in nonperforming assets was primarily related to the resolution of a collateral
dependent
nonperforming loan, with a recorded investment of $1.3 million, that was collected in
full during the second quarter of
2023.
The table below provides information concerning total nonperforming assets
and certain asset quality ratios for the third
quarter of 2023 and the previous four quarters.
2023
2022
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
1,213
1,149
2,680
2,731
347
Total nonperforming assets
$
1,213
1,149
2,680
2,731
347
as a % of loans and other real estate owned
0.22
%
0.22
0.53
0.54
0.07
as a % of total assets
0.12
%
0.11
0.26
0.27
0.03
Nonperforming loans as a % of total loans
0.22
%
0.22
0.53
0.54
0.07
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38
The table below provides information concerning the composition of nonaccrual
loans for the third quarter of 2023 and the
previous four quarters.
2023
2022
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
$
162
178
432
443
—
Commercial real estate
801
819
2,103
2,116
170
Residential real estate
250
152
135
172
177
Consumer installment
—
—
10
—
—
Total nonaccrual loans
$
1,213
1,149
2,680
2,731
347
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 no loans 90 days or more past due and still accruing at September 30,
2023 and December 31, 2022,
respectively.
The Company had no OREO at September 30, 2023 or December 31, 2022.
Deposits
September 30,
December 31,
(In thousands)
2023
2022
Noninterest bearing demand
$
279,458
311,371
NOW
212,412
178,641
Money market
190,426
214,298
Savings
88,730
95,652
Certificates of deposit under $250,000
51,092
93,017
Certificates of deposit and other time deposits of $250,000 or more
142,483
57,358
Total deposits
$
964,601
950,337
Total deposits
were $964.6 million at September 30, 2023,
compared to $950.3 million at December 31, 2022.
The
Company utilizes brokered deposits as an additional funding source.
At September 30, 2023, the Company had $46.6
million in brokered deposits,
compared to none at December 31, 2022.
Excluding brokered deposits, customer deposits
decreased $32.3 million, or 3%, during the first nine months of 2023.
This decrease reflects net outflows to higher yield
investment alternatives in a rising interest rate environment and increased customer spending.
Noninterest-bearing deposits
were $279.5 million, or 29% of total deposits, at September 30, 2023, compared
to $311.4 million, or 33% of total deposits
at December 31, 2022.
The average rate paid on total interest-bearing deposits was 1.02% in the first nine
months of 2023 compared to 0.32% in
the first nine months of 2022.
At September 30, 2023, estimated uninsured deposits totaled $337.4
million,
or 35% of total deposits, compared to $381.7
million, or 40% of total deposits at December 31, 2022.
The decrease in the percentage of the Bank’s deposits
that are
uninsured was in part due to customers’ increased use of the products facilitated by IntraFi
that enable customers to
maximize FDIC deposit insurance coverage for their deposits.
During 2023, the Bank began participating in the
Certificates of Deposit Account Registry Service (the “CDARS”) and the Insured
Cash Sweep product (“ICS”), which
provide for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the
purpose of maximizing FDIC
insurance.
The total of reciprocal deposits at September 30, 2023
was $31.6 million, or 3% of total deposits.
Uninsured
amounts are estimated based on the portion of account balances in excess of FDIC insurance
limits.
The Bank’s uninsured
deposits at September 30, 2023 and December 31, 2022 include approximately $185.7
million and $155.0 million,
respectively, of deposits of state,
county and local governments that are collateralized by securities having an equal
fair
value to such deposits.
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39
The FDIC has proposed a special assessment on uninsured deposits of banks with over $5
billion in uninsured deposits to
the FDIC Deposit Insurance Fund’s costs
of the systemic risk determination made in connection with two recent bank
failures.
This proposal will not apply to AuburnBank.
Other Borrowings and Available
Credit
The Company had no long-term debt at September 30, 2023 and December 31, 2022.
The Bank utilizes short and long-
term non-deposit borrowings from time to time. 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 $61.0 million with no federal funds borrowings outstanding
at September 30, 2023, and December 31,
2022, respectively. Securities
sold under agreements to repurchase, which were entered into on behalf of certain customers
totaled $1.7 million and $2.6 million at September 30, 2023 and December
31, 2022, respectively.
