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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
(Mark One)
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended
March 31, 2024
☐
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)
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
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:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at May 7, 2024
Common Stock, $0.01 par value per share
3,493,699
shares
Table of Contents
AUBURN NATIONAL BANCORPORATION, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1
Financial Statement
Consolidated Balance Sheets (Unaudited) as of March 31, 2024 and December 31, 2023
3
Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2024 and 2023
4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters ended March
31, 2024 and 2023
5
Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2024
and 2023
6
Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2024 and 2023
7
Notes to Consolidated Financial Statements (Unaudited
)
8
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Table 1 – Explanation of Non -GAAP Financial Measures
41
Table 2 – Selected Quarterly Financial Data
42
Table 3 – Average Balances and Net Interest Income Analysis for the quarters ended March 31, 2024
and 2023
43
Item 3
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4
Controls and Procedures
44
PART II. OTHER INFORMATION
Item 1
Legal Proceedings
44
Item 1A
Risk Factors
44
Item 3
Defaults Upon Senior Securities
45
Item 4
Mine Safety Disclosures
45
Item 5
Other Information
45
Item 6
Exhibits
46
Table of Contents
3
PART
1.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31,
December 31,
(Dollars in thousands, except share data)
2024
2023
Assets:
Cash and due from banks
$
18,444
$
27,127
Federal funds sold
17,356
31,412
Interest-bearing bank deposits
36,781
12,830
Cash and cash equivalents
72,581
71,369
Securities available-for-sale
260,770
270,910
Loans held for sale
175
—
Loans
567,520
557,294
Allowance for credit losses
(7,215)
(6,863)
Loans, net
560,305
550,431
Premises and equipment, net
46,193
45,535
Bank-owned life insurance
17,212
17,110
Other assets
21,803
19,900
Total assets
$
979,039
$
975,255
Liabilities:
Deposits:
Noninterest-bearing
$
263,484
$
270,723
Interest-bearing
636,189
625,520
Total deposits
899,673
896,243
Federal funds purchased and securities sold under agreements to repurchase
1,513
1,486
Accrued expenses and other liabilities
3,364
1,019
Total liabilities
904,550
898,748
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
3,802
3,801
Retained earnings
113,563
113,398
Accumulated other comprehensive loss, net
(31,213)
(29,029)
Less treasury stock, at cost -
463,436
shares and
463,521
at March 31, 2024
and December 31, 2023, respectively
(11,702)
(11,702)
Total stockholders’ equity
74,489
76,507
Total liabilities and stockholders’
equity
$
979,039
$
975,255
See accompanying notes to consolidated financial statements
Table of Contents
4
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended March 31,
(Dollars in thousands, except share and per share data)
2024
2023
Interest income:
Loans, including fees
$
6,990
$
5,754
Securities
Taxable
1,411
1,865
Tax-exempt
74
403
Federal funds sold and interest bearing bank deposits
754
213
Total interest income
9,229
8,235
Interest expense:
Deposits
2,570
1,118
Short-term borrowings
2
8
Total interest expense
2,572
1,126
Net interest income
6,657
7,109
Provision for credit losses
334
66
Net interest income after provision for credit
losses
6,323
7,043
Noninterest income:
Service charges on deposit accounts
156
154
Mortgage lending
150
93
Bank-owned life insurance
102
156
Other
479
389
Total noninterest income
887
792
Noninterest expense:
Salaries and benefits
3,071
2,927
Net occupancy and equipment
763
799
Professional fees
326
338
Other
1,515
1,540
Total noninterest expense
5,675
5,604
Earnings before income taxes
1,535
2,231
Income tax expense
164
267
Net earnings
$
1,371
$
1,964
Net earnings per share:
Basic and diluted
$
0.39
$
0.56
Weighted average shares
outstanding:
Basic and diluted
3,493,663
3,502,143
See accompanying notes to consolidated financial statements
Table of Contents
5
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter ended March 31,
(Dollars in thousands)
2024
2023
Net earnings
$
1,371
$
1,964
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities net of
tax benefit of $
734
and tax expense of $
1,834
, respectively
(2,184)
5,463
Other comprehensive (loss) income
(2,184)
5,463
Comprehensive (loss) income
$
(813)
$
7,427
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
stock
Total
Quarter ended March 31, 2024
Balance, December 31, 2023
3,493,614
$
39
$
3,801
$
113,398
$
(29,029)
$
(11,702)
$
76,507
Cumulative effect of change in accounting
standard
—
—
—
(263)
—
—
(263)
Net earnings
—
—
—
1,371
—
—
1,371
Other comprehensive loss
—
—
—
—
(2,184)
—
(2,184)
Cash dividends paid ($
.27
per share)
—
—
—
(943)
—
—
(943)
Sale of treasury stock
85
—
1
—
—
—
1
Balance, March 31, 2024
3,493,699
$
39
$
3,802
$
113,563
$
(31,213)
$
(11,702)
$
74,489
Quarter ended March 31, 2023
Balance, December 31, 2022
3,503,452
$
39
$
3,797
$
116,600
$
(40,920)
$
(11,475)
$
68,041
Cumulative effect of change in accounting
standard
—
—
—
(821)
—
—
(821)
Net earnings
—
—
—
1,964
—
—
1,964
Other comprehensive income
—
—
—
—
5,463
—
5,463
Cash dividends paid ($
.27
per share)
—
—
—
(945)
—
—
(945)
Stock repurchases
(2,648)
—
—
—
—
(64)
(64)
Sale of treasury stock
75
—
1
—
—
1
2
Balance, March 31, 2023
3,500,879
$
39
$
3,798
$
116,798
$
(35,457)
$
(11,538)
$
73,640
See accompanying notes to consolidated financial statements
Table of Contents
7
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Quarter ended March 31,
(Dollars in thousands)
2024
2023
Cash flows from operating activities:
Net earnings
$
1,371
$
1,964
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
334
66
Depreciation and amortization
434
423
Premium amortization and discount accretion, net
386
612
Net gain on sale of loans held for sale
(57)
(4)
Loans originated for sale
(3,123)
—
Proceeds from sale of loans
2,993
—
Increase in cash surrender value of bank-owned life insurance
(102)
(104)
Income recognized from death benefit on bank-owned life insurance
—
(52)
Net (increase) decrease in other assets
(1,500)
4,420
Net increase (decrease) in accrued expenses and other liabilities
2,345
(2,434)
Net cash provided by operating activities
3,081
4,891
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
6,836
6,296
Increase in loans, net
(10,208)
(586)
Net purchases of premises and equipment
(1,043)
(5)
Proceeds from bank-owned life insurance death benefit
—
215
Decrease in FHLB stock
32
41
Net cash (used in) provided by investing activities
(4,383)
5,961
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits
(7,239)
(7,207)
Net increase (decrease) in interest-bearing deposits
10,669
(3,940)
Net increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase
27
(94)
Stock repurchases
—
(64)
Dividends paid
(943)
(945)
Net cash provided by (used in) financing activities
2,514
(12,250)
Net change in cash and cash equivalents
1,212
(1,398)
Cash and cash equivalents at beginning of period
71,369
27,254
Cash and cash equivalents at end of period
$
72,581
$
25,856
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
2,442
$
877
Income taxes
—
—
See accompanying notes to consolidated financial statements
Table of Contents
8
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services
to individuals and
commercial customers in Lee County,
Alabama and surrounding areas through its wholly owned subsidiary,
AuburnBank
(the “Bank”). The Company does not have any segments other than banking that are considered
material.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have been prepared
in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information.
Accordingly, these financial statements
do not
include all of the information and footnotes required by U.S. GAAP for complete financial
statements.
The unaudited
consolidated financial statements include, in the opinion of management, all adjustments
necessary to present a fair
statement of the financial position and the results of operations for all periods
presented. All such adjustments are of a
normal recurring nature. The results of operations in the interim statements are not necessarily
indicative of the results of
operations that the Company and its subsidiaries may achieve for future interim periods
or the entire year. For further
information, refer to the consolidated financial statements and footnotes included in the Company's
Annual Report on Form
10-K for the year ended December 31, 2023.
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 loans and investment
securities, fair value of financial
instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).
Revenue Recognition
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.
Subsequent Events
The Company has evaluated the effects of events and transactions through
the date of this filing that have occurred
subsequent to March 31, 2024.
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.
Table of Contents
9
Correction of Error
The disclosure of loans by vintage in Note 5 – Loans and Allowance for Credit
Losses in the Company’s Annual Report on
Form 10-K for year ended December 31, 2023 contained incorrect information as it pertains
to loans originated by vintage
and revolving loans.
