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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, 2025
☐
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
(§232.405 of this chapter)
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 1, 2025
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 Statements
Consolidated Balance Sheets (Unaudited) as of March 31, 2025 and December 31, 2024
4
Consolidated Statements of Earnings (Unaudited) for the quarters ended March 31, 2025 and 2024
5
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters ended March
31, 2025 and 2024
6
Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2025
and 2024
7
Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2025 and 2024
8
Notes to Consolidated Financial Statements (Unaudited
)
9
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Table 1 – Explanation of Non-GAAP Financial Measures
42
Table 2 – Selected Quarterly Financial Data
43
Table 3 – Average Balances and Net Interest Income Analysis for the quarters ended March 31, 2025
and 2024
44
Item 3
Quantitative and Qualitative Disclosures About Market Risk
45
Item 4
Controls and Procedures
45
PART II. OTHER INFORMATION
Item 1
Legal Proceedings
45
Item 1A
Risk Factors
45
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3
Defaults Upon Senior Securities
46
Item 4
Mine Safety Disclosures
46
Item 5
Other Information
46
Item 6
Exhibits
47
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)
2025
2024
Assets:
Cash and due from banks
$
22,179
$
15,142
Federal funds sold
30,123
37,200
Interest-bearing bank deposits
66,354
41,012
Cash and cash equivalents
118,656
93,354
Securities available-for-sale
242,468
243,012
Loans held for sale
290
—
Loans
560,650
564,017
Allowance for credit losses
(6,750)
(6,871)
Loans, net
553,900
557,146
Premises and equipment, net
45,673
45,931
Bank-owned life insurance
17,618
17,513
Other assets
18,181
20,368
Total assets
$
996,786
$
977,324
Liabilities:
Deposits:
Noninterest-bearing
$
271,749
$
260,874
Interest-bearing
638,754
634,950
Total deposits
910,503
895,824
Accrued expenses and other liabilities
3,168
3,208
Total liabilities
913,671
899,032
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
3,802
Retained earnings
116,346
115,759
Accumulated other comprehensive loss, net
(25,371)
(29,607)
Less treasury stock, at cost -
463,436
shares at both March 31, 2025
and December 31, 2024, respectively
(11,701)
(11,701)
Total stockholders’
equity
83,115
78,292
Total liabilities and stockholders’
equity
$
996,786
$
977,324
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)
2025
2024
Interest income:
Loans, including fees
$
7,543
$
6,990
Securities
Taxable
1,281
1,411
Tax-exempt
68
74
Federal funds sold and interest bearing bank deposits
969
754
Total interest income
9,861
9,229
Interest expense:
Deposits
2,816
2,570
Short-term borrowings
—
2
Total interest expense
2,816
2,572
Net interest income
7,045
6,657
Provision for credit losses
(10)
334
Net interest income after provision for credit
losses
7,055
6,323
Noninterest income:
Service charges on deposit accounts
155
156
Mortgage lending
93
150
Bank-owned life insurance
105
102
Other
394
479
Total noninterest income
747
887
Noninterest expense:
Salaries and benefits
3,310
3,071
Net occupancy and equipment
714
763
Professional fees
287
326
Other
1,569
1,515
Total noninterest expense
5,880
5,675
Earnings before income taxes
1,922
1,535
Income tax expense
392
164
Net earnings
$
1,530
$
1,371
Net earnings per share:
Basic and diluted
$
0.44
$
0.39
Weighted average shares
outstanding:
Basic and diluted
3,493,699
3,493,663
See accompanying notes to consolidated financial statements
Table of Contents
5
AUBURN NATIONAL
BANCORPORATION,
INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Quarter ended March 31,
(Dollars in thousands)
2025
2024
Net earnings
$
1,530
$
1,371
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities, net of
tax expense of $
1,421
and tax benefit of $
734
, respectively
4,236
(2,184)
Other comprehensive income (loss)
4,236
(2,184)
Comprehensive income (loss)
$
5,766
$
(813)
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, 2025
Balance, December 31, 2024
3,493,699
$
39
3,802
115,759
(29,607)
(11,701)
$
78,292
Net earnings
—
—
—
1,530
—
—
1,530
Other comprehensive income
—
—
—
—
4,236
—
4,236
Cash dividends paid ($
.27
per share)
—
—
—
(943)
—
—
(943)
Balance, March 31, 2025
3,493,699
$
39
3,802
116,346
(25,371)
(11,701)
$
83,115
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
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)
2025
2024
Cash flows from operating activities:
Net earnings
$
1,530
$
1,371
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
(10)
334
Depreciation and amortization
528
434
Premium amortization and discount accretion, net
354
386
Net gain on sale of loans held for sale
(8)
(57)
Loans originated for sale
(1,470)
(3,123)
Proceeds from sale of loans
1,182
2,993
Increase in cash surrender value of bank-owned life insurance
(105)
(102)
Net decrease (increase) in other assets
713
(1,500)
Net (decrease) increase in accrued expenses and other liabilities
(87)
2,345
Net cash provided by operating activities
2,627
3,081
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
5,847
6,836
Decrease (increase) in loans, net
3,303
(10,208)
Net purchases of premises and equipment
(211)
(1,043)
Decrease in FHLB stock
—
32
Net cash provided by (used in) investing activities
8,939
(4,383)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits
10,875
(7,239)
Net increase in interest-bearing deposits
3,804
10,669
Net increase in federal funds purchased and securities sold
under agreements to repurchase
—
27
Dividends paid
(943)
(943)
Net cash provided by financing activities
13,736
2,514
Net change in cash and cash equivalents
25,302
1,212
Cash and cash equivalents at beginning of period
93,354
71,369
Cash and cash equivalents at end of period
$
118,656
$
72,581
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
2,822
$
2,442
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, 2024.
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, ATM
and
interchange fees and gains and losses on sales of OREO, 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, 2025.
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
Accounting Developments
In the first quarter of 2025, the Company did not adopt any new accounting
guidance.
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted
average common shares outstanding for
the quarters ended March 31, 2025 and 2024, 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, 2025 and 2024, 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)
2025
2024
Basic and diluted:
Net earnings
$
1,530
$
1,371
Weighted average
common shares outstanding
3,493,699
3,493,663
Net earnings per share
$
0.44
$
0.39
NOTE 3: SECURITIES
At March 31, 2025 and December 31, 2024, 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, 2025 and December 31, 2024,
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, 2025
Agency obligations (a)
$
—
26,867
26,052
—
52,919
—
6,343
$
59,262
Agency MBS (a)
1
19,998
16,181
136,407
172,587
—
24,700
197,287
State and political subdivisions
—
1,625
7,763
7,574
16,962
—
2,836
19,798
Total available-for-sale
$
1
48,490
49,996
143,981
242,468
—
33,879
$
276,347
December 31, 2024
Agency obligations (a)
$
—
26,655
25,756
—
52,411
—
7,734
$
60,145
Agency MBS (a)
10
19,863
14,904
138,899
173,676
—
28,901
202,577
State and political subdivisions
—
966
8,244
7,715
16,925
—
2,901
19,826
Total available-for-sale
$
10
47,484
48,904
146,614
243,012
—
39,536
$
282,548
(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) borrowers of
the loans included 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 $
229.5
million and $
222.3
at March 31, 2025 and December 31, 2024, respectively,
were pledged to secure public deposits,
securities sold under agreements to repurchase, FHLB advances, and for
other
purposes required or permitted by law.