At September 30, 2023
and December 31, 2022, the Bank had no borrowings from the Federal Reserve discount
window and no borrowings under
the Federal Reserve’s new Bank Term
Facility Program (“BTFP”), which opened March 12, 2023.
The Bank is a member of the FHLB of Atlanta and has borrowed, and may in the
future borrow from time to time under the
FHLB of Atlanta’s advance program to
obtain funding for its growth.
FHLB advances include both fixed and variable
terms and are taken out with varying maturities, and are generally secured by eligible assets.
The Bank had no borrowings
under FHLB of Atlanta’s advance program at
September 30, 2023 and December 31, 2022, respectively.
At those dates,
the Bank had $307.7 million and $312.6 million, respectively,
of available lines of credit at the FHLB of Atlanta.
Advances include both fixed and variable terms and may be taken out with varying
maturities.
The average rate paid on the Bank’s
short-term borrowings was 2.43%
in the first nine months of 2023 compared to 0.50%
in the first nine months of 2022.
CAPITAL ADEQUACY
The Company’s consolidated
stockholders’ equity was $61.5 million and $68.0 million as of September 30,
2023 and
December 31, 2022, respectively.
The decrease from December 31, 2022 was primarily driven by an other comprehensive
loss due to the change in unrealized gains/losses on securities available-for-sale,
net of tax of $8.1 million, cash dividends
of $2.8 million, the cumulative effect of adopting CECL accounting standard
of $0.8 million, and repurchases of the
Company’s stock of $0.2
million, partially offset by net earnings of $5.4 million.
Total unrealized
losses on available-for-
sale securities increased
20% from $54.7 million on December 31, 2022 to $65.5 million September
30, 2023.
These
unrealized losses do not affect the Bank’s
capital for regulatory capital purposes.
The Company paid cash dividends of $0.81 per share in the first nine months of 2023,
an increase of 2% from the same
period in 2022. The Company’s share repurchases
of $0.2
million since December 31, 2022 resulted in 10,108 fewer
outstanding common shares at September 30, 2023.
These shares were repurchased at an average cost per share of $22.63.
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 September 30, 2023, the Bank’s ratio
was sufficient to meet the fully phased-in conservation buffer.
On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted
a final rule that amended the
capital conservation buffer.
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.
This rule only affects the capital
buffers, and banking organizations were encouraged to
make prudent capital distribution decisions.
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40
The Federal Reserve has treated us as a “small bank holding company’ under the Federal
Reserve’s Small Bank Holding
Company 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 10.26%, CET1 risk-based capital ratio was 15.01%, tier 1
risk-based capital ratio was 15.01%, and total risk-based capital ratio was 15.98%
at September 30, 2023. 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 7.98%
at September 30, 2023.
On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued
a joint notice of proposed
rulemaking to implement the Basel III endgame components.
The proposal which is subject to public comment and change
only applies to banks and holding companies with $100 billion or more of assets.
The proposal includes provisions dealing
with:
●
Credit risk, which arises from the risk that an obligor fails to perform on an obligation;
●
Credit risk, which arises from the risk than an obligor fails to perform on an obligation;
●
Market risk, which results from changes in the value of trading positions;
●
Operational risk, which is the risk of losses resulting from inadequate or
failed internal process, people, and
systems, or from external events; and
●
Credit valuation adjustment risk, which results from the risk of losses on certain derivative
contracts.
The Basel III endgame regulatory proposals are not applicable to the Company or the Bank
.
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.
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
While a gradual change in interest rates was used in the above analysis to provide an estimate
of exposure under these
scenarios, our modeling under both a gradual and instantaneous change in interest rates indicates
our balance sheet is
liability sensitive over the forecast period
of 12 months.
At September 30, 2023, our earnings simulation model indicated
that we were in compliance with the policy guidelines
noted above.
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41
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 September 30, 2023, 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 September 30, 2023 and December 31,
2022, the Company had no derivative
contracts designated as part of a hedging relationship to assist in managing its interest rate
sensitivity.
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.
The Company seeks to manage its liquidity to
manage or reduce its costs of funds by maintaining liquidity believed adequate
to meet its anticipated funding needs, while
balancing against excessive liquidity that likely would reduce earnings due to the
cost of foregoing alternative higher-
yielding assets.
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.