All current period gross charge-off data, total loans by segment and total loans by credit
quality
indicator were correctly reported.
The loans originated by vintage and revolving loans as of December 31, 2023
have been
corrected in the comparative presentation in Note 5 – Loans and Allowance for Credit Losses
in the Notes herein.
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current
-period presentation. These
reclassifications had no effect on the Company’s
previously reported net earnings or total stockholders’ equity.
Accounting Standards Adopted in 2024
On January 1, 2024, the Company adopted 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 equity investments made primarily
to receive income tax
credits and other income tax benefits,
regardless of the program from which the income tax credits or
benefits 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 adopted ASU 2023-02
effective January 1, 2024 and recorded a cumulative effect of change
in accounting standard adjustment which reduced
beginning retained earnings by $0.3 million.
The Company will prospectively account for its investments in New Market
Tax Credits (“NMTCs”)
using the proportional amortization method through charges to the
provision for income taxes. See
Note 3, Variable
Interest Entities.
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average
common shares outstanding for
the quarters ended March 31, 2024 and 2023, respectively.
Diluted net earnings per share reflect the potential dilution that
could occur upon exercise of securities or other rights for,
or convertible into, shares of the Company’s common
stock.
At
March 31, 2024 and 2023, respectively,
the Company had no such securities or rights issued or outstanding, and
therefore,
no dilutive effect to consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods
are presented below
Quarter ended March 31,
(Dollars in thousands, except share and per share data)
2024
2023
Basic and diluted:
Net earnings
$
1,371
$
1,964
Weighted average common
shares outstanding
3,493,663
3,502,143
Net earnings per share
$
0.39
$
0.56
NOTE 3: VARIABLE
INTEREST ENTITIES
Generally, a variable interest entity (“VIE”)
is a corporation, partnership, trust or other legal structure that does not have
equity investors with substantive or proportional voting rights or has equity investors
that do not provide sufficient financial
resources for the entity to support its activities.
Table of Contents
10
At March 31, 2024, the Company did not have any consolidated VIEs but did have one nonconsolidated
VIE, discussed
below.
New Markets Tax
Credit Investment
The
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.
NMTCs
are
available to investors over seven years and are subject to
recapture if certain events occur during such period.
At March 31,
2024
and
December
31,
2023,
respectively,
the
Company
had
one
such
investment
of
$1.2
million
and
$1.7
million,
respectively,
which
was
included
in
other
assets
in
the
Company’s
consolidated
balance
sheets
as
a
VIE.
While
the
Company’s
investment exceeds
50% of
the outstanding
equity interest
in this
VIE, the
Company does
not consolidate
the
VIE because
the Company
lacks the
power to
direct the
activities of
the VIE,
and therefore
is not a
primary beneficiary
of
the VIE.
On March 29, 2023, the FASB
issued ASU 2023-02, which was effective beginning in 2024 for
public business entities.
We
have
adopted
ASU
2023-02
as
of
January
1,
2024
with
respect
to
accounting
for
our
NMTC
investment.
The
proportional amortization
method results in
the tax
credit investment
being amortized
in proportion
to the
allocation of
tax
credits and other tax
benefits in each
period and a
net presentation within
the income tax
line item.
The cumulative effects
of the
change
in
accounting
standard
resulted
in a
$0.4
million pre-tax
decrease
in
the
Company’s
NMTC
investment
at
January 1, 2024.
See Note 1:
Summary of Significant Accounting Policies – Accounting
Standards Adopted in 2024.
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
1,175
$
1,175
Other assets
NOTE 4: SECURITIES
At March 31, 2024 and December 31, 2023, respectively,
all securities within the scope of ASC 320,
Investments – Debt
and Equity Securities,
were classified as available-for-sale.
The fair value and amortized cost for securities available-for-
sale by contractual maturity at March 31, 2024 and December 31, 2023,
respectively, are presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
March 31, 2024
Agency obligations (a)
$
—
14,416
38,335
—
52,751
—
8,554
$
61,305
Agency MBS (a)
57
15,533
20,254
154,380
190,224
—
30,229
220,453
State and political subdivisions
—
569
9,067
8,159
17,795
—
2,898
20,693
Total available-for-sale
$
57
30,518
67,656
162,539
260,770
—
41,681
$
302,451
December 31, 2023
Agency obligations (a)
$
331
10,339
43,209
—
53,879
—
8,195
$
62,074
Agency MBS (a)
32
15,109
22,090
161,058
198,289
—
27,838
226,127
State and political subdivisions
—
—
9,691
9,051
18,742
1
2,731
21,472
Total available-for-sale
$
363
25,448
74,990
170,109
270,910
1
38,764
$
309,673
(a) Includes securities issued by U.S. government agencies or government-sponsored
entities.
Expected lives of these
securities may differ from contractual maturities because (i)
issuers may have the right to call or repay such securities
obligations with or without prepayment penalties and (ii) loans incuded in Agency MBS
generally have the right to
prepay such loan in whole or in part at any time.
Securities with aggregate fair values of $
204.8
million and $
211.8
at March 31, 2024 and December 31, 2023, 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.
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11
Included in 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 March 31, 2024 and December 31, 2023,
respectively.
Non-marketable equity investments include FHLB of Atlanta stock,
Federal Reserve Bank of Atlanta
(“FRB”) stock, and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at March 31, 2024
and December 31, 2023, respectively,
segregated by those securities that have been in an unrealized loss position for
less than 12 months and 12 months or
longer, are presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
March 31, 2024:
Agency obligations
$
—
—
52,751
8,554
$
52,751
8,554
Agency MBS
15
—
190,209
30,229
190,224
30,229
State and political subdivisions
1,459
6
15,010
2,892
16,469
2,898
Total
$
1,474
6
257,970
41,675
$
259,444
41,681
December 31, 2023:
Agency obligations
$
—
—
53,879
8,195
$
53,879
8,195
Agency MBS
66
1
198,223
27,837
198,289
27,838
State and political subdivisions
793
2
14,408
2,729
15,201
2,731
Total
$
859
3
266,510
38,761
$
267,369
38,764
For the securities in the previous table, the Company considers the severity of the unrealized
loss as well the Company’s
intent to hold the securities to maturity or the recovery of the cost basis.
Unrealized losses have not been recognized into
income as the decline in fair value is largely due to changes in interest rates and other
market conditions.
For the securities
in the previous table as of March 31, 2024, management does not intend to sell and it is likely that
management will not be
required to sell the securities prior to their recovery.
Agency Obligations
Investments in agency obligations are guaranteed of full and timely payments
by the issuing agency.
Based on
management's analysis and judgement, there were no credit losses attributable
to the Company’s investments in agency
obligations at March 31, 2024.
Agency MBS
Investments in agency mortgage backed securities (“MBS”) are issued by Ginnie Mae,
Fannie Mae, and Freddie Mac.
Each of these agencies provide a guarantee of full and timely payments of principal and
interest by the issuing agency.
Based on management's analysis and judgement, there were no credit losses attributable
to the Company’s investments
in
agency MBS at March 31, 2024.
State and Political Subdivisions
Investments in state and political subdivisions are securities issued by various
municipalities in the United States.
The
majority of the portfolio was rated AA or higher,
with no securities rated below investment grade at March 31, 2024.
Based on management's analysis and judgement, there were no credit losses attributable
to the Company’s investments
in
state and political subdivisions at March 31, 2024.
Realized Gains and Losses
The Company had no realized gains or losses on sale of securities during the quarters ended
March 31, 2024 and 2023,
respectively.
Table of Contents
12
NOTE 5: LOANS AND ALLOWANCE
FOR CREDIT LOSSES
March 31,
December 31,
(Dollars in thousands)
2024
2023
Commercial and industrial
$
78,920
$
73,374
Construction and land development
58,909
68,329
Commercial real estate:
Owner occupied
63,826
66,783
Hotel/motel
38,822
39,131
Multi-family
45,634
45,841
Other
152,202
135,552
Total commercial real estate
300,484
287,307
Residential real estate:
Consumer mortgage
59,813
60,545
Investment property
58,427
56,912
Total residential real estate
118,240
117,457
Consumer installment
10,967
10,827
Total Loans
$
567,520
$
557,294
Loans secured by real estate were approximately 84.2% of the Company’s
total loan portfolio at March 31, 2024.
