Auburn National Bancorporation, Inc 10-Q for FY2023 Q2
Auburn National Bancorporation, Inc (AUBN)
10-Q
2023-08-08
For: 2023-06-30
View Original
Added on
April 08, 2026
About this 10-Q
Auburn National Bancorporation, Inc filed this 10-Q on August 8, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $154K
- up 5.5% from $146K a year earlier
- Net income
- $1.93M
- up 7.1% from net income of $1.8M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
☒
For the quarterly period ended
☐
For the transition period __________ to __________
Commission File Number:
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
)
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
☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
Yes
☒
☐
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
☐
☒
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
☐
☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
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 August 7, 2023
Common Stock, $0.01 par value per share
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
INDEX
PAGE
Item 1
3
4
5
6
7
8
Item 2
29
49
50
51
52
Table 5 – Average Balances and Net Interest Income Analysis – for the six months ended June 30, 2023
53
54
55
Item 3
56
Item 4
56
Item 1
56
Item 1A
56
Item 2
57
Item 3
57
Item 4
57
Item 5
57
Item 6
58
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30,
December 31,
(Dollars in thousands, except share data)
2023
2022
Assets:
Cash and due from banks
$
$
Federal funds sold
Interest-bearing bank deposits
Cash and cash equivalents
Securities available-for-sale
Loans
Allowance for credit losses
(6,634 )
(5,765 )
Loans, net
Premises and equipment, net
Bank-owned life insurance
Other assets
Total assets
$
$
Liabilities:
Deposits:
Noninterest-bearing
$
$
Interest-bearing
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Accrued expenses and other liabilities
Total liabilities
Stockholders' equity:
Preferred stock of $
no shares issued
Common stock of $
issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
(39,072 )
(40,920 )
Less treasury stock, at cost -
and December 31, 2022, respectively
(11,572 )
(11,475 )
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
See accompanying notes to consolidated financial statements
4
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Interest income:
Loans, including fees
$
$
$
$
Securities:
Taxable
Tax-exempt
Federal funds sold and interest-bearing bank deposits
Total interest income
Interest expense:
Deposits
Short-term borrowings
Total interest expense
Net interest income
Provision for credit losses
(362 )
(296 )
(250 )
Net interest income after provision for credit losses
Noninterest income:
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Other
Total noninterest income
Noninterest expense:
Salaries and benefits
Net occupancy and equipment
Professional fees
Other
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
$
$
$
$
Net earnings per share:
Basic and diluted
$
$
$
$
Weighted average shares outstanding:
Basic and diluted
See accompanying notes to consolidated financial statements
5
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Net earnings
$
$
$
$
Other comprehensive (loss) income, net of tax:
Unrealized net (loss) gain on securities
(3,615 )
(10,964 )
(29,310 )
Other comprehensive (loss) income
(3,615 )
(10,964 )
(29,310 )
Comprehensive (loss) income
$
(1,687 )
$
(9,163 )
$
$
(25,428 )
See accompanying notes to consolidated financial statements
6
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Unaudited)
Accumulated
Common
Additional
other
Shares
Common
paid-in
Retained
comprehensive
Treasury
(Dollars in thousands, except share data)
Outstanding
Stock
capital
earnings
(loss) income
stock
Total
Quarter ended June 30, 2023
Balance, March 31, 2023
$
$
$
$
(35,457 )
$
(11,538 )
$
Net earnings
—
—
—
—
—
1,928
Other comprehensive loss
—
—
—
—
(3,615 )
—
(3,615 )
Cash dividends paid ($
—
—
—
(945 )
—
—
(945 )
Stock repurchases
(1,577 )
—
—
—
—
(35 )
(35 )
Sale of treasury stock
—
—
—
Balance, June 30, 2023
$
$
$
$
(39,072 )
$
(11,572 )
$
Quarter ended June 30, 2022
Balance, March 31, 2022
$
$
$
$
(17,455 )
$
(11,091 )
$
Net earnings
—
—
—
—
—
Other comprehensive loss
—
—
—
—
(10,964 )
—
(10,964 )
Cash dividends paid ($
—
—
—
(930 )
—
—
(930 )
Stock repurchases
(7,081 )
—
—
—
—
(212 )
(212 )
Sale of treasury stock
—
—
—
—
Balance, June 30, 2022
$
$
$
$
(28,419 )
$
(11,303 )
$
Six months ended June 30,2023
Balance, December 31, 2022
$
$
$
$
(40,920 )
$
(11,475 )
$
Cumulative effect of change in accounting
standard
—
—
—
(821 )
—
—
(821)
Net earnings
—
—
—
—
—
3,892
Other comprehensive income
—
—
—
—
—
1,848
Cash dividends paid ($
—
—
—
(1,890 )
—
—
(1,890 )
Stock repurchases
(4,225 )
—
—
—
—
(99 )
(99 )
Sale of treasury stock
—
—
—
Balance, June 30, 2023
$
$
$
$
(39,072 )
$
(11,572 )
$
Six months ended June 30,2022
Balance, December 31, 2021
$
$
$
$
$
(10,972 )
$
Net earnings
—
—
—
—
—
3,882
Other comprehensive loss
—
—
—
—
(29,310 )
—
(29,310 )
Cash dividends paid ($
—
—
—
(1,862 )
—
—
(1,862 )
Stock repurchases
(10,640 )
—
—
—
—
(331 )
(331 )
Sale of treasury stock
—
—
—
—
Balance, June 30, 2022
$
$
$
$
(28,419 )
$
(11,303 )
$
See accompanying notes to consolidated financial statements
7
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
(Dollars in thousands)
2023
2022
Cash flows from operating activities:
Net earnings
$
$
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses
(296 )
(250 )
Depreciation and amortization
Premium amortization and discount accretion, net
Net gain on sale of loans held for sale
(61 )
(349 )
Net gain on other real estate owned
—
(162 )
Loans originated for sale
(1,219 )
(8,027 )
Proceeds from sale of loans
Increase in cash surrender value of bank-owned life insurance
(172 )
(196 )
Income recognized from death benefit on bank-owned life insurance
(52 )
—
Net decrease (increase) in other assets
(9,152 )
Net (decrease) increase in accrued expenses and other liabilities
(1,401 )
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from prepayments and maturities of securities available-for-sale
Purchase of securities available-for-sale
(77,776 )
(Increase) decrease in loans, net
(15,812 )
Net purchases of premises and equipment
(40 )
(4,059 )
Proceeds from bank-owned life insurance death benefit
—
Decrease (increase) in FHLB stock
(74 )
Proceeds from sale of other real estate owned
—
Net cash used in investing activities
(3,125 )
(34,284 )
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits
(12,892 )
(4,924 )
Net increase in interest-bearing deposits
Net (decrease) increase in federal funds purchased and securities sold
under agreements to repurchase
(384 )
Stock repurchases
(99 )
(331 )
Dividends paid
(1,890 )
(1,862 )
Net cash (used in) provided by financing activities
(1,968 )
Net change in cash and cash equivalents
(23,145 )
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
$
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
$
Income taxes
See accompanying notes to consolidated financial statements
8
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Auburn National Bancorporation, Inc. (the “Company”) provides a full range of banking services to individuals and
commercial customers in Lee County, Alabama and surrounding areas through its wholly owned subsidiary, AuburnBank
(the “Bank”). The Company does not have any segments other than banking that are considered material.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not
include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited
consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair
statement of the financial position and the results of operations for all periods presented. All such adjustments are of a
normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of
operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further
information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2022.