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, 2025 and December 31, 2024,
respectively.
Non-marketable equity investments include FHLB of Atlanta stock, Federal Reserve
Bank of Atlanta
(“FRB”) stock, and stock in a privately held financial institution.
Table of Contents
10
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at March 31, 2025
and December 31, 2024, 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, 2025:
Agency obligations
$
—
—
52,919
6,343
$
52,919
6,343
Agency MBS
2
—
172,585
24,700
172,587
24,700
State and political subdivisions
1,772
42
14,840
2,794
16,612
2,836
Total
$
1,774
42
240,344
33,837
$
242,118
33,879
December 31, 2024:
Agency obligations
$
—
—
52,411
7,734
$
52,411
7,734
Agency MBS
7
—
173,669
28,901
173,676
28,901
State and political subdivisions
1,798
17
14,776
2,884
16,574
2,901
Total
$
1,805
17
240,856
39,519
$
242,661
39,536
For the securities in the previous table, the Company assesses whether or not
it intends to sell the security, or more
likely
than not will be required to sell the security,
before recovery of its amortized cost basis which would require a write-down
to fair value through net income.
Because the Company currently does not intend to sell those securities that have an
unrealized loss at March 31, 2025, and it is not more-likely-than-not that the
Company will be required to sell the securities
before recovery of their amortized cost bases, which may be maturity,
the Company has determined that no write-down is
necessary.
In addition, the Company evaluates whether any portion of the decline in fair value of
securities is the result of
credit deterioration, which would require the recognition of an allowance for credit
losses.
Such evaluations consider the
extent to which the amortized cost of the security exceeds its fair value, changes in credit
ratings and any other known
adverse conditions related to the specific security.
The unrealized losses associated with securities at March 31, 2025 are
driven by changes in interest rates and are not due to the credit quality of the securities,
and accordingly, no allowance
for
credit losses is considered necessary related to securities at March 31, 2025.
These securities will continue to be monitored
as a part of the Company’s ongoing
evaluation of credit quality.
Management evaluates the financial performance of the
issuers on a quarterly basis to determine if it is probable that the issuers can make
all contractual principal and interest
payments.
Realized Gains and Losses
The Company had no realized gains or losses on sale of securities during the quarter
ended March 31, 2025 and 2024,
respectively.
Table of Contents
11
NOTE 4: LOANS AND ALLOWANCE
FOR CREDIT LOSSES
March 31,
December 31,
(Dollars in thousands)
2025
2024
Commercial and industrial
$
59,061
$
63,274
Construction and land development
86,403
82,493
Commercial real estate:
Owner occupied
61,079
55,346
Hotel/motel
34,607
35,210
Multi-family
43,198
43,556
Other
149,469
155,880
Total commercial
real estate
288,353
289,992
Residential real estate:
Consumer mortgage
59,659
60,399
Investment property
57,841
58,228
Total residential real
estate
117,500
118,627
Consumer installment
9,333
9,631
Total Loans
$
560,650
$
564,017
Loans secured by real estate were approximately 87.8% of the Company’s
total loan portfolio at March 31, 2025.
At March
31, 2025, 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
12
●
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
13
The following is a summary of current, accruing past due, and nonaccrual
loans by portfolio segment and class as of March
31, 2025 and December 31, 2024.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
March 31, 2025:
Commercial and industrial
$
58,994
64
—
59,058
3
$
59,061
Construction and land development
85,894
105
—
85,999
404
86,403
Commercial real estate:
Owner occupied
61,079
—
—
61,079
—
61,079
Hotel/motel
34,607
—
—
34,607
—
34,607
Multi-family
43,198
—
—
43,198
—
43,198
Other
149,350
119
—
149,469
—
149,469
Total commercial
real estate
288,234
119
—
288,353
—
288,353
Residential real estate:
Consumer mortgage
59,183
403
—
59,586
73
59,659
Investment property
57,724
—
77
57,801
40
57,841
Total residential real
estate
116,907
403
77
117,387
113
117,500
Consumer installment
9,262
71
—
9,333
—
9,333
Total
$
559,291
762
77
560,130
520
$
560,650
December 31, 2024:
Commercial and industrial
$
63,163
12
—
63,175
99
$
63,274
Construction and land development
82,089
—
—
82,089
404
82,493
Commercial real estate:
Owner occupied
55,346
—
—
55,346
—
55,346
Hotel/motel
35,210
—
—
35,210
—
35,210
Multi-family
43,556
—
—
43,556
—
43,556
Other
155,880
—
—
155,880
—
155,880
Total commercial
real estate
289,992
—
—
289,992
—
289,992
Residential real estate:
Consumer mortgage
59,677
722
—
60,399
—
60,399
Investment property
58,179
49
—
58,228
—
58,228
Total residential real
estate
117,856
771
—
118,627
—
118,627
Consumer installment
9,579
52
—
9,631
—
9,631
Total
$
562,679
835
—
563,514
503
$
564,017
Table of Contents
14
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.”
Table of Contents
15
The following tables presents credit quality indicators for the loan portfolio
segments and classes by year of origination as
of March 31, 2025 and December 31, 2024.