At March
31, 2024, the Company’s geographic
loan distribution was concentrated primarily in Lee County,
Alabama, and
surrounding areas.
The loan portfolio segment is defined as the level at which an entity develops and documents a
systematic method for
determining its allowance for credit losses. As part of the Company’s
quarterly assessment of the allowance, the loan
portfolio included the following portfolio segments: commercial and industrial,
construction and land development,
commercial real estate, residential real estate, and consumer installment. Where appropriate,
the Company’s loan portfolio
segments are further disaggregated into classes. A class is generally determined based
on the initial measurement attribute,
risk characteristics of the loan, and an entity’s
method for monitoring and determining credit risk.
The following describes
the risk characteristics relevant to each of the portfolio segments
and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or
other needs
for small and medium-sized commercial customers. Also included
in this category are loans to finance agricultural
production.
Generally,
the primary source of repayment is the cash flow from business operations and activities
of the
borrower.
Construction and land development (“C&D”) —
includes both loans and credit lines for the purpose of purchasing,
carrying,
and developing land into commercial developments or residential subdivisions.
Also included are loans and credit
lines for construction of residential, multi-family,
and commercial buildings. Generally,
the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate
(“CRE”) —
includes loans in these classes:
●
Owner occupied
– includes loans secured by business facilities to finance business operations, equipment and
owner-occupied facilities primarily for small and medium-sized
commercial customers.
Generally,
the primary
source of repayment is the cash flow from business operations and activities of the borrower,
who owns the
property.
●
Hotel/motel
– includes loans for hotels and motels.
Generally, the primary source of repayment
is dependent upon
income generated from the hotel/motel securing the loan.
The underwriting of these loans takes into consideration
the occupancy and rental rates, as well as the financial health of the borrower.
Table of Contents
13
●
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
14
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio
segment and class as of March
31, 2024 and December 31, 2023.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
March 31, 2024:
Commercial and industrial
$
78,914
6
—
78,920
—
$
78,920
Construction and land development
58,909
—
—
58,909
—
58,909
Commercial real estate:
Owner occupied
63,061
—
—
63,061
765
63,826
Hotel/motel
38,822
—
—
38,822
—
38,822
Multi-family
45,634
—
—
45,634
—
45,634
Other
152,202
—
—
152,202
—
152,202
Total commercial real estate
299,719
—
—
299,719
765
300,484
Residential real estate:
Consumer mortgage
59,656
60
—
59,716
97
59,813
Investment property
58,427
—
—
58,427
—
58,427
Total residential real estate
118,083
60
—
118,143
97
118,240
Consumer installment
10,935
16
—
10,951
16
10,967
Total
$
566,560
82
—
566,642
878
$
567,520
December 31, 2023:
Commercial and industrial
$
73,108
266
—
73,374
—
$
73,374
Construction and land development
68,329
—
—
68,329
—
68,329
Commercial real estate:
Owner occupied
66,000
—
—
66,000
783
66,783
Hotel/motel
39,131
—
—
39,131
—
39,131
Multi-family
45,841
—
—
45,841
—
45,841
Other
135,552
—
—
135,552
—
135,552
Total commercial real estate
286,524
—
—
286,524
783
287,307
Residential real estate:
Consumer mortgage
60,442
—
—
60,442
103
60,545
Investment property
56,597
290
—
56,887
25
56,912
Total residential real estate
117,039
290
—
117,329
128
117,457
Consumer installment
10,781
46
—
10,827
—
10,827
Total
$
555,781
602
—
556,383
911
$
557,294
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15
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.
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.
Substandard accrual and nonaccrual loans are often collectively referred to as “classified.”
The following tables presents credit quality indicators for the loan portfolio segments and
classes by year of origination as
of March 31, 2024 and December 31, 2023.
The December 31, 2023 table has been revised to correct revolving loans and
properly allocate loans by year of origination.
See Note 1: Summary of Significant Accounting Policies – Correction of
Error.
Table of Contents
16
Year of Origination
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
Loans
(Dollars in thousands)
March 31, 2024:
Commercial and industrial
Pass
$
6,167
10,960
19,891
13,067
5,429
14,697
8,449
$
78,660
Special mention
—
—
—
—
—
—
—
—
Substandard
54
—
194
12
—
—
—
260
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial and industrial
6,221
10,960
20,085
13,079
5,429
14,697
8,449
78,920
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
Pass
5,668
26,093
22,446
1,615
1,506
200
905
58,433
Special mention
—
302
—
—
—
—
—
302
Substandard
174
—
—
—
—
—
—
174
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
5,842
26,395
22,446
1,615
1,506
200
905
58,909
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
100
12,842
7,197
18,076
10,283
10,744
2,583
61,825
Special mention
931
257
—
—
—
—
—
1,188
Substandard
—
—
—
—
—
48
—
48
Nonaccrual
—
—
—
—
—
765
—
765
Total owner occupied
1,031
13,099
7,197
18,076
10,283
11,557
2,583
63,826
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
248
8,925
9,765
3,174
1,445
15,265
—
38,822
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
248
8,925
9,765
3,174
1,445
15,265
—
38,822
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
17
Year of Origination
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
Loans
(Dollars in thousands)
March 31, 2024:
Multi-family
Pass
113
12,270
17,834
1,934
6,060
6,682
741
45,634
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
113
12,270
17,834
1,934
6,060
6,682
741
45,634
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
19,687
24,583
35,601
31,278
14,036
25,552
1,313
152,050
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
152
—
—
152
Nonaccrual
—
—
—
—
—
—
—
—
Total other
19,687
24,583
35,601
31,278
14,188
25,552
1,313
152,202
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
1,276
19,445
19,230
2,682
2,636
13,106
327
58,702
Special mention
—
—
—
—
—
493
—
493
Substandard
—
—
—
—
—
521
—
521
Nonaccrual
—
—
—
—
—
97
—
97
Total consumer mortgage
1,276
19,445
19,230
2,682
2,636
14,217
327
59,813
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
5,736
12,255
11,396
9,219
11,829
6,214
1,369
58,018
Special mention
—
—
—
—
—
—
—
—
Substandard
—
83
96
—
230
—
—
409
Nonaccrual
—
—
—
—
—
—
—
—
Total investment property
5,736
12,338
11,492
9,219
12,059
6,214
1,369
58,427
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
2,095
5,157
2,690
570
148
222
—
10,882
Special mention
—
10
1
—
1
—
—
12
Substandard
10
34
11
2
—
—
—
57
Nonaccrual
—
9
7
—
—
—
—
16
Total consumer installment
2,105
5,210
2,709
572
149
222
—
10,967
Current period gross charge-offs
—
6
17
1
—
—
—
24
Total loans
Pass
41,090
132,530
146,050
81,615
53,372
92,682
15,687
563,026
Special mention
931
569
1
—
1
493
—
1,995
Substandard
238
117
301
14
382
569
—
1,621
Nonaccrual
—
9
7
—
—
862
—
878
Total loans
$
42,259
133,225
146,359
81,629
53,755
94,606
15,687
$
567,520
Total current period gross charge-offs
$
—
6
17
1
—
—
—
24
Table of Contents
18
Year of Origination
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2023:
Commercial and industrial
Pass
$
11,571
18,074
13,746
5,602
7,298
7,819
9,003
$
73,113
Special mention
—
—
—
—
—
—
—
—
Substandard
55
203
—
—
3
—
—
261
Nonaccrual
—
—
—
—
—
—
—
—
Total commercial and industrial
11,626
18,277
13,746
5,602
7,301
7,819
9,003
73,374
Current period gross charge-offs
—
—
13
—
151
—
—
164
Construction and land development
Pass
38,646
25,382
1,716
1,526
120
157
782
68,329
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total construction and land development
38,646
25,382
1,716
1,526
120
157
782
68,329
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
12,966
7,337
18,548
10,458
3,948
9,786
2,647
65,690
Special mention
260
—
—
—
—
—
—
260
Substandard
—
—
—
—
50
—
—
50
Nonaccrual
—
—
—
—
783
—
—
783
Total owner occupied
13,226
7,337
18,548
10,458
4,781
9,786
2,647
66,783
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
9,025
9,873
3,205
1,493
3,881
11,654
—
39,131
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
9,025
9,873
3,205
1,493
3,881
11,654
—
39,131
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
19
Year of Origination
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2023:
Multi-family
Pass
12,379
17,955
1,953
6,112
3,790
3,043
609
45,841
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
12,379
17,955
1,953
6,112
3,790
3,043
609
45,841
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
25,810
36,076
31,687
14,597
10,736
15,440
1,052
135,398
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
154
—
—
—
154
Nonaccrual
—
—
—
—
—
—
—
—
Total other
25,810
36,076
31,687
14,751
10,736
15,440
1,052
135,552
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
20,147
20,177
2,683
2,665
1,281
12,217
249
59,419
Special mention
—
—
—
—
190
305
—
495
Substandard
—
—
—
—
—
528
—
528
Nonaccrual
—
—
—
—
—
103
—
103
Total consumer mortgage
20,147
20,177
2,683
2,665
1,471
13,153
249
60,545
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
13,398
12,490
9,397
12,209
5,485
1,865
1,478
56,322
Special mention
41
—
—
—
—
—
—
41
Substandard
43
248
—
233
—
—
—
524
Nonaccrual
—
—
—
—
—
25
—
25
Total investment property
13,482
12,738
9,397
12,442
5,485
1,890
1,478
56,912
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
5,688
3,837
740
206
106
141
—
10,718
Special mention
9
25
9
2
—
—
—
45
Substandard
37
11
5
11
—
—
—
64
Nonaccrual
—
—
—
—
—
—
—
-
Total consumer installment
5,734
3,873
754
219
106
141
—
10,827
Current period gross charge-offs
34
57
13
1
—
—
—
105
Total loans
Pass
149,630
151,201
83,675
54,868
36,645
62,122
15,820
553,961
Special mention
310
25
9
2
190
305
—
841
Substandard
135
462
5
398
53
528
—
1,581
Nonaccrual
—
—
—
—
783
128
—
911
Total loans
$
150,075
151,688
83,689
55,268
37,671
63,083
15,820
$
557,294
Total current period gross charge-offs
$
34
57
26
1
151
—
—
269
Table of Contents
20
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.