The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Significant intercompany transactions and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term
include the determination of allowance for credit losses investment securities, the determination of the allowance for credit
losses on loans, fair value of financial instruments, and the valuation of deferred tax assets and other real estate owned
(“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update (“ASU” or “updates”) 2014-09,
from Contracts with Customers
, codified at
606. The Company adopted ASC
606 using the modified retrospective transition method. The majority of the Company’s revenue stream is generated from
interest income on loans and securities which are outside the scope of ASC 606.
The Company’s sources of income that fall within the scope of ASC 606 include service charges on deposits, interchange
fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. The
following is a summary of the revenue streams that fall within the scope of ASC 606:
●
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either
(i) transaction-based, for which the performance obligations are satisfied when the individual transaction is
processed, or (ii) set periodic service charges, for which the performance obligations are satisfied over the period
the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic
service charges are recognized over the service period.
●
Gains on sales of OREO
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale
exists, including a determination that the institution will collect substantially all of the consideration to which it is
entitled. In addition to the loan-to-value ratio, where the seller provides the purchaser with financing, the analysis
is based on various other factors, including the credit quality of the purchaser, the structure of the loan, and any
other factors that we believe may affect collectability.
9
Subsequent Events
The Company has evaluated the effects of events and transactions through the date of this filing that have occurred
subsequent to June 30, 2023. The Company does not believe there were any material subsequent events during this period
that would have required further recognition or disclosure in the unaudited consolidated financial statements included in
this report.
Reclassifications
Certain amounts reported in prior periods have been reclassified to conform to the current -period presentation. These
reclassifications had no material effect on the Company’s previously reported net earnings or total stockholders’ equity.
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an
estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current
conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost,
including loan receivables and held-to-maturity debt securities, and some off -balance sheet credit exposures such as
unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount
expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the
modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of CECL on January 1, 2023 included an increase in the allowance for credit
losses on loans of $
for credit losses on unfunded loan commitments of $
recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023 for the cumulative effect of adopting
CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be
reported in accordance with previously applicable accounting standards.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have
any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined
that an allowance for credit losses on available for sale securities was not deemed material.
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures” on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan
refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU
2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated financial statements.
10
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in
the process of collection, or when management believes, after considering economic and business conditions and collection
efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days
after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net
amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from
both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company’s loan loss estimation process includes procedures to appropriately consider the unique characteristics of its
respective loan segments (commercial and industrial, construction and land development, commercial real estate,
multifamily, residential real estate, and consumer loans). These segments are further disaggregated into loan classes, the
level at which credit quality is monitored. See Note 5, Loans and Allowance for Credit Losses, for additional information
about our loan portfolio.
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model for each loan segment, except consumer
loans. The weighted average remaining life method is used to estimate credit loss assumptions for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering the forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic factors, and LGD, which is the estimate
of the amount of net loss in the event of default. This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis. The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial, construction and land development,
commercial real estate, multifamily, and residential real estate loans. In addition, forecasted changes in the Alabama home
price index is considered in the model for construction and land development and residential real estate loans; forecasted
changes in the national commercial real estate (“CRE”) price index is considered in the model for commercial real estate
and multifamily loans; and forecasted changes in the Alabama gross state product is considered in the model for
multifamily loans. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to
predict quarterly rates of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments and principal
payments (“curtailments”) when appropriate. Management's determination of the contract term excludes expected
extensions, renewals, and modifications unless the extension or renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company. To the extent the lives of the loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion period.
11
The weighted average remaining life method was deemed most appropriate for the consumer loan segment because
consumer loans contain many different payment structures, payment streams and collateral. The weighted average
remaining life method uses an annual charge-off rate over several vintages to estimate credit losses. The average annual
charge-off rate is applied to the contractual term adjusted for prepayments.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are
believed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may
increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan
review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in
underlying collateral, external factors and economic conditions not already captured.
Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that
foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the
estimated fair value of collateral held at the reporting date, adjusted for selling costs as appropriate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s consolidated
statements of earnings. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment
at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77 thousand for the adoption of
ASC 326. At June 30, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities
was $
Provision for Credit Losses
The composition of the provision for (recoveries of) credit losses for the respective periods is presented below.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Provision for credit losses:
Loans
$
(331 )
$
—
$
(291 )
$
(250 )
Reserve for unfunded commitments (1)
(31 )
—
(5 )
—
Total provision for credit losses
$
(362 )
$
—
$
(296 )
$
(250 )
(1)
Reserve requirements for unfunded commitments were reported as a component of other noninterest expense prior
to the adoption of ASC 326.
12
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for
the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of
securities or other rights for, or convertible into, shares of the Company’s common stock. At June 30, 2023 and 2022,
respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods are presented below
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except share and per share data)
2023
2022
2023
2022
Basic and diluted:
Net earnings
$
$
$
$
Weighted average common shares outstanding
Net earnings per share
$
$
$
$
NOTE 3: VARIABLE INTEREST ENTITIES
Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or other legal structure that does not have
equity investors with substantive or proportional voting rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities.
At June 30, 2023, the Company did not have any consolidated VIEs to disclose but did have one nonconsolidated VIE,
discussed below.