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42
Primary sources of funding for the Bank include customer deposits, other borrowings,
interest payments on earning assets,
repayment and maturity of securities and loans, sales of securities, and the
sale of loans, particularly residential mortgage
loans. The Bank has access to federal funds lines from various banks and borrowings
from the Federal Reserve discount
window and the Federal Reserve’s recent
BTFP borrowing facility.
In addition to these sources, the Bank is eligible to
participate in the FHLB of Atlanta’s advance
program to obtain funding for growth and liquidity.
Advances include both
fixed and variable terms and may be taken out with varying maturities. At September
30, 2023, the Bank had no FHLB of
Atlanta advances outstanding and available credit from the FHLB of $307.7
million. At September 30, 2023, the Bank also
had $61.0 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 reasonably
expected borrower,
depositor, and creditor requirements over the next twelve
months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual
Obligations
At September 30, 2023, the Bank had outstanding standby letters of credit of $0.8
million and unfunded loan commitments
outstanding of $60.1
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 or raise deposits.
Mortgage lending activities
We generally 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 September 30, 2023,
the aggregate unpaid principal balance of residential mortgage loans,
which we have originated
and sold, but retained the servicing rights, was $219.3 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.
The Company was not required to repurchase any loans during the first nine months
of 2023 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 September 30, 2023.
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 agreements under which we act as servicer generally specifies standard
s
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
our agreements with Fannie Mae and
Fannie Mae’s mortgage servicing
guides.
Remedies could include repurchase of an affected loan.
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43
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 September 30, 2023, 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.
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.
Inflation can affect our noninterest expenses. It also can affect
our customers’ behaviors, and can affect the interest rates we
have to pay on our deposits and other borrowings, and the interest rates we earn on our earning
assets.
The difference
between our interest expense and interest income is also affected by the shape
of the yield curve and the speeds at which
our assets and liabilities,
respectively, reprice
in response to interest rate changes.
The yield curve was inverted on
September 30, 2023, which means shorter term interest rates are higher than longer
interest rates.
This results in a lower
spread between our costs of funds and our interest income.
In addition, net interest income could be affected by
asymmetrical changes in the different interest rate indexes, given that
not all of our assets or liabilities are priced with the
same index. Higher market interest rates and sales of securities held by the Federal Reserve
to reduce inflation generally
reduce economic activity and may reduce loan demand and growth.
Inflation and related changes in market interest rates,
as the Federal Reserve acts to meet its long term inflation goal of 2%, also can adversely affect
the values and liquidity of
our loans and securities,
the value of collateral for our loans,
and the success of our borrowers and such borrowers’
available cash to pay interest on and principal of our loans to them.
Inflation is running at levels unseen in decades and, while it has declined during 2023,
it remains above the Federal
Reserve’s long term inflation goal of 2.0%
annually.
Beginning in March 2022, the Federal Reserve has been raising target
federal funds interest rates and reducing its securities holdings in an effort
to reduce inflation.
During 2022, the Federal
Reserve increased the target federal funds range from 0 – 0.25%
to 4.25 – 4.50%.
The target federal funds rate was
increased another 25 basis points on each of January 31, March 7, May 3 and July 26, 2023
to 5.25-5.50%, and further
increases in the target federal funds rate may be made if inflation remains elevated.
The Federal Reserve has indicated it
will maintain higher target rates and restrictive monetary policy to
meet its 2% inflation rate over the longer term and
maximum employment goals.
Our deposit costs may increase as the Federal Reserve increases its target
federal funds rate,
market interest rates increase, and as customer savings behaviors change as a result of inflation
and customers seek higher
market interest rates on deposits and other alternative investments.
Monetary efforts to control inflation may also affect
unemployment which is an important component in our CECL model used to estimate our
allowance for credit losses.
Table of Contents
44
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB
but is not yet effective.
●
ASU 2023-02,
Investments – Equity Method and Joint Ventures
(Topic 323):
Accounting for Investments in Tax
Credit Structures Using
the Proportional Amortization Method
Information about this pronouncement is described in more detail below.
ASU 2023-02,
Investments – Equity Method and Joint Ventures
(Topic 323):
Accounting for Investments in Tax
Credit
Structures Using the Proportional
Amortization Method
, The amendments in this Update permit reporting entities to elect
to account for their tax equity investments, regardless of the tax credit program from which
the income tax credits are
received, using the proportional amortization method if certain conditions are
met. The new standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15,
2023.
The Company is currently
evaluating the impact of the new standard on the Company’s
consolidated financial statements.