The composition of the provision for credit losses for the respective periods
is presented below.
Quarter ended March 31,
(Dollars in thousands)
2024
2023
Provision for credit losses:
Loans
$
285
$
40
Reserve for unfunded commitments
49
26
Total provision for credit
losses
$
334
$
66
The following table details the changes in the allowance for credit losses for loans, by portfolio
segment, for the respective
periods.
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
March 31, 2024
Beginning balance
$
1,288
960
3,921
546
148
$
6,863
Charge-offs
—
—
—
—
(24)
(24)
Recoveries
66
—
—
3
22
91
Net recoveries (charge-offs)
66
—
—
3
(2)
67
Provision for credit losses
61
(120)
281
64
(1)
285
Ending balance
$
1,415
840
4,202
613
145
$
7,215
Quarter ended:
March 31, 2023
Beginning balance
$
747
949
3,109
828
132
$
5,765
Impact of adopting ASC 326
532
(17)
873
(347)
(22)
1,019
Charge-offs
—
—
—
—
(11)
(11)
Recoveries
2
—
—
5
1
8
Net recoveries (charge-offs)
2
—
—
5
(10)
(3)
Provision for credit losses
(49)
89
(16)
11
5
40
Ending balance
$
1,232
1,021
3,966
497
105
$
6,821
The following table presents the amortized cost basis of collateral dependent loans, which
are individually evaluated to
determine expected credit losses as of March 31, 2024 and December 31, 2023:
(Dollars in thousands)
Real Estate
Total Loans
March 31, 2024:
Commercial real estate
$
765
$
765
Total
$
765
$
765
December 31, 2023:
Commercial real estate
$
783
$
783
Total
$
783
$
783
Table of Contents
21
The following table is a summary of the Company’s
nonaccrual loans by major categories as of March 31, 2024 and
December 31, 2023.
CECL
Nonaccrual loans
Nonaccrual loans
Total
(Dollars in thousands)
with no Allowance
with an Allowance
Nonaccrual Loans
March 31, 2024
Commercial real estate
$
765
—
765
Residential real estate
—
97
97
Consumer
—
16
16
Total
$
765
113
878
December 31, 2023
Commercial real estate
$
783
—
783
Residential real estate
—
128
128
Total
$
783
128
911
NOTE 6: MORTGAGE SERVICING
RIGHTS, NET
Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the
servicing rights on the date the
corresponding mortgage loans are sold.
An estimate of the Company’s MSRs is determined
using assumptions that market
participants would use in estimating future net servicing income, including estimates
of prepayment speeds, discount rate,
default rates, cost to service, escrow account earnings, contractual servicing
fee income, ancillary income, and late fees.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Under
the amortization method, MSRs are amortized in proportion to, and over the period
of, estimated net servicing income.
Increases in market interest rates generally increase the fair value of MSRs by reducing
prepayments and refinancings and
therefore reducing the prepayment speed.
The Company has recorded MSRs related to loans sold to Fannie Mae.
The Company generally sells conforming, fixed-
rate, closed-end, residential mortgages to Fannie Mae.
MSRs are included in other assets on the accompanying
consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis.
Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and loan type.
If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established.
The valuation allowance is adjusted
as the fair value changes.
Changes in the valuation allowance are recognized in earnings as a component of
mortgage
lending income.
Table of Contents
22
The change in amortized MSRs and the related valuation allowance for the quarters
ended March 31, 2024 and 2023 are
presented below.
Quarter ended March 31,
(Dollars in thousands)
2024
2023
MSRs, net:
Beginning balance
$
992
$
1,151
Additions, net
12
—
Amortization expense
(39)
(55)
Ending balance
$
965
$
1,096
Valuation
allowance included in MSRs, net:
Beginning of period
$
—
$
—
End of period
—
—
Fair value of amortized MSRs:
Beginning of period
$
2,382
$
2,369
End of period
2,378
2,419
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 quarter ended
March 31, 2024, there were no
transfers between levels and no changes in valuation techniques for the Company’s
financial assets and liabilities.
Table of Contents
23
Assets and liabilities measured at fair value on a recurring
basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using
Level 2 inputs.
For these securities, the Company
obtains pricing data from third party pricing services.
These third party pricing services consider observable data that
may
include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported
trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and
conditions.
On a quarterly basis,
management reviews the pricing data received from the third party pricing services
for reasonableness given current market
conditions.
As part of its review, management
may obtain non-binding third party broker/dealer quotes to validate the fair
value measurements.
In addition, management will periodically submit pricing information
provided by the third party
pricing services to another independent valuation firm on a sample basis.
This independent valuation firm will compare the
prices
provided by the third party pricing service with its own prices
and will review the significant assumptions and
valuation methodologies used with management.
The following table presents the balances of the assets and liabilities measured at fair value
on a recurring basis as of March
31, 2024 and December 31, 2023, respectively,
by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
March 31, 2024:
Securities available-for-sale:
Agency obligations
$
52,751
—
52,751
—
Agency MBS
190,224
—
190,224
—
State and political subdivisions
17,795
—
17,795
—
Total securities available-for-sale
260,770
—
260,770
—
Total
assets at fair value
$
260,770
—
260,770
—
December 31, 2023:
Securities available-for-sale:
Agency obligations
$
53,879
—
53,879
—
Agency MBS
198,289
—
198,289
—
State and political subdivisions
18,742
—
18,742
—
Total securities available-for-sale
270,910
—
270,910
—
Total
assets at fair value
$
270,910
—
270,910
—
Assets and liabilities measured at fair value on a nonrecurring
basis
Collateral Dependent Loans
Collateral dependent loans are measured at the fair value of the collateral securing the loan
less estimated selling costs. The
fair value of real estate collateral is determined based on real estate appraisals
which are generally based on recent sales of
comparable properties which are then adjusted for property specific factors.
Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determined
values based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral
dependent loans are classified within Level 3 of
the hierarchy due to the unobservable inputs used in determining their fair value such as collateral
values and the borrower's
underlying financial condition.
Table of Contents
24
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
March 31, 2024 and December 31, 2023, respectively,
by caption, on the accompanying consolidated balance sheets and by
FASB ASC 820 valuation
hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
March 31, 2024:
Loans held for sale
$
175
—
175
—
Loans, net
(1)
765
—
—
765
Other assets
(2)
965
—
—
965
Total assets at fair value
$
1,905
—
175
1,730
December 31, 2023:
Loans, net
(1)
$
783
—
—
783
Other assets
(2)
992
—
—
992
Total assets at fair value
$
1,775
—
—
1,775
(1)
Loans considered collateral dependent under ASC 326.
(2)
Represents MSRs, net, carried at lower of cost or
estimated fair value.