New Markets Tax Credit Investment
The New Markets Tax Credit (“NMTC”) program provides federal tax incentives to investors to make investments in
distressed communities and promotes economic improvement through the development of successful businesses in these
communities. The NMTC is available to investors over seven years and is subject to recapture if certain events occur
during such period. At June 30, 2023 and December 31, 2022, respectively, the Company had one such investment in the
amounts of $1.9 million and $2.1 million, respectively, which was included in other assets in the consolidated balance
sheets. The Company’s equity investment in the NMTC entity meets the definition of a VIE. While the Company’s
investment exceeds 50% of the outstanding equity interests, the Company does not consolidate the VIE because it does not
meet the characteristics of a primary beneficiary since the Company lacks the power to direct the activities of the VIE.
(Dollars in thousands)
Maximum
Loss Exposure
Asset Recognized
Classification
Type:
New Markets Tax Credit investment
$
$
Other assets
13
NOTE 4: SECURITIES
At June 30, 2023 and December 31, 2022, respectively, all securities within the scope of ASC 320,
Investments – Debt and
Equity Securities,
were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale
by contractual maturity at June 30, 2023 and December 31, 2022, respectively, are presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
June 30, 2023
Agency obligations (a)
$
$
Agency MBS (a)
State and political subdivisions
Total available-for-sale
$
$
December 31, 2022
Agency obligations (a)
$
$
Agency MBS (a)
State and political subdivisions
Total available-for-sale
$
$
(a) Includes securities issued by U.S. government agencies or government-sponsored entities.
Securities with aggregate fair values of $
respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan
Bank of Atlanta (“FHLB of Atlanta”) advances, and for other purposes required or permitted by law.
Included in other assets on the accompanying consolidated balance sheets are non-marketable equity investments. The
carrying amounts of non-marketable equity investments were $
respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve Bank of Atlanta
(“FRB”) stock, and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at June 30, 2023 and December 31, 2022, respectively, segregated
by those securities that have been in an unrealized loss position for less than 12 months and 12 months or longer, are
presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
June 30, 2023:
Agency obligations
$
$
Agency MBS
State and political subdivisions
Total
$
$
December 31, 2022:
Agency obligations
$
$
Agency MBS
State and political subdivisions
Total
$
$
14
For the securities in the previous table, the Company assesses whether or not it intends to sell or is more likely than not that
the Company will be required to sell the securities before recovery of the amortized cost basis, which may be maturity.
Because the Company currently does not intend to sell those securities that have an unrealized loss at June 30, 2023 and it
is not more-likely-than-not that the Company will be required to sell the security before recovery of their amortized cost
bases, which may be maturity, the Company has determined that no provision for credit loss is necessary. In addition, the
Company evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit
deterioration, which would require the recognition of a provision to increase the allowance for credit losses. Such
evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings
and any other known adverse conditions related to the specific security. The unrealized losses associated with available-for-
sale securities at June 30, 2023 are driven by changes in market interest rates and are not due to the credit quality of the
securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at
June 30, 2023. These securities will continue to be monitored as a part of the Company's ongoing evaluation of credit
quality. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable
that the issuers can make all contractual principal and interest payments.
Realized Gains and Losses
The Company had no realized gains and losses on sale of securities during the quarter and six months ended June 30, 2023
and 2022, respectively.
NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES
June 30,
December 31,
(Dollars in thousands)
2023
2022
Commercial and industrial
$
$
Construction and land development
Commercial real estate:
Owner occupied
Hotel/motel
37,511
Multi-family
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total Loans
$
$
Loans secured by real estate were approximately
86.4%
2023, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding
areas.
The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for
determining its allowance for credit losses. As part of the Company’s quarterly assessment of the allowance, the loan
portfolio included the following portfolio segments: commercial and industrial, construction and land development,
commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio
segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute,
risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk.
The following describes the risk characteristics relevant to each of the portfolio segments and classes.
Commercial and industrial (“C&I”) —
includes loans to finance business operations, equipment purchases, or other needs
for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural
production. Generally, the primary source of repayment is the cash flow from business operations and activities of the
borrower.
15
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
owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary
source of repayment is the cash flow from business operations and activities of the borrower, who owns the
property.
●
Hotel/motel
– includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon
income generated from the hotel/motel securing the loan. The underwriting of these loans takes into consideration
the occupancy and rental rates, as well as the financial health of the borrower.
●
Multi-family
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
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
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
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.
16
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of June
30, 2023 and December 31, 2022.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
June 30, 2023:
Commercial and industrial
$
$
Construction and land development
—
Commercial real estate:
Owner occupied
67,679
Hotel/motel
—
Multi-family
44,431
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
$
$
December 31, 2022:
Commercial and industrial
$
$
Construction and land development
—
Commercial real estate:
Owner occupied
Hotel/motel
—
Multi-family
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
$
$
17
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the
standard asset classification system used by the federal banking agencies. The following table presents credit quality
indicators for the loan portfolio segments and classes by year of origination as of June 30, 2023. These categories are
utilized to develop the associated allowance for credit losses using historical losses adjusted for qualitative and
environmental factors and are defined as follows:
●
Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if
any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
●
Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or
inadequately protect the Company’s position at some future date. These loans are not adversely classified and do
not expose an institution to sufficient risk to warrant an adverse classification.
●
Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment,
even though they are currently performing. These loans are characterized by the distinct possibility that the
Company may incur a loss in the future if these weaknesses are not corrected .
●
Nonaccrual – includes loans where management has determined that full payment of principal and interest is not
expected.