Year of Origination
2025
2024
2023
2022
2021
Prior to
2021
Revolving
Loans
Total
Loans
(Dollars in thousands)
March 31, 2025:
Commercial and industrial
Pass
$
2,160
5,714
6,740
8,130
12,128
21,273
2,550
$
58,695
Special mention
—
49
74
—
—
—
—
123
Substandard
51
—
19
164
6
—
—
240
Nonaccrual
—
—
—
3
—
—
—
3
Total commercial and industrial
2,211
5,763
6,833
8,297
12,134
21,273
2,550
59,061
Current period gross charge-offs
—
—
99
—
—
—
—
99
Construction and land development
Pass
4,983
35,676
23,353
16,671
951
737
3,628
85,999
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
404
—
—
—
—
—
404
Total construction and land development
4,983
36,080
23,353
16,671
951
737
3,628
86,403
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
7,216
1,440
10,856
6,626
16,856
14,968
2,028
59,990
Special mention
—
—
—
—
—
581
—
581
Substandard
—
508
—
—
—
—
—
508
Nonaccrual
—
—
—
—
—
—
—
—
Total owner occupied
7,216
1,948
10,856
6,626
16,856
15,549
2,028
61,079
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
—
461
6,397
9,322
3,047
15,380
—
34,607
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
—
461
6,397
9,322
3,047
15,380
—
34,607
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
16
Year of Origination
2025
2024
2023
2022
2021
Prior to
2021
Revolving
Loans
Total
Loans
(Dollars in thousands)
March 31, 2025:
Multi-family
Pass
20
3,728
8,495
16,930
1,843
12,160
22
43,198
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
20
3,728
8,495
16,930
1,843
12,160
22
43,198
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
974
32,992
19,560
30,079
21,556
31,565
12,624
149,350
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
119
—
119
Nonaccrual
—
—
—
—
—
—
—
—
Total other
974
32,992
19,560
30,079
21,556
31,684
12,624
149,469
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
806
5,003
17,298
17,824
2,598
13,201
1,582
58,312
Special mention
—
244
—
—
—
262
—
506
Substandard
—
—
—
—
—
768
—
768
Nonaccrual
—
—
73
—
—
—
—
73
Total consumer mortgage
806
5,247
17,371
17,824
2,598
14,231
1,582
59,659
Current period gross charge-offs
—
—
—
—
—
1
—
1
Investment property
Pass
1,409
10,306
10,404
10,661
8,157
15,573
762
57,272
Special mention
—
—
—
—
—
—
—
—
Substandard
—
287
—
93
7
142
—
529
Nonaccrual
—
—
40
—
—
—
—
40
Total investment property
1,409
10,593
10,444
10,754
8,164
15,715
762
57,841
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
2,022
3,401
1,688
1,461
230
107
333
9,242
Special mention
1
—
11
—
9
—
—
21
Substandard
—
46
15
9
—
—
—
70
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
2,023
3,447
1,714
1,470
239
107
333
9,333
Current period gross charge-offs
—
—
—
—
—
—
—
—
Total loans
Pass
19,590
98,721
104,791
117,704
67,366
124,964
23,529
556,665
Special mention
1
293
85
—
9
843
—
1,231
Substandard
51
841
34
266
13
1,029
—
2,234
Nonaccrual
—
404
113
3
—
—
—
520
Total loans
$
19,642
100,259
105,023
117,973
67,388
126,836
23,529
$
560,650
Total current period gross charge-offs
$
—
—
99
—
—
1
—
100
Table of Contents
17
Year of Origination
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2024:
Commercial and industrial
Pass
$
11,290
7,265
8,488
9,677
4,659
16,989
4,425
$
62,793
Special mention
49
74
—
—
—
—
—
123
Substandard
50
21
181
7
—
—
—
259
Nonaccrual
—
99
—
—
—
—
—
99
Total commercial and industrial
11,389
7,459
8,669
9,684
4,659
16,989
4,425
63,274
Current period gross charge-offs
—
—
9
—
—
—
—
9
Construction and land development
Pass
31,144
29,520
16,504
1,794
1,434
104
1,589
$
82,089
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
404
—
—
—
—
—
—
404
Total construction and land development
31,548
29,520
16,504
1,794
1,434
104
1,589
82,493
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
1,921
11,206
6,776
17,114
3,396
12,030
1,552
$
53,995
Special mention
—
249
—
—
591
—
—
840
Substandard
511
—
—
—
—
—
—
511
Nonaccrual
—
—
—
—
—
—
—
—
Total owner occupied
2,432
11,455
6,776
17,114
3,987
12,030
1,552
55,346
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
480
6,480
5,303
3,079
1,299
14,437
4,132
35,210
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total hotel/motel
480
6,480
5,303
3,079
1,299
14,437
4,132
35,210
Current period gross charge-offs
—
—
—
—
—
—
—
—
Table of Contents
18
Year of Origination
2024
2023
2022
2021
2020
Prior to
2020
Revolving
Loans
Total
Loans
(Dollars in thousands)
December 31, 2024:
Multi-family
Pass
3,739
6,041
17,037
1,863
3,493
6,400
4,983
43,556
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Nonaccrual
—
—
—
—
—
—
—
—
Total multi-family
3,739
6,041
17,037
1,863
3,493
6,400
4,983
43,556
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
43,753
21,085
32,521
21,249
16,743
16,289
4,120
155,760
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
120
—
—
120
Nonaccrual
—
—
—
—
—
—
—
—
Total other
43,753
21,085
32,521
21,249
16,863
16,289
4,120
155,880
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
5,885
18,389
18,434
2,466
2,565
10,590
808
59,137
Special mention
243
—
—
—
2
486
—
731
Substandard
—
—
—
—
—
531
—
531
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer mortgage
6,128
18,389
18,434
2,466
2,567
11,607
808
60,399
Current period gross charge-offs
—
—
—
—
—
61
—
61
Investment property
Pass
10,339
10,824
10,651
8,305
11,435
4,794
1,317
57,665
Special mention
—
—
—
—
—
—
—
—
Substandard
278
40
93
9
143
—
—
563
Nonaccrual
—
—
—
—
—
—
—
—
Total investment property
10,617
10,864
10,744
8,314
11,578
4,794
1,317
58,228
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
5,015
2,057
1,911
296
90
113
67
9,549
Special mention
—
9
—
9
—
—
—
18
Substandard
39
15
10
—
—
—
—
64
Nonaccrual
—
—
—
—
—
—
—
—
Total consumer installment
5,054
2,081
1,921
305
90
113
67
9,631
Current period gross charge-offs
25
42
42
1
—
4
—
114
Total loans
Pass
113,566
112,867
117,625
65,843
45,114
81,746
22,993
559,754
Special mention
292
332
—
9
593
486
—
1,712
Substandard
878
76
284
16
263
531
—
2,048
Nonaccrual
404
99
—
—
—
—
—
503
Total loans
$
115,140
113,374
117,909
65,868
45,970
82,763
22,993
$
564,017
Total current period gross charge-offs
$
25
42
51
1
—
65
—
184
Table of Contents
19
Allowance for Credit Losses
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)
2025
2024
Provision for credit losses:
Loans
$
(57)
$
285
Reserve for unfunded commitments
47
49
Total provision for credit
losses
$
(10)
$
334
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, 2025:
Beginning balance
$
1,244
1,059
3,842
588
138
$
6,871
Charge-offs
(99)
—
—
(1)
—
(100)
Recoveries
28
—
—
2
6
36
Net (charge-offs) recoveries
(71)
—
—
1
6
(64)
Provision for credit losses
46
342
(689)
272
(28)
(57)
Ending balance
$
1,219
1,401
3,153
861
116
$
6,750
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
The following table presents the amortized cost basis of collateral dependent loans,
which are individually evaluated to
determine expected credit losses for the respective periods:
Business
(Dollars in thousands)
Real Estate
Assets
Total Loans
March 31, 2025:
Construction and land development
$
404
—
$
404
Total
$
404
—
$
404
December 31, 2024:
Commercial and industrial
$
—
99
$
99
Construction and land development
$
404
—
$
404
Total
$
404
99
$
503
Table of Contents
20
The following table summarizes the Company’s
nonaccrual loans by major categories for the respective periods.
(Dollars in thousands)
No Allowance
With an Allowance
Total
March 31, 2025
Commercial and industrial
$
—
3
3
Construction and land development
—
404
404
Residential real estate
—
113
113
Total
$
—
520
520
December 31, 2024
Commercial and industrial
$
—
99
99
Construction and land development
404
—
404
Total
$
404
99
503
NOTE 5: 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.
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.
The change in amortized MSRs and the related valuation allowance
for the quarters ended March 31, 2025 and 2024 are
presented below.
Quarter ended March 31,
(Dollars in thousands)
2025
2024
MSRs, net:
Beginning balance
$
892
$
992
Additions, net
6
12
Amortization expense
(41)
(39)
Ending balance
$
857
$
965
Valuation
allowance included in MSRs, net:
Beginning of period
$
—
$
—
End of period
—
—
Fair value of amortized MSRs:
Beginning of period
$
2,204
$
2,382
End of period
2,201
2,378
Table of Contents
21
NOTE 6: 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, 2025, there were no
transfers between levels and no changes in valuation techniques for the
Company’s financial assets and liabilities.
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.