Quantitative Disclosures for Level 3 Fair Value
Measurements
At March 31, 2024 and December 31, 2023, the Company had no Level 3 assets measured
at fair value on a recurring basis.
For Level 3 assets measured at fair value on a non-recurring basis at March 31, 2024
and December 31, 2023, the
significant unobservable inputs used in the fair value measurements and
the range of such inputs with respect to such assets
are presented below.
Range of
Weighted
Carrying
Significant
Unobservable
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Inputs
of Input
March 31, 2024:
Collateral dependent loans
$
765
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
965
Discounted cash flow
Prepayment speed or CPR
6.3
-
11.3
6.6
Discount rate
10.0
-
12.0
10.0
December 31, 2023:
Collateral dependent loans
$
783
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
992
Discounted cash flow
Prepayment speed or CPR
5.9
-
10.6
6.0
Discount rate
10.5
-
12.5
10.5
Table of Contents
25
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.
Loans held for sale
Fair values of loans held for sale are determined using quoted secondary market
prices for similar loans.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The
discount rates were based on rates currently
offered for deposits with similar remaining maturities.
The carrying value,
related estimated fair value, and placement in the fair value hierarchy of the Company’s
financial
instruments at March 31, 2024 and December 31, 2023 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
March 31, 2024:
Financial Assets:
Loans, net (1)
$
560,305
$
522,379
$
—
$
—
$
522,379
Loans held for sale
175
175
—
175
—
Financial Liabilities:
Time Deposits
$
190,603
$
188,651
$
—
$
188,651
$
—
December 31, 2023:
Financial Assets:
Loans, net (1)
$
550,431
$
526,372
$
—
$
—
$
526,372
Financial Liabilities:
Time Deposits
$
198,215
$
195,171
$
—
$
195,171
$
—
(1) Represents loans, net of allowance for credit losses.
The fair value of loans was measured using an
exit price notion.
Table of Contents
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of various factors related to the results
of operations and financial condition of the Company and the Bank.
This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed consolidated
financial statements and related
notes for the quarters ended March 31, 2024 and 2023, as well as the information
contained in our Annual Report on Form
10-K for the year ended December 31, 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,” “target” and other similar words
and expressions of the future. These forward-looking
statements may not be realized due to a variety of factors, including, without limitation:
●
the effects of future economic, business and market conditions and
changes, foreign, domestic and locally,
including inflation, seasonality, natural
disasters or climate change, such as rising sea and water levels, hurricanes
and tornados, COVID-19 or other health crises, 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;
●
governmental monetary and fiscal policies, including the amount and costs of borrowing
by the federal
government and its agencies, the continuing effects of COVID-19
fiscal and monetary stimuli, and subsequent
changes in monetary policies 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 through quantitative tightening; and the
duration that the Federal Reserve will keep its targeted federal funds rates at or
above current rates to meet its long
term inflation target of 2%;
●
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;
●
changes in accounting pronouncements and interpretations, including the required use,
beginning January 1,
2023,of Financial Accounting Standards Board’s
(“FASB”) Accounting
Standards Update (ASU) 2016-13,
“Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments,” as
well as the updates issued since June 2016 (collectively,
FASB
ASC Topic 326) on Current Expected
Credit
Losses(“CECL”), and ASU 2022-02, Troubled
Debt Restructurings and Vintage Disclosures,
which eliminates
troubled debt restructurings (“TDRs”) and related guidance;
Table of Contents
27
●
the failure of assumptions and estimates, including those used in the Company’s
CECL models to establish our
allowance for credit losses and estimate asset impairments, 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 CECL models and loan portfolio reviews;
●
the risks of changes in market interest rates and the shape of the yield curve on customer
behaviors; the levels,
composition and costs of deposits, loan demand and mortgage loan originations; the
values and liquidity of loan
collateral, our securities portfolio and interest-sensitive assets and liabilities;
and the risks and uncertainty of the
amounts realizable on collateral;
●
the risks of increases in market interest rates creating unrealized losses on our securities available
for sale, which
adversely affect our stockholders’ equity for financial reporting purposes and our
tangible equity;
●
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 regulation, including capital, and supervision and examination,
as the Company
and the Bank and credit unions, which are not subject to federal income taxation;
●
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;
●
the risks that our dividends, share repurchases and discretionary bonuses are
limited by regulation to the
maintenance of a capital conservation buffer of 2.5% and our future earnings and
“eligible retained earnings” over
rolling four calendar quarter periods;
●
other factors and risks described under “Risk Factors” herein, in our Annual Report
on Form 10-K as of and for
the year ended December 31, 2024 filed with the United States Securities and Exchange
Commission (the
“Commission” or “SEC”), and in any of our subsequent reports that we make with the 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.
Table of Contents
28
Summary of Results of Operations
Quarter ended March 31,
(Dollars in thousands, except per share data)
2024
2023
Net interest income (a)
$
6,677
$
7,217
Less: tax-equivalent adjustment
20
108
Net interest income (GAAP)
6,657
7,109
Noninterest income
887
792
Total revenue
7,544
7,901
Provision for credit losses
334
66
Noninterest expense
5,675
5,604
Income tax expense
164
267
Net earnings
$
1,371
$
1,964
Basic and diluted earnings per share
$
0.39
$
0.56
(a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP
Financial Measures."
Financial Summary
The Company’s net earnings were $1.4
million for the first three months of 2024,
compared to $2.0 million for the first
three months of 2023.
Basic and
diluted earnings per share were $0.39 per share for the first three months of 2024,
compared to $0.56 per share for the first three months of 2023.
Net interest income (tax-equivalent) was $6.7 million for the first three
months of 2024, a 7% decrease compared to $7.2
million for the first three months of 2023.
This decrease was primarily due to a smaller balance sheet and a decrease in the
Company’s net interest margin.
The Company’s net interest
margin (tax-equivalent) was 3.04% for the first three months
of 2024 compared to 3.17%
for the first three months of 2023.
This decrease was primarily due to increased cost of funds
which was partially offset by a more favorable asset mix and
higher yields on interest earning assets.
Average loans for the
first three months of 2024 were
$560.9 million, a 12% increase from the first three months of 2023.
Average total
securities for the first three months of 2024 were $267.6 million compared to
$402.7 million for the first three months of
2023.
The decrease was primarily the result of the Company’s
balance sheet repositioning strategy in the fourth quarter of
2024.
See “Results of Operations – Average
Balance Sheet and Interest Rates” and “Net Interest Income and Margin”
below.
At March 31, 2024, the Company’s allowance
for credit losses was $7.2 million, or 1.27% of total loans, compared to $6.9
million, or 1.23% of total loans, at December 31, 2023, and $6.8 million, or 1.35%
of total loans, at March 31, 2023.
The Company recorded a provision for credit losses during the first three months of
2024 of $0.3 million, compared to $0.1
million during the first three months of 2023.
The provision for credit losses under CECL reflects the Company’s
evaluation of its credit risk profile and its future economic outlook and forecasts.
Our CECL model is largely influenced by
economic factors including, most notably,
the anticipated unemployment rate.
The increase in the provision for credit
losses in the first quarter of 2024, as compared to the first quarter of 2023, was related to changes in the
composition of,
and increases in, loans as well as the continued uncertainty in the economic environment
which impacts the projected
macroeconomic factors used in our CECL modeling.
Noninterest income was $0.9 million in the first three months of 2024,
compared to $0.8 million in the first three months of
2023.
Noninterest expense was $5.7 million in the first three months of 2024,
compared to $5.6 million for the first three months
of 2023.
The increase in noninterest expense was primarily due to routine increases
in salaries and benefits expense.
Income tax expense was $0.2 million for the first three months of 2024 compared
to $0.3 million for the first three months
of 2023.
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 three months of 2024
was 10.68%, compared to 11.97% in the first three months
of 2023.
The Company’s effective income
tax rate is affected principally by tax-exempt earnings from the Company’s
investment in municipal securities, bank-owned life insurance (“BOLI”),
and New Markets Tax Credits
(“NMTCs”).
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29
The Company paid cash dividends of $0.27 per share in the first three months of 2024 and 2023
.
At March 31, 2024, 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 15.69%,
a tier 1 leverage ratio of 10.34% and a common equity
tier 1 (“CET1”) ratio of 14.62% at March 31, 2024.
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.
There have been no significant changes to our Critical Accounting Estimates
as described in our Form 10-K.