18
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
June 30, 2023:
Commercial and industrial
Pass
$
$
Special mention
Substandard
Nonaccrual
Total commercial and industrial
Current period gross charge-offs
—
—
—
—
—
—
—
—
Construction and land development
Pass
Special mention
Substandard
Nonaccrual
Total construction and land development
Current period gross charge-offs
—
—
—
—
—
—
—
—
Commercial real estate:
Owner occupied
Pass
Special mention
Substandard
Nonaccrual
Total owner occupied
Current period gross charge-offs
—
—
—
—
—
—
—
—
Hotel/motel
Pass
Special mention
Substandard
Nonaccrual
Total hotel/motel
6,533
10,087
3,264
1,586
4,022
12,019
—
37,511
Current period gross charge-offs
—
—
—
—
—
—
—
—
19
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior to
2019
Revolving
Loans
Total
Loans
June 30, 2023:
Multi-family
Pass
Special mention
Substandard
Nonaccrual
Total multi-family
Current period gross charge-offs
—
—
—
—
—
—
—
—
Other
Pass
Special mention
Substandard
Nonaccrual
Total other
Current period gross charge-offs
—
—
—
—
—
—
—
—
Residential real estate:
Consumer mortgage
Pass
Special mention
Substandard
Nonaccrual
Total consumer mortgage
Current period gross charge-offs
—
—
—
—
—
—
—
—
Investment property
Pass
Special mention
Substandard
Nonaccrual
Total investment property
Current period gross charge-offs
—
—
—
—
—
—
—
—
Consumer installment
Pass
Special mention
Substandard
Nonaccrual
Total consumer installment
Current period gross charge-offs
—
—
—
Total loans
Pass
Special mention
Substandard
Nonaccrual
Total loans
$
$
Total current period gross charge-offs
$
—
—
—
20
(Dollars in thousands)
Mention
Substandard
Accruing
Nonaccrual
Total loans
December 31, 2022:
Commercial and industrial
$
$
Construction and land development
—
Commercial real estate:
Owner occupied
Hotel/motel
—
Multi-family
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
$
$
The following table is a summary of the Company’s nonaccrual loans by major categories as of June 30, 2023 and
December 31, 2022.
CECL
Incurred Loss
June 30, 2023
December 31, 2022
Nonaccrual
Nonaccrual
Total
Loans with
Loans with an
Nonaccrual
Nonaccrual
(Dollars in thousands)
No Allowance
Allowance
Loans
Loans
Commercial and industrial
$
—
$
Commercial real estate
—
Residential real estate
—
Total
$
—
$
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to
determine expected credit losses:
(Dollars in thousands)
Real Estate
Business Assets
Total Loans
June 30, 2023:
Commercial and industrial
$
—
$
178
Commercial real estate
—
819
Total
$
$
Allowance for Credit Losses
The Company adopted ASC 326 on January 1, 2023, which introduced the CECL methodology for estimating all expected
losses over the life of a financial asset. Under the CECL methodology, the allowance for credit losses is measured on a
collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics
with the collectively evaluated pools, evaluations are performed on an individual basis.
21
The following table details the changes in the allowance for credit losses by portfolio segment for the respective periods.
June 30, 2023
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
$
Charge-offs
—
—
—
—
(56 )
(56 )
Recoveries
Net recoveries (charge-offs)
(55 )
Provision for credit losses
(228 )
(16 )
(178 )
(331 )
Ending balance
$
$
Six months ended:
Beginning balance
$
$
Impact of adopting ASC 326
(17 )
(347 )
(22 )
Charge-offs
(67 )
(67 )
Recoveries
Net recoveries (charge-offs)
(65 )
Provision for credit losses
(277 )
(194 )
(291 )
Ending balance
$
$
June 30, 2022
(Dollars in thousands)
Commercial and
industrial
Construction
and land
development
Commercial
real estate
Residential
real estate
Consumer
installment
Total
Quarter ended:
Beginning balance
$
$
Charge-offs
(4 )
(16 )
(20 )
Recoveries
Net (charge-offs) recoveries
(2 )
Provision for loan losses
(11 )
(35 )
(31 )
Ending balance
$
$
Six months ended:
Beginning balance
$
$
Charge-offs
(4 )
(64 )
(68 )
Recoveries
Net recoveries (charge-offs)
(9 )
Provision for loan losses
(96 )
(238 )
(250 )
Ending balance
$
$
22
The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio
segment and impairment methodology as of June 30, 2022 as determined, prior to the adoption of ASC 326.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(In thousands)
losses
in loans
losses
in loans
losses
in loans
June 30, 2022:
Commercial and industrial
$
—
—
Construction and land development
—
—
Commercial real estate
—
Residential real estate
—
—
Consumer installment
—
—
Total
$
—
(1)
Represents loans collectively evaluated for impairment, prior to the adopton of ASC 326, in accordance with ASC 450-20,
Loss
Contingencies, and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)
Represents loans individually evaluated for impairment, prior to the adoption of ASC 326, in accordance with ASC 310-30,
Receivables, and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
23
Impaired loans
The following tables present impaired loans at December 31, 2022 as determined under ASC 310 prior to the adoption of
ASC 326. Loans that have been fully charged-off are not included in the following tables. The related allowance generally
represents the following components that correspond to impaired loans:
●
Individually evaluated impaired loans equal to or greater than $500 thousand secured by real estate (nonaccrual
construction and land development, commercial real estate, and residential real estate loans).
●
Individually evaluated impaired loans equal to or greater than $250 thousand not secured by real estate
(nonaccrual commercial and industrial and consumer installment loans).
The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated
for impairment at December 31, 2022.
December 31, 2022
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial and industrial
$
(1 )
$
—
Commercial real estate:
Owner occupied
(3 )
Total commercial real estate
(3 )
—
Total
(4 )
—
With allowance recorded:
Commercial and industrial
$
Commercial real estate:
Owner occupied
Total commercial real estate
Total
Total impaired loans
$
(4 )
$
(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
24
Pursuant to the adoption of ASU 2022-02, effective January 1, 2023, the Company prospectively discontinued the
recognition and measurement guidance previously required for troubled debt restructurings (TDRs). As of June 30, 2023,
the Company had no loans that would have previously required disclosure as TDRs.
The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the
amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the quarter
and six months ended June 30, 2023 as determined under ASC 310 prior to the adoption of ASC 326.
Quarter ended June 30, 2022
Six months ended June 30, 2022
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(Dollars in thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial real estate:
Other
$
$
Total commercial real estate
Residential real estate:
Investment property
Total residential real estate
Total
$
$
NOTE 6: MORTGAGE SERVICING RIGHTS, NET
Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the
corresponding mortgage loans are sold. An estimate of the fair value of the Company’s MSRs is determined using
assumptions that market participants would use in estimating future net servicing income, including estimates of
prepayment speeds, discount rates, default rates, costs to service, escrow account earnings, contractual servicing fee
income, ancillary income, and late fees. Subsequent to the date of transfer, the Company has elected to measure its MSRs
under the amortization method. Under the amortization method, MSRs are amortized in proportion to, and over the period
of, estimated net servicing income.
The Company generally sells, without recourse, conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae,
where the Company services the mortgages sold and records MSRs. MSRs are included in other assets on the
accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted
as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage
lending income.