Table of Contents
22
The following table presents the balances of the assets and liabilities measured at fair
value on a recurring basis as of March
31, 2025 and December 31, 2024, 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, 2025:
Securities available-for-sale:
Agency obligations
$
52,919
—
52,919
—
Agency MBS
172,587
—
172,587
—
State and political subdivisions
16,962
—
16,962
—
Total securities available
-for-sale
242,468
—
242,468
—
Total
assets at fair value
$
242,468
—
242,468
—
December 31, 2024:
Securities available-for-sale:
Agency obligations
$
52,411
—
52,411
—
Agency MBS
173,676
—
173,676
—
State and political subdivisions
16,925
—
16,925
—
Total securities available
-for-sale
243,012
—
243,012
—
Total
assets at fair value
$
243,012
—
243,012
—
Assets and liabilities measured at fair value on a nonrecurring
basis
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value. Fair values of loans
held for sale are determined using
quoted secondary market prices for similar loans.
Loans held for sale are classified within Level 2 of the fair value
hierarchy.
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.
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.
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23
The following table presents the balances of the assets and liabilities measured at fair
value on a nonrecurring basis as of
March 31, 2025 and December 31, 2024, 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, 2025:
Loans held for sale
$
290
—
290
—
Loans, net
(1)
404
—
—
404
Other assets
(2)
857
—
—
857
Total assets at fair value
$
1,551
—
290
1,261
December 31, 2024:
Loans, net
(1)
$
503
—
—
503
Other assets
(2)
892
—
—
892
Total assets at fair value
$
1,395
—
—
1,395
(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, 2025 and December 31, 2024, 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,
2025 and December 31, 2024, 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, 2025:
Collateral dependent loans
$
404
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
857
Discounted cash flow
Prepayment speed or CPR
6.5
-
11.1
7.2
Discount rate
10.0
-
12.0
10.0
December 31, 2024:
Collateral dependent loans
$
503
Appraisal
Appraisal discounts
10.0
-
10.0
%
10.0
%
Mortgage servicing rights, net
892
Discounted cash flow
Prepayment speed or CPR
6.7
-
11.2
7.3
Discount rate
10.0
-
12.0
10.0
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.
Table of Contents
24
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, 2025 and December 31, 2024 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, 2025:
Financial Assets:
Loans, net (1)
$
553,900
$
531,696
—
—
$
531,696
Loans held for sale
290
296
—
296
—
Financial Liabilities:
Time Deposits
$
189,385
$
188,438
—
188,438
$
—
December 31, 2024:
Financial Assets:
Loans, net (1)
$
557,146
$
532,344
—
—
$
532,344
Financial Liabilities:
Time Deposits
$
191,247
$
190,636
—
190,636
$
—
(1) Represents loans, net of allowance for credit losses.
The fair value of loans was measured using an
exit price notion.
Table of Contents
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
General
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding
company registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding
Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and in
1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state member
bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled
the Bank since 1984.
As a bank holding
company, the Company
may diversify into a broader range of financial services and other business activities than
currently
are permitted to the Bank under applicable laws and regulations.
The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the
Bank.
The Bank has operated continuously since 1907 and currently conducts its business
primarily in East Alabama, including
Lee County and surrounding areas.
The Bank has been a member of the Federal Reserve System since April 1995.
The
Bank’s primary regulators are the
Federal Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”).
The Bank has been a member of the FHLB of Atlanta since 1991. Certain of the statements
made in this
discussion and analysis and elsewhere, including information incorporated
herein by reference to other documents, are
“forward-looking statements” as more fully described under “Special Cautionary
Notice Regarding Forward-Looking
Statements” below.
The following discussion and analysis is intended to provide a better understanding
of various factors related to the results
of operations and financial condition of the Company and the Bank.
This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed
consolidated financial statements and related
notes for the quarters and quarters ended March 31, 2025 and 2024,
as well as the information contained in our Annual
Report on Form 10-K for the year ended December 31, 2024.
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 forwar
d-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,” “seek” 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 tornadoes, 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, tariffs,
sanctions, the value of the U.S.
dollar against other currencies, or other events that may affect general
economic conditions, including inflation,
and consumer and business confidence;
Table of Contents
26
●
governmental monetary and fiscal policies, including taxes, federal
deficit spending and the debt required to fund
such spending, changes in monetary policies in response to inflation and changes
in prices and unemployment,
including changes in the Federal Reserve’s
target federal funds rate and changes in the Federal Reserve’s
holdings
of securities through quantitative tightening or easing; and the duration that the
Federal Reserve will keep its
targeted federal funds rates at or above current target
ranges in furtherance of its long term inflation target of 2%
and supporting maximum employment;
●
legislative, executive branch and regulatory changes, including changes
by executive orders, the possible
reorganization and/or consolidation of the bank regulatory
agencies, the SEC and/or the CFPB, changes in the
leadership and personnel, including reductions in the number and
experience of personnel, at the bank and
securities regulators and the CFPB, oversight by the Office of Management
and Budget of these agencies, freezes
on changes in regulations and interpretations, numerous new Executive Orders,
and the uncertain effects of all
these, including the costs and benefits of such changes;
●
the effects of the potential privatization of Fannie Mae and Freddie Mac
and their release from conservatorship on
the mortgage markets and us as an originator,
seller and servicer of residential mortgage loans;
●
recent Supreme Court rulings that may lead to more court challenges to regulations
and regulatory actions, which
may cause uncertainty,
wasted implementation costs and time by the industry,
and lengthy delays until ultimate
resolution;
●
changes in banking, securities and tax laws, regulations and rules and their
application by the regulators, including
capital and liquidity requirements, and changes in the scope and cost of FDIC insurance;
●
changes in accounting pronouncements and interpretations;
●
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 changes in 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 liquidity requirements,
internal controls, and
supervision and examination, as the Company and the Bank, and competition
from credit unions, which are not
subject to federal income taxation;
●
more permissive regulation and/or enforcement regarding digital assets, such as cyber
currency and stable coins
that creates additional competition to banks, and greater risks to the
payment systems that the banking industry,
including the Company,
relies on, and greater risks of fraud and theft of digital assets and their effects
on
customers, other financial institutions, including our counterparties, financial
stability and confidence in the
financial system, generally;
Table of Contents
27
●
the timing and amount of rental income from third parties from office
space in our Auburn Center headquarters
and in former office locations;
●
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 and in any of our
subsequent reports that we make
with the Securities and Exchange Commission (the “Commission” or
“SEC”) under the Exchange Act.
All written or oral forward-looking statements that we make or are
attributable to us are expressly qualified in their entirety
by this cautionary notice.
We have no obligation
and do not undertake to update, revise or correct any of the forward-
looking statements after the date of this report, or after the respective dates on which
such statements otherwise are made.
Summary of Results of Operations
Quarter ended March 31,
(Dollars in thousands, except per share data)
2025
2024
Net interest income (a)
$
7,062
$
6,677
Less: tax-equivalent adjustment
17
20
Net interest income (GAAP)
7,045
6,657
Noninterest income
747
887
Total revenue
7,792
7,544
Provision for credit losses
(10)
334
Noninterest expense
5,880
5,675
Income tax expense
392
164
Net earnings
$
1,530
$
1,371
Basic and diluted earnings per share
$
0.44
$
0.39
(a) Tax-equivalent.
See "Table 1 - Explanation
of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were
$1.5 million for the first quarter of 2025, compared to $1.4 million for the first
quarter of
2024.