Table of Contents
45
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.
2023
2022
Third
Second
First
Fourth
Third
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,272
6,888
7,109
7,471
7,243
Tax-equivalent adjustment
108
106
108
117
117
Net interest income (Tax
-equivalent)
$
6,380
6,994
7,217
7,588
7,360
Nine months ended September 30,
(In thousands)
2023
2022
Net interest income (GAAP)
$
20,269
19,695
Tax-equivalent adjustment
322
339
Net interest income (Tax
-equivalent)
$
20,591
20,034
Table of Contents
46
Table 2
- Selected Quarterly Financial Data
2023
2022
Third
Second
First
Fourth
Third
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,380
6,994
7,217
7,588
7,360
Less: tax-equivalent adjustment
108
106
108
117
117
Net interest income (GAAP)
6,272
6,888
7,109
7,471
7,243
Noninterest income
865
791
792
3,898
852
Total revenue
7,137
7,679
7,901
11,369
8,095
Provision for credit losses
105
(362)
66
1,000
250
Noninterest expense
5,362
5,825
5,604
4,449
5,415
Income tax expense
182
288
267
1,454
432
Net earnings
$
1,488
1,928
1,964
4,466
1,998
Per share data:
Basic and diluted net earnings
$
0.43
0.55
0.56
1.27
0.57
Cash dividends declared
0.27
0.27
0.27
0.265
0.265
Weighted average shares outstanding:
Basic and diluted
3,496,411
3,500,064
3,502,143
3,504,344
3,507,318
Shares outstanding, at period end
3,493,614
3,499,412
3,500,879
3,503,452
3,505,355
Book value
$
17.59
20.28
21.03
19.42
17.06
Common stock price:
High
$
22.80
24.32
24.50
24.71
29.02
Low
20.85
18.80
22.55
22.07
23.02
Period end:
21.50
21.26
22.66
23.00
23.02
To earnings ratio
7.65
x
7.21
7.79
7.82
10.46
To book value
122
%
105
108
118
135
Performance ratios:
Annualized return on average equity
8.59
%
10.37
11.44
28.23
10.35
Annualized return on average assets
0.58
%
0.75
0.77
1.75
0.75
Dividend payout ratio
62.79
%
49.09
48.21
20.87
46.49
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.24
%
1.27
1.35
1.14
1.05
Nonperforming loans
559
%
577
255
211
1,431
Nonperforming assets as a % of:
Loans and foreclosed properties
0.22
%
0.22
0.53
0.54
0.07
Total assets
0.12
%
0.11
0.26
0.27
0.03
Nonperforming loans as a % of total loans
0.22
%
0.22
0.53
0.54
0.07
Annualized net charge-offs (recoveries) as % of average loans
0.01
%
(0.11)
—
0.16
—
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.01
%
15.33
15.45
15.39
15.39
Tier 1 risk-based capital ratio
15.01
%
15.33
15.45
15.39
15.39
Total risk-based capital ratio
15.98
%
16.31
16.48
16.25
16.16
Tier 1 leverage ratio
10.26
%
10.23
10.07
10.01
9.29
Other financial data:
Net interest margin (a)
2.73
%
3.03
3.17
3.27
3.00
Effective income tax rate
10.90
%
13.00
11.97
24.56
17.78
Efficiency ratio (b)
74.01
%
74.82
69.97
38.73
65.94
Selected average balances:
Securities
$
390,772
402,929
402,684
407,792
432,393
Loans, net of unearned income
529,382
512,066
502,158
490,163
457,722
Total assets
1,020,980
1,022,874
1,022,938
1,022,863
1,069,973
Total deposits
942,533
942,552
948,393
951,122
987,614
Total stockholders’ equity
69,269
74,404
68,655
63,283
77,191
Selected period end balances:
Securities
$
373,286
394,079
405,692
405,304
411,538
Loans, net of unearned income
545,610
520,411
505,041
504,458
474,035
Allowance for credit losses
6,778
6,634
6,821
5,765
4,966
Total assets
1,030,724
1,026,130
1,017,746
1,023,888
1,042,559
Total deposits
964,602
950,742
939,190
950,337
977,938
Total stockholders’ equity
61,451
70,976
73,640
68,041
59,793
(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.
See
"Table 1 - Explanation of Non-GAAP Financial Measures."