25
The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
MSRs, net:
Beginning balance
$
$
$
$
Additions, net
Amortization expense
(55 )
(69 )
(110 )
(147 )
Ending balance
$
$
$
$
Valuation allowance included in MSRs, net:
Beginning of period
$
$
$
$
End of period
Fair value of amortized MSRs:
Beginning of period
$
$
$
$
End of period
NOTE 7: FAIR VALUE
Fair Value Hierarchy
Fair Value Measurements and Disclosures
, as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction occurring in the principal market (or most advantageous
market in the absence of a principal market) for an asset or liability at the measurement date. GAAP establishes a fair
value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets.
Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable for the
asset or liability, either directly or indirectly.
Level 3—inputs to the valuation methodology are unobservable and reflect the Company’s own assumptions about the
inputs market participants would use in pricing the asset or liability.
Level changes in fair value measurements
Transfers between levels of the fair value hierarchy are generally recognized at the end of each reporting period. The
Company monitors the valuation techniques utilized for each category of financial assets and liabilities to ascertain when
transfers between levels have been affected. The nature of the Company’s financial assets and liabilities generally is such
that transfers in and out of any level are expected to be infrequent. For the six months ended June 30, 2023, there were no
transfers between levels and no changes in valuation techniques for the Company’s financial assets and liabilities.
26
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company
obtains pricing data from third party pricing services. These third party pricing services consider observable data that may
include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis,
management reviews the pricing data received from the third party pricing services for reasonableness given current market
conditions. As part of its review, management may obtain non-binding third party broker/dealer quotes to validate the fair
value measurements. In addition, management will periodically submit pricing information provided by the third party
pricing services to another independent valuation firm on a sample basis. This independent valuation firm will compare the
prices provided by the third party pricing service with its own prices and will review the significant assumptions and
valuation methodologies used with management.
The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of June
30, 2023 and December 31, 2022, respectively, by caption, on the accompanying consolidated balance sheets by ASC 820
valuation hierarchy (as described above).
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
June 30, 2023:
Securities available-for-sale:
Agency obligations
$
Agency MBS
State and political subdivisions
Total securities available-for-sale
Total assets at fair value
$
December 31, 2022:
Securities available-for-sale:
Agency obligations
$
Agency MBS
State and political subdivisions
Total securities available-for-sale
Total assets at fair value
$
Assets and liabilities measured at fair value on a nonrecurring basis
Collateral Dependent Loans
Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The
fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of
comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on
various sources, including third party asset valuations and internally determined values based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of
the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's
underlying financial condition.
27
Mortgage servicing rights, net
MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or
estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of
MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the
present value of estimated future net servicing income using assumptions that market participants would use in estimating
future net servicing income, including estimates of prepayment speeds, discount rates, default rates, 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 prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average
discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s
MSRs are classified within Level 3 of the valuation hierarchy.
The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of
June 30, 2023 and December 31, 2022, respectively, by caption, on the accompanying consolidated balance sheets and by
FASB ASC 820 valuation hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
June 30, 2023:
Loans, net
(1)
Other assets
(2)
Total assets at fair value
$
December 31, 2022:
Loans, net
(3)
Other assets
(2)
Total assets at fair value
$
(1)
Loans considered collateral dependent under ASC 326.
(2)
Represents MSRs, net, carried at lower of cost or estimated fair value.
(3)
Loans considered impaired under ASC 310-10-35 Receivables, prior to the adoption of ASC 326. This amount reflects the recorded
investment in impaired loans, net of any related allowance for loan losses.
Quantitative Disclosures for Level 3 Fair Value Measurements
At June 30, 2023 and December 31, 2022, the Company had no Level 3 assets measured at fair value on a recurring basis.
For Level 3 assets measured at fair value on a non-recurring basis at June 30, 2023 and and December 31, 2022, the
significant unobservable inputs used in the fair value measurements and the range of such inputs with respect to such assets
are presented below.
Range of
Weighted
Carrying
Significant
Unobservable
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Inputs
of Input
June 30, 2023:
Collateral dependent loans
$
Appraisal
Appraisal discounts
-
%
%
Mortgage servicing rights, net
Discounted cash flow
Prepayment speed or CPR
-
Discount rate
-
December 31, 2022:
Impaired loans
$
Appraisal
Appraisal discounts
-
%
%
Mortgage servicing rights, net
Discounted cash flow
Prepayment speed or CPR
-
Discount rate
-
28
Fair Value of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial instruments, whether or not
recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather are good-faith estimates of the fair
value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar
loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently
offered for deposits with similar remaining maturities.
The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial
instruments at June 30, 2023 and December 31, 2022 are presented below. This table excludes financial instruments for
which the carrying amount approximates fair value. Financial assets for which fair value approximates carrying value
included cash and cash equivalents. Financial liabilities for which fair value approximates carrying value included
noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits. Fair value approximates
carrying value in these financial liabilities due to these products having no stated maturity. Additionally, financial
liabilities for which fair value approximates carrying value included overnight borrowings such as federal funds purchased
and securities sold under agreements to repurchase.
Fair Value Hierarchy
Carrying
Estimated
Level 1
Level 2
Level 3
(Dollars in thousands)
amount
fair value
inputs
inputs
Inputs
June 30, 2023:
Financial Assets:
Loans, net (1)
$
$
$
$
$
Financial Liabilities:
Time Deposits
$
$
$
$
$
December 31, 2022:
Financial Assets:
Loans, net (1)
$
$
$
$
$
Financial Liabilities:
Time Deposits
$
$
$
$
$
(1) Represents loans, net of allowance for credit losses. The fair value of loans was measured using an exit price notion.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The following discussion and analysis is designed to provide a better understanding of various factors related to the results
of operations and financial condition of the Company and the Bank. This discussion is intended to supplement and
highlight information contained in the accompanying unaudited condensed consolidated financial statements and related
notes for the quarters and six months ended June 30, 2023 and 2022, as well as the information contained in our Annual
Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Reports on Form 10-Q.