Basic and diluted earnings per share were $0.44 per share for the first quarter of 2025, compared
to $0.39 per share
for the first quarter of 2024.
Net interest
income (tax-equivalent) was $7.1 million for the first quarter of
2025, a 6% increase compared to $6.7 million
for the first quarter of 2024.
This increase was primarily due to an increase in the Company’s
net interest margin and an
increase in average interest-earning assets.
The Company’s net interest margin
(tax-equivalent) was 3.20% for the first
quarter of 2025 compared to 3.04% for the first quarter of 2024.
This increase was primarily due to a more favorable asset
mix and improvements in our yields on interest-earning assets, which
outpaced increases
in the cost of our interest-bearing
deposits.
Average loans for
the first quarter of 2025 were $566.3 million, a 1% increase from the first quarter of 2024.
See
“Results of Operations – Average
Balance Sheet and Interest Rates” and “Net Interest Income and Margin”
below.
Table of Contents
28
At March 31, 2025, the Company’s
allowance for credit losses was $6.8 million, or 1.20% of total loans, compared to
$6.9
million, or 1.22% of total loans, at December 31, 2024, and $7.2
million, or 1.27% of total loans, at March 31, 2024.
The Company recorded a negative provision for credit losses during the
first quarter of 2025 of $10 thousand, compared to
a charge to provision for credit losses of $334 thousand
during the first quarter of 2024.
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,
the anticipated Alabama unemployment rate, which may
be affected by government policies, including monetary,
fiscal and other policies, including tariffs.
Noninterest income was $0.8 million in the first quarter of 2025,
compared to $0.9 million in the first quarter of 2024.
The
decrease was primarily related to a decrease in mortgage lending income
and other noninterest income.
Noninterest expense was $5.9 million in the first quarter of 2025,
compared to $5.7 million for the first quarter of 2024.
The increase was primarily related to routine increases in salaries and
benefits expense.
Income tax expense was $0.4 million for the first quarter of 2025
compared to $0.2 million for the first quarter of 2024.
The Company's effective tax rate for the first quarter of 2025
was 20.40%, compared to 10.68% in the first quarter of 2024.
The Company’s effective
income tax rate is affected principally by tax-exempt earnings
from the Company’s investments
in municipal securities and loans, bank-owned life insurance (“BOLI”), and
NMTCs.
The Company paid cash dividends of $0.27 per share in the first quarter of 2025
and 2024.
At March 31, 2025, 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 16.05%, a tier 1 leverage ratio of
10.52% and a common equity tier 1
(“CET1”) ratio of 15.04% at March 31, 2025.
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 as of and for the year ended December 31, 2024.
Table of Contents
29
RESULTS
OF OPERATIONS
Average Balance
Sheet and Interest Rates
Quarter ended March 31,
2025
2024
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Interest-earning assets:
Loans and loans held for sale
$
566,267
5.40%
$
560,942
5.01%
Securities - taxable
231,325
2.25%
257,229
2.21%
Securities - tax-exempt
9,263
3.72%
10,377
3.64%
Total securities
240,588
2.30%
267,606
2.26%
Federal funds sold
26,865
4.39%
17,980
5.57%
Interest bearing bank deposits
61,235
4.49%
37,790
5.37%
Total interest-earning
assets
894,955
4.48%
884,318
4.21%
Interest-bearing liabilities:
Deposits:
NOW
209,222
1.44%
196,648
1.31%
Savings and money market
242,701
0.84%
241,792
0.57%
Time Deposits
190,895
3.34%
199,562
3.20%
Total interest-bearing
deposits
642,818
1.78%
638,002
1.62%
Short-term borrowings
-
0.00%
1,592
0.51%
Total interest-bearing
liabilities
642,818
1.78%
639,594
1.62%
Net interest income and margin (tax-equivalent)
$
7,062
3.20%
$
6,677
3.04%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $7.1 million for the first quarter
of 2025, a 6% increase compared to $6.7 million
for the first quarter of 2024.
This increase was primarily due to an increase in the Company’s
net interest margin and
average interest-earning assets.
The Company’s net interest margin
(tax-equivalent) was 3.20% in the first quarter of 2025
compared to 3.04% in the first quarter of 2024.
This increase was primarily due to a more favorable asset mix and
improvements in our yields on interest-earning assets, which was partially offset
by higher market interest rates, which
increased our cost of funds, generally.
Since March 2022, the Federal Reserve increased the target federal funds rate
by
525 basis points before announcing a 50-basis points rate reduction on
September 18, 2024, its first decrease in rates since
its March 2020 COVID rate reduction,
followed by two 25 basis points reductions in October and December
2024.
At
March 31, 2025, the target federal funds rate ranged from 4.25% - 4.50%.
The tax-equivalent yield on total interest-earning assets increased by
27 basis points to 4.48% in the first quarter of 2025
compared to 4.21% in the first quarter of 2024.
This increase was primarily due to improved asset mix, and higher market
interest rates on interest earning assets.
The cost of interest-bearing liabilities increased to 178 basis points in
the first quarter ended of 2025, compared to 162 basis
points in the first quarter ended of 2024.
Average interest-bearing
deposits were $642.8 million during the first quarter of
2025,
a 1% increase compared to $638.0 million during the first quarter of 2024.
Average interest-bearing
deposits were
71% of average total deposits for both March 31, 2025 and 2024.
Our deposit costs may continue to increase as we
compete for deposit funds 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 2025.
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 the
remainder of 2025.
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30
Provision for Credit Losses
The Company recorded a negative provision for credit losses during the
first quarter of 2025 of $10 thousand, compared to
a charge to provision for credit losses of $334 thousand during
the first quarter of 2024.
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, the anticipated Alabama unemployment
rate, which may be affected by government policies, including
monetary,
fiscal and other policies, including tariffs.
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, 2025,
the Company’s allowance for credit
losses was $6.8 million, or 1.20% of total loans, compared to $6.9 million, or 1.22% of
total loans, at December 31, 2024, and $7.2 million, or 1.27% of total loans, at March 31, 2024.
Noninterest Income
Quarter ended March 31,
(Dollars in thousands)
2025
2024
Service charges on deposit accounts
$
155
$
156
Mortgage lending income
93
150
Bank-owned life insurance
105
102
Other
394
479
Total noninterest income
$
747
$
887
The Company’s mortgage
lending income includes income from 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.
The Company has elected to measure its MSRs under the amortization
method.
Servicing fee income is reported net of any
related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis.
Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type.
If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s
aggregate fair value, a valuation allowance for that group is established.
The valuation
allowance is adjusted as the fair value changes.
An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in
a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s
mortgage lending income.
Quarter ended March 31,
(Dollars in thousands)
2025
2024
Origination income, net
$
8
$
57
Servicing fees, net
85
93
Total mortgage lending
income
$
93
$
150
The Company’s mortgage
lending income typically fluctuates as mortgage interest rates, housing
sales and refinancings
change.
Origination income decreased in the first quarter of 2025 compared to the first quarter
of 2024 due to a decrease in
mortgage lending demand in our primary market area.
Other noninterest income was $0.4 million for the first quarter of 2025, compared
to $0.5 million for the first quarter of
2024.
The decrease in other noninterest income was primarily due to decreased
fee income on reciprocal deposits sold
through the Intrafi network.