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
Table of Contents
47
Table 3
- Selected Financial Data
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2023
2022
Results of Operations
Net interest income (a)
$
20,591
20,034
Less: tax-equivalent adjustment
322
339
Net interest income (GAAP)
20,269
19,695
Noninterest income
2,448
2,608
Total revenue
22,717
22,303
Provision for credit losses
(191)
—
Noninterest expense
16,791
15,374
Income tax expense
737
1,049
Net earnings
$
5,380
5,880
Per share data:
Basic and diluted net earnings
$
1.54
1.67
Cash dividends declared
0.81
0.795
Weighted average shares outstanding:
Basic and diluted
3,499,518
3,513,068
Shares outstanding, at period end
3,493,614
3,505,355
Book value
$
17.59
17.06
Common stock price:
High
$
24.50
34.49
Low
18.80
23.02
Period end
21.50
23.02
To earnings ratio
7.65
x
10.46
To book value
122
%
135
Performance ratios:
Annualized return on average equity
10.15
%
8.76
Annualized return on average assets
0.70
%
0.72
Dividend payout ratio
52.60
%
47.60
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.24
%
1.05
Nonperforming loans
559
%
1,431
Nonperforming assets as a % of:
Loans and other real estate owned
0.22
%
0.07
Total assets
0.12
%
0.03
Nonperforming loans as a % of total loans
0.22
%
0.07
Annualized net recoveries as a % of average loans
(0.03)
%
(0.01)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.01
%
15.39
Tier 1 risk-based capital ratio
15.01
%
15.39
Total risk-based capital ratio
15.98
%
16.16
Tier 1 leverage ratio
10.26
%
9.29
Other financial data:
Net interest margin (a)
2.97
%
2.67
Effective income tax rate
12.05
%
15.14
Efficiency ratio (b)
72.88
%
67.90
Selected average balances:
Securities
$
398,751
431,629
Loans, net of unearned income
514,635
442,081
Total assets
1,022,257
1,092,216
Total deposits
944,471
996,900
Total stockholders’ equity
70,659
89,544
Selected period end balances:
Securities
$
373,286
411,538
Loans, net of unearned income
545,610
474,035
Allowance for credit losses
6,778
4,966
Total assets
1,030,724
1,042,559
Total deposits
964,602
977,938
Total stockholders’ equity
61,451
59,793
(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.
See
"Table 1 - Explanation of Non-GAAP Financial Measures."
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
Table of Contents
48
Table 4
- Average Balances
and Net Interest Income Analysis
Quarter ended September 30,
2023
2022
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)
$
529,521
$
6,373
4.77%
$
457,861
$
5,097
4.42%
Securities - taxable (2)
336,406
1,783
2.10%
373,529
1,808
1.92%
Securities - tax-exempt (2)(3)
54,366
510
3.72%
58,864
558
3.76%
Total securities
390,772
2,293
2.33%
432,393
2,366
2.17%
Federal funds sold
1,918
26
5.38%
38,994
200
2.03%
Interest bearing bank deposits
4,799
59
4.88%
45,343
226
1.98%
Total interest-earning assets
927,010
$
8,751
3.75%
974,591
$
7,889
3.21%
Cash and due from banks
14,345
14,503
Other assets
79,625
80,879
Total assets
$
1,020,980
$
1,069,973
Interest-bearing liabilities:
Deposits:
NOW
$
191,849
$
534
1.10%
$
195,655
$
70
0.14%
Savings and money market
283,152
661
0.93%
328,555
163
0.20%
Time deposits
183,539
1,139
2.46%
151,785
291
0.76%
Total interest-bearing deposits
658,540
2,334
1.41%
675,995
524
0.31%
Short-term borrowings
4,347
37
3.38%
3,759
5
0.50%
Total interest-bearing liabilities
662,887
$
2,371
1.42%
679,754
$
529
0.31%
Noninterest-bearing deposits
283,993
311,619
Other liabilities
4,831
1,409
Stockholders' equity
69,269
77,191
Total liabilities and stockholders'
equity
$
1,020,980
$
1,069,973
Net interest income and margin (tax-equivalent)
$
6,380
2.73%
$
7,360
3.00%
(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) Includes average net unrealized gains (losses) on investment securities available
for sale
(3) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using a federal income
tax rate of 21%.