Special Cautionary Notice Regarding Forward-Looking Statements
Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” “Description of
Property” and elsewhere, are “forward-looking statements” within the meaning and protections of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different from future results, performance,
achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “designed”, “plan,” “point to,”
“project,” “could,” “intend,” “seeks,” “model,” “simulations,” “target”, “view”, and other similar words and expressions of
the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
●
the effects of future economic, business and market conditions and changes, foreign, domestic and local, including
inflation, seasonality, natural disasters or climate change, such as rising sea and water levels, hurricanes and
tornados, COVID-19 or other epidemics or pandemics including supply chain disruptions, inventory volatility, and
changes in consumer behaviors;
●
the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or other events that may affect
general economic conditions;
●
governmental monetary and fiscal policies, including the continuing effects of fiscal and monetary stimuli in
response to the COVID-19 crisis, followed by changes in monetary policies beginning in March 2022 in response
to inflation, including increases in the Federal Reserve’s target federal funds rate and reductions in the Federal
Reserve’s holdings of securities;
●
legislative and regulatory changes, including changes in banking, securities and tax laws, regulations and rules and
their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost
of FDIC insurance, including changes being considered in light of three regional bank failures in California and
New York in March and May 2023;
●
the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan
portfolio reviews;
●
the risks of inflation, changes in market interest rates and the shape of the yield curve on the levels, composition
and costs of deposits and borrowings, the values of our securities and loans, loan demand and mortgage loan
originations, and the values and liquidity of loan collateral, securities, and interest-sensitive assets and liabilities,
and the risks and uncertainty of the amounts realizable on collateral;
30
●
the risks of further increases in market interest rates creating additional unrealized losses on our securities
available for sale, which adversely affect our stockholders’ equity (including tangible stockholders’ equity) for
financial reporting purposes;
●
changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;
●
changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that
may be included as capital for regulatory purposes;
●
changes in the prices, values and sales volumes of residential and commercial real estate;
●
the effects of competition from a wide variety of local, regional, national and other providers of financial,
investment and insurance services, including the disruptive effects of financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank and credit unions, which are not subject
to federal income taxation;
●
the failure of assumptions and estimates underlying the establishment of allowances for credit losses, including
asset impairments, losses valuations of assets and liabilities and other estimates;
●
the timing and amount of rental income from third parties following the June 2022 opening of our new
headquarters;
●
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
●
changes in technology or products that may be more difficult, costly, or less effective than anticipated;
●
cyber-attacks and data breaches that may compromise our systems, our vendors’ systems or customers’
information;
●
the risks that our deferred tax assets (“DTAs”) included in “other assets” on our consolidated balance sheets, if
any, could be reduced if estimates of future taxable income from our operations and tax planning strategies are less
than currently estimated, and sales of our capital stock could trigger a reduction in the amount of net operating loss
carry-forwards that we may be able to utilize for income tax purposes; and
●
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 are we make or are attributable to us are expressly qualified in their
entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are
made.
31
Summary of Results of Operations
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2023
2022
2023
2022
Net interest income (a)
$
6,994
$
6,484
$
14,211
$
12,674
Less: tax-equivalent adjustment
106
110
214
222
Net interest income (GAAP)
6,888
6,374
13,997
12,452
Noninterest income
791
848
1,583
1,756
Total revenue
7,679
7,222
15,580
14,208
Provision for credit losses
(362)
—
(296)
(250)
Noninterest expense
5,825
5,058
11,429
9,959
Income tax expense
288
363
555
617
Net earnings
$
1,928
$
1,801
$
3,892
$
3,882
Basic and diluted earnings per share
$
0.55
$
0.51
$
1.11
$
1.10
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $3.9 million for the first six months of 2023 and 2022, respectively. Basic and diluted
earnings per share were $1.11 per share for the first six months of 2023, compared to $1.10 per share for the first six
months of 2022.
Net interest income (tax-equivalent) was $14.2 million for the first six months of 2023, a 12% increase compared to $12.7
million for the first six months of 2022. This increase was primarily due to improvements in the Company’s net interest
margin. The Company’s net interest margin (tax-equivalent) was 3.10% in the first six months of 2023 compared to 2.51%
in the first six months of 2022. This increase was primarily due to a more favorable asset mix and higher yields on interest
earning assets. These higher yields on interest earning assets were partially offset by increased cost of funds. The cost of
funds increased to 82 basis points, compared to 33 basis points in the first six months of 2022, also reflecting higher market
interest rates in the first six months of both 2022 and 2023. Average loans for the first six months of 2023 were $507.2
million, a 17% increase from the first six months of 2022.
At June 30, 2023, the Company’s allowance for credit losses was $6.6 million, or 1.27% of total loans, compared to $5.8
million, or 1.14% of total loans, at December 31, 2022, and $4.7 million, or 1.07% of total loans, at June 30, 2022. The
implementation of CECL required pursuant to Accounting Standards (“ASC”) 326, which was effective January 1, 2023,
increased our allowance for credit losses by $1.0 million, or 0.20% of total loans, as a day one transition adjustment.
The Company recorded a negative provision for credit losses during the first six months of 2023 of $0.3 million, compared
to a negative provision for credit losses of $0.3 million during the first six months of 2022. The provision for credit losses
under CECL is reflective of the Company’s credit risk profile and the future economic outlook and forecasts. Our CECL
model is largely influenced by economic factors including, most notably, the anticipated unemployment rate. The negative
provision for credit losses during the first six months of 2023 was primarily related to the resolution of a collateral
dependent nonperforming loan, with a recorded investment of $1.3 million and a corresponding allowance of $0.5 million,
that was collected in full during the second quarter of 2023.
Noninterest income was $1.6 million in the first six months of 2023, compared to $1.8 million in the first six months of
2022. The decrease in noninterest income was primarily due to a decrease in mortgage lending income of $0.2 million as a
result of higher mortgage market interest rates.
Noninterest expense was $11.4 million in the first six months of 2023, compared to $10.0 million for the first six months of
2022. The increase in noninterest expense was primarily due to an increase in net occupancy and equipment expense of
$0.4 million related to the Company’s new headquarters, which opened in June 2022, professional fees expense of $0.2
million, and other noninterest expense of $0.8 million.
Income tax expense was $0.6 million for the first six months of 2023 and 2022, respectively. The Company's effective tax
rate for the first six months of 2023 was 12.48%, compared to 13.71% in the first six months of 2022. The Company’s
effective income tax rate is principally affected by tax-exempt earnings from the Company’s investment in municipal
securities, bank-owned life insurance (“BOLI”), and New Markets Tax Credits (“NMTCs”).