Table of Contents
31
Noninterest Expense
Quarter ended March 31,
(Dollars in thousands)
2025
2024
Salaries and benefits
$
3,310
$
3,071
Net occupancy and equipment
714
763
Professional fees
287
326
Other
1,569
1,515
Total noninterest expense
$
5,880
$
5,675
The increase in salaries and benefits was primarily due to routine annual increases
in salaries and wages.
Income Tax
Expense
Income tax expense was $0.4 million during the first quarter of
2025 compared to $0.2 million during the first quarter of
2024.
The Company's effective tax rate for the first quarter of 2025
was 20.40%, compared to 10.68% in the first quarter of
2024.
The Company’s effective income
tax rate is affected principally by tax-exempt earnings from the Company’s
investments in municipal securities and loans, BOLI, and NMTCs.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $242.5 million at March 31, 2025,
compared to $243.0 million at December 31, 2024.
This decrease reflects a $6.2 million decrease in the amortized cost basis of securities
available-for-sale and an increase in
the fair value of securities available-for-sale of $5.7 million.
The average annualized tax-equivalent yields earned on total
securities were 2.30%
in the first quarter of 2025 and 2.26% in the first quarter of 2024.
Loans
2025
2024
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
59,061
63,274
61,510
77,627
78,920
Construction and land development
86,403
82,493
77,956
73,688
58,909
Commercial real estate
288,353
289,992
297,773
297,232
300,484
Residential real estate
117,500
118,627
118,582
119,427
118,240
Consumer installment
9,333
9,631
9,878
10,094
10,967
Total loans
$
560,650
564,017
565,699
578,068
567,520
Total loans were $560.7
million at March 31, 2025, a 1% decrease compared to $564.0 million at December
31, 2024.
Four loan categories represented the majority of the loan portfolio at March
31, 2025: commercial real estate (51%),
residential real estate (21%), construction and land development (15%)
and commercial and industrial (11%).
Approximately 21% of the Company’s
commercial real estate loans were classified as owner-occupied at March 31, 2025.
Within the residential real estate portfolio segment,
the Company had junior lien mortgages of approximately $11.3
million,
or 2% of total loans,
and $11.2 million, or 2%, of total loans at March 31, 2025
and December 31, 2024, respectively.
For
residential real estate mortgage loans with a consumer purpose, the Company
had no loans that required interest only
payments at March 31, 2025 and December 31, 2024. 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 5.40% in the first quarter
of 2025 and 5.01% in the first
quarter of 2024.
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32
The specific economic and credit risks associated with our loan portfolio include,
but are not limited to, the effects of
current economic conditions, including the levels of market interest rates, supply
chain disruptions, commercial office
occupancy levels, housing supply shortages, and effects of
inflation on our borrowers’ cash flows, real estate market sales
volumes and liquidity,
valuations used in making loans and evaluating collateral, availability and
cost of financing
properties, real estate industry concentrations, competitive pressures from
a wide range of other lenders, deterioration in
certain credits, interest rate fluctuations, reduced collateral values or
non-existent collateral, title defects, in accurate
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 which
may exist 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 $22.8 million.
Furthermore, we have an internal limit for aggregate credit exposure (loans
outstanding plus
unfunded commitments) to a single borrower of $20.5 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, 2025, the Bank had no loan
relationships exceeding our internal limit.
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.
Loans to borrowers in each of the following
classes exceeded 25% of the Bank’s
total risk-based capital at March 31, 2025 (and related balances at
December 31,
2024).
March 31,
December 31,
(Dollars in thousands)
2025
2024
Lessors of 1-4 family residential properties
$
57,841
$
58,228
Multi-family residential properties
43,198
43,556
Shopping centers/strip malls
36,731
37,349
Hotel/motel
34,607
35,210
Office Buildings
28,314
29,780
Allowance for Credit Losses
Our allowance for credit losses was approximately $6.8 million and $6.9
million at March 31, 2025 and December 31,
2024,
respectively, which our management
believed
to be adequate at each of the respective dates. Our allowance for credit
losses as a percentage of total loans was 1.20%
at March 31, 2025,
compared to 1.22% at December 31, 2024.
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, 2025, reasonable and supportable
periods of four quarters were utilized followed by an eight quarters straight
line reversion period to long term averages.
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33
A summary of the changes in the allowance for credit losses and certain
asset quality ratios for the first quarter of 2025 and
the previous four quarters is presented below.
2025
2024
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,871
6,876
7,142
7,215
6,863
Charge-offs:
Commercial and industrial
(99)
—
—
(9)
—
Residential real estate
(1)
(7)
(54)
—
—
Consumer installment
—
(31)
(40)
(19)
(24)
Total charge
-offs
(100)
(38)
(94)
(28)
(24)
Recoveries
36
54
34
19
91
Net (charge-offs) recoveries
(64)
16
(60)
(9)
67
Provision for credit losses - Loans
(57)
(21)
(206)
(64)
285
Ending balance
$
6,750
6,871
6,876
7,142
7,215
as a % of loans
1.20
%
1.22
1.22
1.24
1.27
as a % of nonperforming loans
1,298
%
1,366
887
900
822
Net charge-offs (recoveries) as % of average
loans (a)
0.05
%
(0.01)
0.04
0.01
(0.05)
(a) Net charge-offs (recoveries) are annualized.
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34
The allowance for credit losses by loan category for the first quarter of 2025 and the previous four
quarters is presented
below.
2025
2024
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
1,219
10.5
$
1,244
11.2
$
1,160
10.9
$
1,366
13.4
$
1,415
13.9
Construction and land
development
1,401
15.4
1,059
14.6
985
13.8
942
12.7
840
10.4
Commercial real estate
3,153
51.4
3,842
51.5
3,989
52.6
4,091
51.5
4,202
53.0
Residential real estate
861
21.0
588
21.0
595
21.0
603
20.7
613
20.8
Consumer installment
116
1.7
138
1.7
147
1.7
140
1.7
145
1.9
Total allowance for
credit losses
$
6,750
$
6,871
$
6,876
$
7,142
$
7,215
* Loan balance in each category expressed as a percentage of total loans.
Nonperforming Assets
At both March 31, 2025 and December 31, 2024, the Company had $0.5 million,
respectively, in nonperforming
assets.
The table below provides information concerning total nonperforming
assets and certain asset quality ratios for the first
quarter of 2025 and the previous four quarters.
2025
2024
First
Fourth
Third
Second
First
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
520
503
775
794
878
Total nonperforming
assets
$
520
503
775
794
878
as a % of loans and OREO
0.09
%
0.09
0.14
0.14
0.15
as a % of total assets
0.05
%
0.05
0.08
0.08
0.09
Nonperforming loans as a % of total loans
0.09
%
0.09
0.14
0.14
0.15
Accruing loans 90 days or more past due
$
77
—
—
—
—
The table below provides information concerning the composition of
nonaccrual loans for the first quarter of 2025 and the
previous four quarters.
2025
2024
First
Fourth
Third
Second
First
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
$
3
99
—
—
—
Construction and land development
404
404
—
—
—
Commercial real estate
—
—
735
753
765
Residential real estate
113
—
40
41
97
Consumer installment
—
—
—
—
16
Total nonaccrual
loans
$
520
503
775
794
878
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 $77 thousand in loans 90 days or more past due and still accruing
at March 31, 2025 compared to none
at
December 31, 2024.
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35
The Company had no OREO at March 31, 2025 or December 31, 2024.