RESULTS
OF OPERATIONS
Average Balance
Sheet and Interest Rates
Quarter ended March 31,
2024
2023
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Interest-earning assets:
Loans and loans held for sale
$
560,942
5.01%
$
502,158
4.65%
Securities - taxable
257,229
2.21%
344,884
2.19%
Securities - tax-exempt
10,377
3.64%
57,800
3.59%
Total securities
267,606
2.26%
402,684
2.38%
Federal funds sold
17,980
5.57%
7,314
4.71%
Interest bearing bank deposits
37,790
5.37%
11,607
4.47%
Total interest-earning assets
884,318
4.21%
923,763
3.66%
Interest-bearing liabilities:
Deposits:
NOW
196,648
1.31%
187,566
0.54%
Savings and money market
241,792
0.57%
300,657
0.39%
Time Deposits
199,562
3.20%
155,676
1.51%
Total interest-bearing deposits
638,002
1.62%
643,899
0.70%
Short-term borrowings
1,592
0.51%
3,046
1.11%
Total interest-bearing liabilities
639,594
1.62%
646,945
0.71%
Net interest income and margin (tax-equivalent)
$
6,677
3.04%
$
7,217
3.17%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $6.7 million for the first three
months of 2024, a 7% increase compared to $7.2
million for the first three months of 2023.
This decrease was primarily due to a decline in the Company’s
net interest
margin (tax-equivalent).
The Company’s net interest
margin (tax-equivalent) was 3.04% in the first three months of 2024
compared to 3.17% in the first three months of 2023.
This decrease was primarily due to higher market interest rates,
which increased our cost of funds, generally,
and changes in our deposit mix to higher cost interest bearing deposits, which
was partially offset by a more favorable asset mix and higher
yields on interest-earning assets.
The cost of interest-bearing
liabilities increased to 162 basis points, compared to 71 basis points in the first three
months of 2024.
Since March 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 55 basis points
to 4.21% in the first three months of
2024 compared to 3.66% in the first three months of 2023.
This increase was primarily due to the Company’s
balance
sheet repositioning strategy in the fourth quarter of 2023, which improved our asset
mix, and higher market interest rates on
interest earning assets.
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30
The cost of total interest-bearing liabilities increased by 91 basis points to
1.62% in the first three months of 2024
compared to 0.71% in the first three months of 2023.
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 2024.
Our ability to compete and manage our deposit costs until our interest-earning assets
reprice and we generate new loans with current market interest rates will be important
to our net interest margin during
2024.
Provision for Credit Losses
On January 1, 2023, we adopted ASC 326 and its CECL methodology,
which 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 provision for credit losses during the
first three months of 2024 of $0.3
million, compared to $0.1 million during the first three months of 2023.
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 increase in the provision for
credit losses in the first quarter of 2024, as compared to the first quarter of 2023,
was related to changes in the composition
of, and increases in, loans as well as the continued uncertainty in the economic environment
which impacts the projected
macroeconomic factors used in our CECL modeling.
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 March 31, 2024,
the Company’s allowance for credit
losses was $7.2 million, or 1.27% of total loans, compared to $6.9 million, or 1.23% of
total loans, at December 31, 2023, and $6.8 million, or 1.35% of total loans, at March 31, 2023.
Noninterest Income
Quarter ended March 31,
(Dollars in thousands)
2024
2023
Service charges on deposit accounts
$
156
$
154
Mortgage lending income
150
93
Bank-owned life insurance
102
156
Other
479
389
Total noninterest income
$
887
$
792
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.
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31
The following table presents a breakdown of the Company’s
mortgage lending income.
Quarter ended March 31,
(Dollars in thousands)
2024
2023
Origination income, net
$
57
$
4
Servicing fees, net
93
89
Total mortgage lending income
$
150
$
93
Income from bank-owned life insurance was $102 thousand and $156
thousand for the first three months of 2024 and 2023,
respectively.
Excluding a $52 thousand non-taxable death benefit received during the first
three months of 2023, income
from bank-owned life insurance would have been $104 thousand for the first three
months of 2023.
Other noninterest income was $479 thousand for the first three
months of 2024, compared to $389 thousand for the first
three months of 2023.
The increase in other noninterest income was primarily due to increased fee income on one-way
sell
reciprocal deposits sold through the Intrafi network.
Noninterest Expense
Quarter ended March 31,
(Dollars in thousands)
2024
2023
Salaries and benefits
$
3,071
$
2,927
Net occupancy and equipment
763
799
Professional fees
326
338
Other
1,515
1,540
Total noninterest expense
$
5,675
$
5,604
The increase in salaries and benefits was primarily due to routine annual increases in
salaries and wages.
The decrease in other noninterest expense was primarily due to the Company’s
adoption of FASB
ASU 2023-02
Investments – Equity Method and Joint Ventures
(Topic 323)
which allows the proportional amortization method for our
NMTC investments on January 1, 2024.
With the adoption of this ASU, amortization of NMTCs
are now included in
income tax expense.
During the first three months of 2023, other noninterest expense included
$105 thousand related to
our equity method investment in NMTCs.
Income Tax
Expense
Income tax expense was $0.2 million for the first three months of 2024
compared to $0.3 million for the first three months
of 2023.
This decrease was due to declines in earnings before taxes and the Company’s
effective tax rate.
The Company’s
effective income tax rate for the first three months of 2024 was 10.68
%, compared to 11.97% in the first three months of
2023.
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 Mark
ets Tax Credits.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $260.8
million at March 31, 2024, compared to $270.9 million at December 31, 2023.
This decrease reflects a $7.2 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 $2.9 million.
The average annualized tax-equivalent yields earned on total
securities were 2.26%
in the first quarter of 2024 and 2.39% in the first quarter of 2023.
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32
Loans
2024
2023
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
78,920
73,374
66,014
61,880
59,602
Construction and land development
58,909
68,329
70,129
63,874
66,500
Commercial real estate
300,484
287,307
281,964
275,801
267,962
Residential real estate
118,240
117,457
117,150
109,834
101,975
Consumer installment
10,967
10,827
10,353
9,022
9,002
Total loans
$
567,520
557,294
545,610
520,411
505,041
Total loans
were $567.5 million at March 31, 2024, a 2% increase compared to $557.3 million at December 31,
2023.
Four
loan categories represented the majority of the loan portfolio at March 31,
2024: commercial real estate (53%), residential
real estate (21%), commercial and industrial (14%) and construction and land development
(10%).
Approximately 21% of
the Company’s commercial real
estate loans were classified as owner-occupied at March 31,
2024.
Within the residential real estate portfolio segment, the Company
had junior lien mortgages of approximately $9.2 million,
or 2% of total loans, and $8.7 million, or 2%, of total loans at March 31, 2024 and
December 31, 2023, respectively.
For
residential real estate mortgage loans with a consumer purpose, the Company had no loans
that required interest only
payments at March 31, 2024 and December 31, 2023. 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 5.01% in the first quarter of
2024 and 4.65% in the first
quarter of 2023.
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 rates 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 $22.3 million.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding
plus
unfunded commitments) to a single borrower of $20.1 million. Our loan policy requires
that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit.
At March 31, 2024, the Bank had one
loan relationship exceeding our internal limit.
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33
We periodically analyze
our commercial and industrial and commercial real estate loan portfolios to determine if
a
concentration of credit risk exists in any one or more industries. We
use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers.
Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk
-based capital at March 31, 2024 and December 31, 2023.
March 31,
December 31,
(Dollars in thousands)
2024
2023
Lessors of 1-4 family residential properties
$
58,427
$
56,912
Multi-family residential properties
45,634
45,841
Hotel/motel
38,822
39,131
Office Buildings
27,897
30,871
Allowance for Credit Losses
On January 1, 2023, we adopted ASC 326 and its CECL methodology,
which 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 March 31, 2024 and December 31, 2023, our allowance
for credit losses was approximately
$7.2 million and
$6.9 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 1.27%
at March 31, 2024, compared to 1.23% at
December 31, 2023.
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.
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 March 31, 2024, reasonable and supportable periods of 4 quarters
were utilized followed by an 8 quarter straight line
reversion period to long term averages.
A summary of the changes in the allowance for credit losses and certain asset
quality ratios for the first quarter of 2024 and
the previous four quarters is presented below.