32
The Company paid cash dividends of $0.54 per share in the first six months of 2023, an increase of 2% from the same
period of 2022. The Company repurchased 4,225 shares for $0.1 million during the first six months of 2023. At June 30,
2023, the Bank’s regulatory capital ratios were well above the minimum amounts required to be “well capitalized” under
current regulatory standards with a total risk-based capital ratio of 16.31%, a tier 1 leverage ratio of 10.23% and a common
equity tier 1 (“CET1”) ratio of 15.33% at June 30, 2023. At June 30, 2023, the Company’s equity to total assets ratio was
6.92%, compared to 6.65% at December 31, 2022, and 7.02% at June 30, 2022 .
For the second quarter of 2023, net earnings were $1.9 million, or $0.55 per share, compared to $1.8 million, or $0.51 per
share, for the second quarter of 2022. Net interest income (tax-equivalent) was $7.0 million for the second quarter of 2023,
an increase of 8% compared to $6.5 million for the second quarter of 2022. This increase was primarily due to
improvements in the Company’s net interest margin. The Company’s net interest margin (tax-equivalent) was 3.03% in the
second quarter of 2023 compared to 2.60% in the second quarter of 2022. The Company recorded a negative provision for
credit losses during the second quarter of 2023 of $0.4 million, compared to no provision for credit losses during the second
quarter 2022. The provision for credit losses was primarily related to the resolution of a collateral dependent
nonperforming loan, with a recorded investment of $1.3 million and a corresponding allowance of $0.5 million, that was
collected in full during the second quarter of 2023. Noninterest income was $0.8 million in the second quarter of 2023 and
2022, respectively. Noninterest expense was $5.8 million in the second quarter of 2023, compared to $5.1 million for the
second quarter of 2022. The increase in noninterest expense was primarily due to increases in other noninterest expense of
$0.4 million. Income tax expense was $0.3 million for the second quarter of 2023, compared to $0.4 million for the second
quarter of 2022. The Company's effective tax rate for the second quarter of 2023 was 13.00%, compared to 16.77% in the
second quarter of 2022. The Company’s effective income tax rate is principally impacted by tax-exempt earnings from the
Company’s investment in municipal securities, bank-owned life insurance, and New Markets Tax Credits.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting
principles and with general practices within the banking industry. In connection with the application of those principles, we
have made judgments and estimates which, in the case of the determination of our allowance for credit losses for loans, our
determination of credit losses for investment securities, recurring and non-recurring fair value measurements, the valuation
of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial
position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly
impact our financial position and results of operations.
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASC 326 as described more fully in our unaudited financial statements in Part I
of this Quarterly report, especially Note 1, Accounting Standards Adopted in 2023 and Note 5, Loans and Allowance for
Credit Losses. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to
as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining
estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts
and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt
securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets
measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit
losses.
In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require
credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management
does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the
modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.
The transition adjustment upon the adoption of CECL on January 1, 2023 included an increase in the allowance for credit
losses on loans of $1.0 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance
for credit losses on unfunded loan commitments of $0.1 million, which is recorded within other liabilities. The Company
recorded a net decrease to retained earnings of $0.8 million as of January 1, 2023 for the cumulative effect of adopting
CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be
reported in accordance with previously applicable accounting standards.
33
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have
any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined
that an allowance for credit losses on available for sale securities was not deemed material.
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is
90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that
this policy results in the timely reversal of uncollectible interest.
The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures” on January 1, 2023, the effective date of the guidance, on a prospective basis.
ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan
refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than
applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring
guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU
2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within
the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 did not
have a material impact on the Company’s consolidated financial statements.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported
at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and
deferred fees and costs. Accrued interest receivable related to loans is recorded in other assets on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating
prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in
the process of collection, or when management believes, after considering economic and business conditions and collection
efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days
after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such
loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery
method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment
performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net
amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the
balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from
both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company’s loan loss estimation process includes procedures to appropriately consider the unique characteristics of its
loan segments (commercial and industrial, construction and land development, commercial real estate, multifamily,
residential real estate, and consumer loans). These segments are further disaggregated into loan classes, the level at which
credit quality is monitored. See Note 5, Loans and Allowance for Credit Losses, for additional information about our loan
portfolio.
34
Credit loss assumptions are estimated using a discounted cash flow ("DCF") model for each loan segment, except consumer
loans. The weighted average remaining life method is used to estimate credit loss assumptions for consumer loans.
The DCF model calculates an expected life-of-loan loss percentage by considering the forecasted probability that a
borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic factors, and LGD, which is the estimate
of the amount of net loss in the event of default. This model utilizes historical correlations between default experience and
certain macroeconomic factors as determined through a statistical regression analysis. The forecasted Alabama
unemployment rate is considered in the model for commercial and industrial, construction and land development,
commercial real estate, multifamily, and residential real estate loans. In addition, forecasted changes in the Alabama home
price index is considered in the model for construction and land development and residential real estate loans; forecasted
changes in the national commercial real estate (“CRE”) price index is considered in the model for commercial real estate
and multifamily loans; and forecasted changes in the Alabama gross state product is considered in the model for
multifamily loans. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to
predict quarterly rates of default based on the statistical PD models.
Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments and principal
payments (“curtailments”) when appropriate. Management's determination of the contract term excludes expected
extensions, renewals, and modifications unless the extension or renewal option is included in the contract at the reporting
date and is not unconditionally cancellable by the Company. To the extent the lives of the loans in the portfolio extend
beyond the period for which a reasonable and supportable forecast can be made (which is 4 quarters for the Company), the
Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion period.
The weighted average remaining life method was deemed most appropriate for the consumer loan segment because
consumer loans contain many different payment structures, payment streams and collateral. The weighted average
remaining life method uses an annual charge-off rate over several vintages to estimate credit losses. The average annual
charge-off rate is applied to the contractual term adjusted for prepayments.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are
believed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may
increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan
review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in
underlying collateral, external factors and economic conditions not already captured.
Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that
foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the
estimated fair value of collateral held at the reporting date, adjusted for selling costs as appro priate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial
letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for off -balance sheet loan commitments is represented by the
contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to
extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s consolidated
statements of earnings. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment
at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for
unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $77 thousand for the adoption of
ASC 326. For the six months ended June 30, 2023, the Company recorded a negative provision for credit losses for
unfunded commitments of $5 thousand. At June 30, 2023, the liability for credit losses on off-balance-sheet credit
exposures included in other liabilities was $0.3 million.