Deposits
(In thousands)
2025
2024
Noninterest bearing demand
$
271,749
260,874
NOW
211,093
199,883
Money market
152,160
153,916
Savings
86,116
89,904
Certificates of deposit under $250,000
100,954
103,594
Certificates of deposit and other time deposits of $250,000 or more
88,431
87,653
Total deposits
$
910,503
895,824
Total deposits were $910.5
million at March 31, 2025, compared to $895.8 million at December 31, 2024.
Noninterest-
bearing deposits were $271.7 million, or 30% of total deposits, at March
31, 2025, compared to $260.9 million, or 29% of
total deposits at December 31, 2024.
At March 31, 2025 the Company had $64.7 million reciprocal deposits sold,
compared to $74.1 million at December 31, 2024.
The Company had no brokered deposits at March 31, 2025 and
December 31, 2024.
The average rate paid on total interest-bearing deposits was 1.78% in the first
quarter of 2025, compared to 1.62% in first
quarter of 2024.
At March 31, 2025, estimated uninsured deposits totaled $366.7
million, or 40% of total deposits, compared to $359.7
million, or 40% of total deposits at December 31, 2024.
The Bank participates 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 Company had reciprocal deposits on balance sheet of $10.0 million at March
31, 2025, compared to $6.9
million at December 31, 2024.
Uninsured amounts are estimated based on the portion of account balances in excess
of
FDIC insurance limits.
The Bank’s estimated uninsured
deposits at March 31, 2025 and December 31, 2024 include
approximately $221.8 million and $223.1 million, respectively,
of deposits of state, county and local governments that are
collateralized by securities having an equal fair value to such deposits.
Excluding estimated uninsured deposits of state,
county and local governments,
our estimated uninsured deposits would have been 16% and 15% of total deposits
at March
31, 2025 and December 31, 2024, respectively.
The estimated uninsured time deposits by maturity as of March 31, 2025
is presented below.
(Dollars in thousands)
March 31, 2025
Maturity of:
3 months or less
$
23,844
Over 3 months through 6 months
13,022
Over 6 months through 12 months
19,381
Over 12 months
2,434
Total estimated uninsured
time deposits
$
58,681
Other Borrowings and Available
Credit
The Company had no long-term debt at March 31, 2025 and December 31, 2024.
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 $65.2 million with no federal funds borrowings
outstanding at March 31, 2025, and December 31,
2024, respectively.
The Company had no securities sold under agreements to repurchase,
which generally have been
entered into on behalf of certain customers at both March 31, 2025
and December 31, 2024.
The Bank is eligible to borrow
from the FRB’s discount window,
but had no such borrowings at March 31, 2025 and December 31, 2024.
The Bank never
borrowed from the Federal Reserve’s
Bank Term Facility Program
(“BTFP”), which 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.
FHLB advances include both fixed and variable rates and are taken out
with varying
maturities, and are generally secured by eligible assets.
The Bank had no borrowings under FHLB of Atlanta’s
advance
program at March 31, 2025 and December 31, 2024, respectively.
At those dates, the Bank had $293.1 million and $296.9
million, respectively,
of available lines of credit at the FHLB of Atlanta.
The Bank had no short-term borrowings in the first quarter of 2025.
The average rate paid on the Bank’s short
-term
borrowings was 0.51%
in the first quarter of 2024.
The Bank had average short term borrowings of $1.6 million during the
first quarter of 2024.
CAPITAL ADEQUACY
The Company’s consolidated
stockholders’ equity was $83.1 million and $78.3 million as of March 31,
2025 and
December 31, 2024, respectively.
The increase from December 31, 2024 was primarily driven by
net earnings of $1.5
million and other comprehensive income due to the change in unrealized
gains/losses on securities available-for-sale, net of
tax of $4.2 million, partially offset by cash dividends of $0.9 million.
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 2025 and first quarter of 2024.
Federal Reserve rules require a capital conservation buffer
of CET1 capital of 2.5% that is added to the minimum
requirements for capital adequacy purposes.
A banking organization with a capital conservation buffer
of 2.5% or less is
subject to limitation on “distributions” from “eligible retained earnings”,
including dividend payments, share repurchases
and certain discretionary bonus payments.
“eligible retained income” is the greater of (i) net income for the four preceding
quarters, net of distributions and associated tax effects
not reflected in net income; and (ii) the average of all net income
over the preceding four quarters.
The 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 10.52
%, CET1 risk-based capital ratio was 15.04%, tier 1
risk-based capital ratio was 15.04%, and total risk-based capital ratio was 16.05%
at March 31, 2025. 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 8.05% at March 31, 2025.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage
assets and liabilities to provide a satisfactory,
consistent level of profitability within
the framework of established liquidity,
loan, investment, borrowing, and capital policies. The Bank’s
Asset Liability
Management Committee (“ALCO”) is charged with the
responsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two
critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from
fluctuations in interest rates. ALCO
measures and evaluates interest rate risk so that the Bank can meet customer
demands for various types of loans and
deposits. Measurements used to help manage interest rate sensitivity include
an earnings simulation model and an economic
value of equity (“EVE”) model.
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37
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, 2025, 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, 2025, our EVE model indicated that we were in compliance
with our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our
net interest income will be affected by
changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates.
In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions.
Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types
of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable
-rate mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
Prepayments
and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of
certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest
rates or economic stress, which may
differ across industries and economic sectors. ALCO reviews each
of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory,
consistent levels of profitability within the framework of the
Company’s established liquidity,
loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve
the balance between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing
to meet the credit and deposit
needs of our customers. From time to time, the Company also may
enter into back-to-back interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify
as derivatives, but are not
designated as hedging instruments. At March 31, 2025 and December 31, 2024,
the Company had no derivative contracts
designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
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38
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,
and Federal Reserve Regulation W restricts Company borrowings from, and other
transactions with, the Bank.
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, 2025, the Bank had no FHLB of Atlanta advances
outstanding and available credit from the FHLB
of $293.1 million. At March 31, 2025, the Bank also had $65.2 million
of available federal funds lines with no borrowings
outstanding. Primary uses of funds include repayment of maturing obligations
and growing the loan portfolio.
The
Company also has access to the FRB discount window.
Management believes that the Company and the Bank have adequate
sources of liquidity to meet all their respective known
contractual obligations and unfunded commitments, including loan
commitments and reasonably
expected borrower,
depositor, and creditor requirements over
the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual
Obligations
At March 31, 2025, the Bank had outstanding standby letters of credit of $0.8
million and unfunded loan commitments
outstanding of $70.6 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 use its cash and
cash equivalents,
deposits with other banks, 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
customary 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 and compliance with applicable
federal, state, and local laws, among other
matters.
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39
As of March 31, 2025, the aggregate unpaid principal balance of residential
mortgage loans, which we have originated and
sold, but retained the servicing rights, was $200.1 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 our 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 2025 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, 2025.
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.
Our mortgage servicing agreements
generally specify our standards
of responsibility as servicer and provide protection
against expenses and liabilities incurred by us when acting in compliance with these
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, 2025, 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 was current as of such date.