2024
2023
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,863
6,778
6,634
6,821
5,765
Impact of adopting ASC 326
—
—
—
—
1,019
Charge-offs:
Commercial and industrial
—
(164)
—
—
—
Consumer installment
(24)
(20)
(18)
(56)
(11)
Total charge
-offs
(24)
(184)
(18)
(56)
(11)
Recoveries
91
11
4
200
8
Net recoveries (charge-offs)
67
(173)
(14)
144
(3)
Provision for credit losses
285
258
158
(331)
40
Ending balance
$
7,215
6,863
6,778
6,634
6,821
as a % of loans
1.27
%
1.23
1.24
1.27
1.35
as a % of nonperforming loans
822
%
753
559
577
255
Net (recoveries) charge-offs as % of average loans (a)
(0.05)
%
0.13
0.01
(0.11)
—
(a) Net (recoveries) charge-offs are annualized.
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34
The allowance for credit losses by loan category for the first quarter of 2024 and the previous four quarters
is presented
below.
2024
2023
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
1,415
13.9
$
1,288
13.2
$
1,215
12.1
$
1,198
11.9
$
1,232
11.8
Construction and land
development
840
10.4
960
12.3
1,073
12.9
1,005
12.3
1,021
13.2
Commercial real estate
4,202
53.0
3,921
51.5
3,803
51.6
3,788
53.0
3,966
53.0
Residential real estate
613
20.8
546
21.1
551
21.5
529
21.1
497
20.2
Consumer installment
145
1.9
148
1.9
136
1.9
114
1.7
105
1.8
Total allowance for credit
losses
$
7,215
$
6,863
$
6,778
$
6,634
$
6,821
* Loan balance in each category expressed as a percentage of total loans.
Nonperforming Assets
At March 31, 2024 and December 31, 2023, the Company had $0.9 million in nonperforming assets.
The table below provides information concerning total nonperforming assets
and certain asset quality ratios for the first
quarter of 2024 and the previous four quarters.
2024
2023
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
878
911
1,213
1,149
2,680
Total nonperforming assets
$
878
911
1,213
1,149
2,680
as a % of loans and other real estate owned
0.15
%
0.16
0.22
0.22
0.53
as a % of total assets
0.09
%
0.09
0.12
0.11
0.26
Nonperforming loans as a % of total loans
0.15
%
0.16
0.22
0.22
0.53
The table below provides information concerning the composition of nonaccrual
loans for the first quarter of 2024 and the
previous four quarters.
2024
2023
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
$
—
—
162
178
432
Commercial real estate
765
783
801
819
2,103
Residential real estate
97
128
250
152
135
Consumer installment
16
—
—
—
10
Total nonaccrual loans
$
878
911
1,213
1,149
2,680
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 March 31,
2024 and December 31, 2023,
respectively.
The Company had no OREO at March 31, 2024 or December 31, 2023.
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35
Deposits
March 31,
December 31,
(In thousands)
2024
2023
Noninterest bearing demand
$
263,484
270,723
NOW
197,044
190,724
Money market
160,980
148,040
Savings
87,562
88,541
Certificates of deposit under $250,000
101,186
100,572
Certificates of deposit and other time deposits of $250,000 or more
89,417
97,643
Total deposits
$
899,673
896,243
Total deposits
were $899.7 million at March 31, 2024,
compared to $896.2 million at December 31, 2023. At March 31,
2024, the Company had $48.9 million of reciprocal deposits sold,
compared to $59.0 million at December 31, 2023.
Noninterest-bearing deposits were $263.5 million, or 29% of total deposits, at March
31, 2024, compared to $270.7 million,
or 30% of total deposits at December 31, 2023.
The average rate paid on total interest-bearing deposits was 1.62% in the first quarter of 2024
,
compared to 0.70% in first
quarter of 2023.
At March 31, 2024, estimated uninsured deposits totaled $351.5 million, or 39%
of total deposits, compared to $356.3
million, or 40% of total deposits at December 31, 2023.
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 improving the FDIC insurance
coverage for our depositors.
The total of reciprocal deposits at March 31, 2024 was $10.6 million, compared
to none at
December 31, 2023.
Uninsured amounts are estimated based on the portion of account balances in excess of FDIC
insurance limits.
The Bank’s uninsured deposits at
March 31, 2024 and December 31, 2023 include approximately $215.0
million and $206.2 million, respectively,
of deposits of state, county and local governments that are collateralized by
securities having an equal fair value to such deposits.
The estimated uninsured time deposits by maturity as of March 31, 2024
is presented below.
(Dollars in thousands)
March 31, 2024
Maturity of:
3 months or less
$
15,297
Over 3 months through 6 months
25,558
Over 6 months through 12 months
20,461
Over 12 months
2,598
Total estimated uninsured
time deposits
$
63,914
The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large
banks with more than $5
billion of uninsured deposits as a result of the systemic risk determination to insure all depositors
in connection with the
March 2023 failures of Silicon Valley
Bank and Signature Bank.
These special assessments do not apply to the Bank.
Other Borrowings and Available
Credit
The Company had no long-term debt at March 31, 2024 and December 31, 2023.
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 March 31, 2024, and December 31,
2023, respectively. Securities
sold under agreements to repurchase, which were entered into on behalf of certain customers
totaled $1.5 million at March 31, 2024 and December 31, 2023, respectively
.
At March 31, 2024 and December 31, 2023,
the Bank had no borrowings from the Federal Reserve discount window and
never had any borrowings under the Federal
Reserve’s Bank Term
Facility Program (“BTFP”).
The BTFP ceased making new loans on March 11,
2024.
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36
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 prog
ram at March 31, 2024 and December 31, 2023, respectively.
At those dates, the
Bank had $293.2 million and $309.1 million, respectively,
of available lines of credit at the FHLB of Atlanta.
Advances
include both fixed and variable interest rates and varying maturities may be
used.
The average rate paid on the Bank’s
short-term borrowings was 0.51% in the first quarter of 2024
compared to 1.11% in the
first quarter of 2023.
CAPITAL ADEQUACY
The Company’s consolidated
stockholders’ equity was $74.5 million and $76.5 million as of March 31,
2024 and
December 31, 2023, respectively.
The decrease from December 31, 2023 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 $2.2 million, cash dividends
of $0.9 million, and the cumulative effect of adopting NMTC accounting
standard of $0.3
million, partially offset by net
earnings of $1.4 million.
Total unrealized losses,
net of tax, on available-for-sale securities increased from $29.0
million
on December 31, 2023 to $31.2 million March 31, 2024.
These unrealized losses do not affect the Bank’s
capital for
regulatory capital purposes.
The Company paid cash dividends of $0.27 per share for both the first quarter of 2024
and first quarter of 2023.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory
capital framework and
related Dodd-Frank Wall
Street Reform and Consumer Protection Act changes.
The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements
for capital adequacy purposes.
The capital
conservation buffer was subject to a three-year phase-in period that began on January 1,
2016 and was fully phased-in on
January 1, 2019 at 2.5%.
A banking organization with a conservation buffer of less than the
required amount will be
subject to limitations on capital distributions, including dividend payments and certain discretionary
bonus payments to
executive officers.
At March 31, 2024, the Bank’s ratio
was sufficient to meet the fully phased-in conservation buffer,
and
did not limit capital distributions or discretionary bonuses.
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.
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 10.34%, CET1 risk-based capital ratio was 14.62%, tier 1
risk-based capital ratio was 14.62%, and total risk-based capital ratio was 15.69%
at March 31, 2024. 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 7.69%
at March 31, 2024.
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
.
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37
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 March 31, 2024, our earnings simulation model indicated that we were in compliance
with the policy guidelines noted
above.
Economic Value
of Equity
. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic values are
estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheet items,
which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12-month timeframe,
EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.
Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding
to or anticipating changes in
interest rates, or market and competitive conditions.
To help limit interest rate risk,
we have stated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decrease from our
base case by more than
the following:
●
35% for an instantaneous change of +/- 400 basis points
●
30% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At March 31, 2024, our EVE model indicated that we were in compliance
with our policy guidelines.
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38
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income
will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated
with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition,
the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain
assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions.
Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets
and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
Prepayments
and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of certain instruments.
The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates or
economic stress, which may
differ across industries and economic sectors. ALCO reviews each of the
above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory,
consistent levels of profitability within the framework of the
Company’s established liquidity,
loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between interest-sensitive
assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity
while continuing to meet the credit and deposit
needs of our customers. From time to time, the Company also may enter into back-to-back
interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify
as derivatives, but are not
designated as hedging instruments. At March 31, 2024 and December 31, 2023,
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 payment of Company expenses, dividends paid to stockholders
and Company stock repurchases.