Table of Contents
49
Table 5
- Average Balances
and Net Interest Income Analysis
Nine months ended September 30,
2023
2022
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)
$
514,706
$
18,146
4.71%
$
442,613
$
14,638
4.42%
Securities - taxable (2)
344,136
5,474
2.13%
371,595
4,691
1.69%
Securities - tax-exempt (2)(3)
54,615
1,531
3.75%
60,034
1,614
3.59%
Total securities
398,751
7,005
2.35%
431,629
6,305
1.95%
Federal funds sold
4,372
159
4.86%
54,924
313
0.76%
Interest bearing bank deposits
8,118
283
4.66%
73,630
454
0.82%
Total interest-earning assets
925,947
$
25,593
3.70%
1,002,796
$
21,710
2.89%
Cash and due from banks
15,160
15,029
Other assets
81,150
74,391
Total assets
$
1,022,257
$
1,092,216
Interest-bearing liabilities:
Deposits:
NOW
$
189,586
$
1,067
0.75%
$
201,792
$
189
0.13%
Savings and money market
291,988
1,368
0.63%
335,005
494
0.20%
Time deposits
168,000
2,499
1.99%
155,824
978
0.84%
Total interest-bearing deposits
649,574
4,934
1.02%
692,621
1,661
0.32%
Short-term borrowings
3,748
68
2.43%
3,969
15
0.50%
Total interest-bearing liabilities
653,322
$
5,002
1.02%
696,590
$
1,676
0.32%
Noninterest-bearing deposits
294,897
304,279
Other liabilities
3,379
1,803
Stockholders' equity
70,659
89,544
Total liabilities and stockholders'
equity
$
1,022,257
$
1,092,216
Net interest income and margin (tax-equivalent)
$
20,591
2.97%
$
20,034
2.67%
(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) Includes average net unrealized gains (losses) on
investment securities available for sale
(3) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using a federal income
tax rate of 21%.
Table of Contents
50
Table 6
- Allocation of Allowance for Credit Losses
2023
2022
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
1,215
12.1
$
1,198
11.9
$
1,232
11.8
$
747
13.1
$
732
14.9
Construction and land
development
1,073
12.9
1,005
12.3
1,021
13.2
949
13.2
789
11.6
Commercial real estate
3,803
51.6
3,788
53.0
3,966
53.0
3,109
52.4
2,561
52.6
Residential real estate
551
21.5
529
21.1
497
20.2
828
19.4
783
19.3
Consumer installment
136
1.9
114
1.7
105
1.8
132
1.9
101
1.6
Total allowance for
credit losses
$
6,778
$
6,634
$
6,821
$
5,765
$
4,966
* Loan balance in each category expressed as a percentage of total loans.
Table of Contents
51
Table 7
– Estimated Uninsured Time Deposits by Maturity
(Dollars in thousands)
September 30, 2023
Maturity of:
3 months or less
$
17,953
Over 3 months through 6 months
5,154
Over 6 months through 12 months
36,255
Over 12 months
11,099
Total estimated uninsured
time deposits
$
70,461
Table of Contents
52
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, 2022.
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, 2022,
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 and
reductions in the Federal Reserve’s securities portfolio,
have
and is expected to continue to affect the levels of interest rates,
mortgage originations and income, the market values of our
securities portfolio and loans and have resulted in unrealized losses that have adversely
affected our stockholders’ equity.
These have affected and are expected to continue to affect our
deposit costs and mixes, and consumer savings and payment
behaviors.
These may also affect our borrower’s operating costs,
expected returns and cash flows available to service our
loans.
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
53
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock
during the third quarter of 2023 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
July 1 - July 31, 2023
948
21.89
948
4,495,859
August 1 - August 31, 2023
4,935
22.21
4,935
4,386,264
September 1 - September 30, 2023
—
—
—
4,386,264
Total
5,883
22.16
5,883
4,386,264
On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of Directors
had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022. The new program
authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the
earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan
and
(iii) April 15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases,
and otherwise.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
Table of Contents
54
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 David A. Hedges, 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 W. James Walker, IV, Senior 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 David A. Hedges, 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 W. James Walker, IV, Senior 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:
November 7, 2023
By:
/s/ David A. Hedges
David A. Hedges
President and CEO
Date:
November 7, 2023
By:
/s/
W.
James Walker,
IV
W.
James Walker,
IV
Senior Vice President and Chief Financial
Officer