We maintain ongoing
communications with our mortgage purchasers 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 increase our noninterest expenses. It also can affect
our customers’ behaviors, the mix of deposits between
interest and noninterest bearing, the levels of 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 and amounts at which our various assets and liabilities, respectively,
reprice
in response to interest rate changes. The yield curve was inverted during most of 2024,
until September, when it began to
normalize. An inverted yield curve means shorter term interest rates are higher
than longer term 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, and may adversely affect unemployment
rates. Inflation and related changes in market interest rates, as the Federal Reserve
maintains interest rates to meet its
longer-term inflation goal of 2%, also can adversely affect the values
and liquidity of our loans and securities, the value of
collateral securing loans to our borrowers, and the success of our borrowers and
such borrowers’ available cash to pay
interest on and principal of our loans to them.
Beginning in September 2024, in light of inflation moderating, the FOMC had three reductions
in its target federal funds
rate range totaling 100 basis points to 4.25% to 4.50%. While the FOMC reaffirmed
its target inflation rate of 2% over the
longer run, it indicated it was “recalibrating” its policy based on decreas
ing inflation rates and the risks of increasing
unemployment, but would act on incoming data, the evolving outlook
and the balance of the risks of inflation and
unemployment levels. In the future, the Federal Reserve could further
decrease target interest rates, or could increase such
target rates, depending on the data and its outlook.
The FOMC stated on March 19, 2025 that its “assessments will take
into account a wide range of information, including readings on labor market
conditions, inflation pressures and inflation
expectations, and financial and international developments.”
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
ASU 2023-09 seeks to 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.
2025
2024
First
Fourth
Third
Second
First
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
7,045
6,969
6,790
6,709
6,657
Tax-equivalent adjustment
17
19
21
19
20
Net interest income (Tax
-equivalent)
$
7,062
6,988
6,811
6,728
6,677
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42
Table 2
- Selected Quarterly Financial Data
2025
2024
First
Fourth
Third
Second
First
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
7,062
6,988
6,811
6,728
6,677
Less: tax-equivalent adjustment
17
19
21
19
20
Net interest income (GAAP)
7,045
6,969
6,790
6,709
6,657
Noninterest income
747
845
846
896
887
Total revenue
7,792
7,814
7,636
7,605
7,544
Provision for credit losses
(10)
(48)
(127)
(123)
334
Noninterest expense
5,880
5,472
5,500
5,519
5,675
Income tax expense
392
830
531
475
164
Net earnings
$
1,530
1,560
1,732
1,734
1,371
Per share data:
Basic and diluted net earnings
$
0.44
0.45
0.50
0.50
0.39
Cash dividends declared
0.27
0.27
0.27
0.27
0.27
Weighted average shares outstanding:
Basic and diluted
3,493,699
3,493,699
3,493,699
3,493,699
3,493,663
Shares outstanding, at period end
3,493,699
3,493,699
3,493,699
3,493,699
3,493,699
Book value
$
23.79
22.41
24.14
21.53
21.32
Common stock price
High
$
23.37
24.57
24.35
19.25
21.55
Low
20.36
20.06
17.50
16.63
18.82
Period end:
21.59
23.49
22.90
18.29
19.27
To earnings ratio (b)
11.42
12.77
91.60
101.61
83.78
To book value
91
%
105
95
85
90
Performance ratios:
Annualized return on average equity
7.83
%
7.49
9.10
9.63
7.13
Annualized return on average assets
0.62
%
0.63
0.71
0.71
0.56
Dividend payout ratio
61.36
%
60.00
54.00
54.00
69.23
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.20
%
1.22
1.22
1.24
1.27
Nonperforming loans
1,298
%
1,366
887
900
822
Nonperforming assets as a % of:
Loans and OREO
0.09
%
0.09
0.14
0.14
0.15
Total assets
0.05
%
0.05
0.08
0.08
0.09
Nonperforming loans as a % of total loans
0.09
%
0.09
0.14
0.14
0.15
Annualized net charge-offs (recoveries) as % of average loans
0.05
%
(0.01)
0.04
0.01
(0.05)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.04
%
14.80
14.75
14.47
14.62
Tier 1 risk-based capital ratio
15.04
%
14.80
14.75
14.47
14.62
Total risk-based capital ratio
16.05
%
15.81
15.76
15.49
15.69
Tier 1 leverage ratio
10.52
%
10.49
10.43
10.39
10.34
Other financial data:
Net interest margin (a)
3.20
%
3.09
3.05
3.06
3.04
Effective income tax rate
20.40
%
34.73
23.46
21.50
10.68
Efficiency ratio (d)
75.30
%
69.86
71.83
72.39
75.03
Selected average balances:
Securities available-for-sale
$
240,588
255,168
251,723
258,228
267,606
Loans
566,082
567,634
571,651
573,443
560,757
Total assets
987,272
991,275
982,656
978,107
976,930
Total deposits
906,805
904,605
904,860
900,673
897,051
Total stockholders’ equity
78,158
83,325
76,113
72,059
76,948
Selected period end balances:
Securities available-for-sale
$
242,468
243,012
258,285
254,359
260,770
Loans
560,650
564,017
565,699
578,068
567,520
Allowance for credit losses
6,750
6,871
6,876
7,142
7,215
Total assets
996,786
977,324
990,143
1,025,054
979,039
Total deposits
910,503
895,824
901,724
946,405
899,673
Total stockholders’ equity
83,115
78,292
84,336
75,209
74,489
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Calculated by dividing period end share price by
earnings per share for the previous four quarters.
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary, AuburnBank.
(d) 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.
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43
Table 3
- Average
Balances and Net Interest Income Analysis
Quarter ended March 31,
2025
2024
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)
$
566,267
$
7,543
5.40%
$
560,942
$
6,990
5.01%
Securities - taxable (2)
231,325
1,281
2.25%
257,229
1,411
2.21%
Securities - tax-exempt (2)(3)
9,263
85
3.72%
10,377
94
3.64%
Total securities
240,588
1,366
2.30%
267,606
1,505
2.26%
Federal funds sold
26,865
291
4.39%
17,980
249
5.57%
Interest bearing bank deposits
61,235
678
4.49%
37,790
505
5.37%
Total interest-earning assets
894,955
$
9,878
4.48%
884,318
$
9,249
4.21%
Cash and due from banks
18,077
17,772
Other assets
74,240
74,840
Total assets
$
987,272
$
976,930
Interest-bearing liabilities:
Deposits:
NOW
$
209,222
$
742
1.44%
$
196,648
$
640
1.31%
Savings and money market
242,701
502
0.84%
241,792
340
0.57%
Time deposits
190,895
1,572
3.34%
199,562
1,590
3.20%
Total interest-bearing deposits
642,818
2,816
1.78%
638,002
2,570
1.62%
Short-term borrowings
—
—
0.00%
1,592
2
0.51%
Total interest-bearing liabilities
642,818
$
2,816
1.78%
639,594
$
2,572
1.62%
Noninterest-bearing deposits
263,987
259,050
Other liabilities
2,309
1,338
Stockholders' equity
78,158
76,948
Total liabilities and stockholders' equity
$
987,272
$
976,930
Net interest income and margin (tax-equivalent)
$
7,062
3.20%
$
6,677
3.04%
(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, 2024.
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, 2024,
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 sell any common stock or other equity securities during
the first quarter of 2025.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
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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 2, 2025
By:
/s/ David A. Hedges
David A. Hedges
President and CEO
Date:
May 2, 2025
By:
/s/
W.
James Walker,
IV
W. James Walker,
IV
Senior Vice President and
Chief Financial Officer