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. 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 March 31, 2024, the Bank had no FHLB of Atlanta advances outstanding
and available credit from the FHLB
of $293.2 million. At March 31, 2024, 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.
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39
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual
Obligations
At March 31, 2024, the Bank had outstanding standby letters of credit of $0.6 million and
unfunded loan commitments
outstanding of $69.1 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 March 31, 2024,
the aggregate unpaid principal balance of residential mortgage loans,
which we have originated and
sold, but retained the servicing rights, was $214.0 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 quarter of 2024
as a result of representation and
warranty provisions contained in the Company’s
sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at March 31, 2024.
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.
Although repurchase and make whole requests related to representation and
warranty provisions and servicing activities
have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse
investors for losses incurred
(make whole requests) may increase in frequency if investors more aggressively
pursue all means of recovering losses on
their purchased loans.
As of March 31, 2024, 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.
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40
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 continued to be inverted
on March 31, 2024, 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 reductions in the 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 has been running at levels unseen in decades and, while it has declined
towards the end of 2023, it has been
persistent through March 31, 2024 and 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 goals of (i) 2% target inflation rate over the longer term and (ii)
maximum employment goals.
Following its May
1, 2024 meeting, the Federal Reserve’s Open Market
Committee (“FOMC”) reaffirmed its commitment to the 2% inflation
objective and announced that it “does not expect it will be appropriate to reduce
the target range until it has gained greater
confidence that inflation is moving substantially toward 2%.”
Further, the FOMC reduced its monthly reduction of
Treasury securities from $60 billion to $25 billion,
and was maintaining the monthly reduction on agency debt and agency
mortgage-backed securities at $35 billion.
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.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB
but is not yet effective.
●
ASU 2023-09,
Income Taxes
(Topic
740): Improvements to Income Tax
disclosures
Information about this pronouncement is described in more detail below.
ASU 2023-09,
Income Taxes
(Topic 740):
Improvements to Income Tax
Disclosures,
The amendments in this Update
enhance the transparency and decision usefulness of income tax disclosures.
For public business entities, the new standard
is effective for annual periods beginning after December 15, 2024.
The Company does not expect the new standard to have
a material impact on the Company’s consolidated
financial statements.
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41
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.
2024
2023
First
Fourth
Third
Second
First
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,657
6,059
6,272
6,888
7,109
Tax-equivalent adjustment
20
95
108
106
108
Net interest income (Tax
-equivalent)
$
6,677
6,154
6,380
6,994
7,217
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42
Table 2
- Selected Quarterly Financial Data
2024
2023
First
Fourth
Third
Second
First
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,677
6,154
6,380
6,994
7,217
Less: tax-equivalent adjustment
20
95
108
106
108
Net interest income (GAAP)
6,657
6,059
6,272
6,888
7,109
Noninterest income
887
(5,429)
865
791
792
Total revenue
7,544
630
7,137
7,679
7,901
Provision for credit losses
334
326
105
(362)
66
Noninterest expense
5,675
5,803
5,362
5,825
5,604
Income tax expense
164
(1,514)
182
288
267
Net earnings
$
1,371
(3,985)
1,488
1,928
1,964
Per share data:
Basic and diluted net earnings
$
0.39
(1.14)
0.43
0.55
0.56
Cash dividends declared
0.27
0.27
0.27
0.27
0.27
Weighted average shares outstanding:
Basic and diluted
3,493,663
3,493,614
3,496,411
3,500,064
3,502,143
Shares outstanding, at period end
3,493,699
3,493,614
3,493,614
3,499,412
3,500,879
Book value
$
21.32
21.90
17.59
20.28
21.03
Common stock price
High
$
21.55
21.99
22.80
24.32
24.50
Low
18.82
19.72
20.85
18.80
22.55
Period end:
19.27
21.28
21.50
21.26
22.66
To earnings ratio
83.78
53.20
7.65
7.21
7.79
To book value
90
%
97
122
105
108
Performance ratios:
Return on average equity
7.13
%
(26.40)
8.59
10.37
11.44
Return on average assets
0.56
%
(1.56)
0.58
0.75
0.77
Dividend payout ratio
69.23
%
(23.68)
62.79
49.09
48.21
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.27
%
1.23
1.24
1.27
1.35
Nonperforming loans
822
%
753
559
577
255
Nonperforming assets as a % of:
Loans and other real estate owned
0.15
%
0.16
0.22
0.22
0.53
Total assets
0.09
%
0.09
0.12
0.11
0.26
Nonperforming loans as a % of total loans
0.15
%
0.16
0.22
0.22
0.53
Annualized net (recoveries) charge-offs as % of average loans
(0.05)
%
0.13
0.01
(0.11)
-
Capital Adequacy: (c)
CET 1 risk-based capital ratio
14.62
%
14.52
15.01
15.33
15.45
Tier 1 risk-based capital ratio
14.62
%
14.52
15.01
15.33
15.45
Total risk-based capital ratio
15.69
%
15.52
15.98
16.31
16.48
Tier 1 leverage ratio
10.34
%
9.72
10.26
10.23
10.07
Other financial data:
Net interest margin (a)
3.04
%
2.65
2.73
3.03
3.17
Effective income tax rate
10.68
%
(27.53)
10.90
13.00
11.97
Efficiency ratio (b)
75.03
%
800.41
74.01
74.82
69.97
Selected average balances:
Securities available-for-sale
$
267,606
354,065
390,772
402,929
402,684
Loans
560,757
550,938
529,382
512,066
502,158
Total assets
976,930
1,020,476
1,020,980
1,022,874
1,022,938
Total deposits
897,051
953,674
942,533
942,552
948,393
Total stockholders’ equity
76,948
60,372
69,269
74,404
68,655
Selected period end balances:
Securities available-for-sale
$
260,770
270,910
373,286
394,079
405,692
Loans
567,520
557,294
545,610
520,411
505,041
Allowance for credit losses
7,215
6,863
6,778
6,634
6,821
Total assets
979,039
975,255
1,030,724
1,026,130
1,017,746
Total deposits
899,673
896,243
964,602
950,742
939,190
Total stockholders’ equity
74,489
76,507
61,451
70,976
73,640
(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 Measures.
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
Table of Contents
43
Table 3
- Average Balances
and Net Interest Income Analysis
Quarter ended March 31,
2024
2023
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)
$
560,942
$
6,990
5.01%
$
502,158
$
5,754
4.65%
Securities - taxable (2)
257,229
1,411
2.21%
344,884
1,865
2.19%
Securities - tax-exempt (2)(3)
10,377
94
3.64%
57,800
511
3.59%
Total securities
267,606
1,505
2.26%
402,684
2,366
2.38%
Federal funds sold
17,980
249
5.57%
7,314
85
4.71%
Interest bearing bank deposits
37,790
505
5.37%
11,607
128
4.47%
Total interest-earning assets
884,318
$
9,249
4.21%
923,763
$
8,343
3.66%
Cash and due from banks
17,772
15,527
Other assets
74,840
83,648
Total assets
$
976,930
$
1,022,938
Interest-bearing liabilities:
Deposits:
NOW
$
196,648
$
640
1.31%
$
187,566
$
248
0.54%
Savings and money market
241,792
340
0.57%
300,657
290
0.39%
Time deposits
199,562
1,590
3.20%
155,676
580
1.51%
Total interest-bearing deposits
638,002
2,570
1.62%
643,899
1,118
0.70%
Short-term borrowings
1,592
2
0.51%
3,046
8
1.11%
Total interest-bearing liabilities
639,594
$
2,572
1.62%
646,945
$
1,126
0.71%
Noninterest-bearing deposits
259,050
304,494
Other liabilities
1,338
2,844
Stockholders' equity
76,948
68,655
Total liabilities and stockholders' equity
$
976,930
$
1,022,938
Net interest income and margin (tax-equivalent)
$
6,677
3.04%
$
7,217
3.17%
(1) 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
44
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, 2023.
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, 2023,
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.
The persistence of inflation above the Federal Reserve’s
long
term targets, and the maintenance of or further increases in, tightened Federal
Reserve monetary policy by increased target
interest rates and reductions in the Federal Reserve’s
securities portfolio, have and are 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
45
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not repurchase any of its common stock during the first quarter of 2024.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
Table of Contents
46
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:
May 8, 2024
By:
/s/ David A. Hedges
David A. Hedges
President and CEO
Date:
May 8, 2024
By:
/s/
W.
James Walker,
IV
W.
James Walker,
IV
Senior Vice President and Chief Financial
Officer