35
Assessment for Allowance for Credit Losses – Available -for-Sale Securities
For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, 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. If either of these criteria are met, the security's amortized cost basis is written
down to fair value through net income. If neither criterion is met, the Company evaluates whether any portion of the
decline in fair value is the result of credit deterioration. 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. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by
which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by
the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit
losses is recognized in other comprehensive income.
The Company is required to own certain stock as a condition of membership, such as the FHLB of Atlanta and Federal
Reserve Bank of Atlanta (“FRB”). These non-marketable equity securities are accounted for at cost which equals par or
redemption value. These securities do not have a readily determinable fair value as their ownership is restricted and there is
no market for these securities. The Company records these non-marketable equity securities as a component of other
assets, which are periodically evaluated for impairment. Management considers these non-marketable equity securities to
be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the
ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Fair Value Determination
U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value,
including investments classified as available-for-sale and derivatives. ASC 820,
Fair Value Measurements and Disclosures
,
which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands
disclosures about fair value measurements. For more information regarding fair value measurements and disclosures,
please refer to Note 7, Fair Value, of the unaudited consolidated financial statements that accompany this report.
Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or
liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have
readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,
prepayments, market volatility and other factors, taking into account current observable market data and experience.
These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Other Real Estate Owned
Other real estate owned or OREO, consists of properties obtained through foreclosure or otherwise in satisfaction of loans
and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired with any loss recognized as
a charge-off through the allowance for credit losses. Additional OREO losses for subsequent valuation adjustments are
determined on a specific property basis and are included as a component of other noninterest expense along with holding
costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and
complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates
can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds
realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to
determine the fair value of OREO.
36
Deferred Tax Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. At June 30, 2023 we had total deferred tax assets of $13.4 million included
as “other assets”, including $13.1 million resulting from unrealized losses in our securities portfolio. Based upon the level
of taxable income over the last three years and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible
differences at June 30, 2023. The amount of the deferred tax assets considered realizable, however, could be reduced if
estimates of future taxable income are reduced.
RESULTS OF OPERATIONS
Average Balance Sheet and Interest Rates
Six months ended June 30,
2023
2022
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
507,176
4.68%
$
434,863
4.42%
Securities - taxable
348,066
2.14%
370,549
1.57%
Securities - tax-exempt
54,741
3.76%
60,691
3.51%
Total securities
402,807
2.36%
431,240
1.84%
Federal funds sold
5,619
4.77%
63,021
0.36%
Interest bearing bank deposits
9,805
4.61%
88,008
0.52%
Total interest-earning assets
925,407
3.67%
1,017,132
2.74%
Deposits:
NOW
188,491
0.57%
204,912
0.12%
Savings and money market
296,425
0.48%
338,283
0.20%
Time deposits
160,102
1.71%
157,877
0.88%
Total interest-bearing deposits
645,018
0.81%
701,072
0.33%
Short-term borrowings
3,443
1.82%
4,075
0.50%
Total interest-bearing liabilities
648,461
0.82%
705,147
0.33%
Net interest income and margin (tax-equivalent)
$
14,211
3.10%
$
12,674
2.51%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $14.2 million for the first six months of 2023, a 12% increase compared to $12.7
million for the first six months of 2022. This increase was primarily due to improvements in the Company’s net interest
margin (tax-equivalent). The Company’s net interest margin (tax-equivalent) was 3.10% in the first six months of 2023
compared to 2.51% in the first six months of 2022. This increase was primarily due to a more favorable asset mix and
higher yields on interest earning assets. Since March of 2022, the Federal Reserve increased the target federal funds range
from 0 – 0.25% to 5.00 – 5.25%. The target rate was increased another 25 basis points on July 26, 2023, and further
increases in the target federal funds rate appear likely if inflation remains elevated.
The tax-equivalent yield on total interest-earning assets increased by 93 basis points to 3.67% in the first six months of
2023 compared to 2.74% in the first six months of 2022. This increase was primarily due to changes in our asset mix and
higher market interest rates on interest earning assets.
The cost of total interest-bearing liabilities increased by 49 basis points to 0.82% in the first six months of 2023 compared
to 0.33% in the first six months of 2022. Our deposit costs may continue to increase as the Federal Reserve increases its
target federal funds rate, market interest rates increase, and as customer behaviors change as a result of inflation and higher
market interest rates on deposits and other alternative investments.
37
The Company continues to deploy various asset liability management strategies to manage its risks from interest rate
fluctuations. Deposit and loan pricing remain competitive in our markets. We believe this challenging rate environment
will continue throughout 2023. Our ability to compete and manage our deposit costs until our interest-earning assets
reprice will be important to maintaining or potentially increasing our net interest margin during the monetary tightening
cycle that we believe will continue throughout 2023.
Provision for Credit Losses
On January 1, 2023, we adopted ASC 326, which introduces the current expected credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loans. Accordingly, the provision for credit
losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation,
is adequate to provide coverage for all expected credit losses. The Company recorded a negative provision for credit losses
during the first six months of 2023 of $0.3 million, compared to a negative provision for credit losses of $0.3 million during
the first six months of 2022. Provision expense is affected by organic loan growth in our loan portfolio, our internal
assessment of the credit quality of the loan portfolio, our expectations about future economic conditions and net charge-
offs. Our CECL model is largely influenced by economic factors including, most notably, the anticipated unemployment
rate, which may be affected by monetary policy. The negative provision for credit losses during the first six months of
2023 was primarily related to the resolution of a collateral dependent nonperforming loan, with a recorded investment of
$1.3 million and a corresponding allowance of $0.5 million, that was collected in full during the second quarter of 2023.
Our allowance for credit losses reflects an amount we believe appropriate, based on our allowance assessment
methodology, to adequately cover all expected future losses as of the date the allowance is determined. At June 30, 2023,
the Company’s allowance for credit losses was $6.6 million, or 1.27% of total loans, compared to $5.8 million, or 1.14% of
total loans, at December 31, 2022, and $4.7 million, or 1.07% of total loans, at June 30, 2022. The implementation of
CECL, as of January 1, 2023, increased our allowance for credit losses by $1.0 million, or 0.20% of total loans, as a day
one transition adjustment to ASC 326.
Noninterest Income
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Service charges on deposit accounts
$
154
$
146
$
308
$
288
Mortgage lending income
142
187
235
440
Bank-owned life insurance
68
97
224
196
Other
427
418
816
832
Total noninterest income
$
791
$
848
$
1,583
$
1,756
The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of mortgage loans
and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage
loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans, which are
netted against the commission expense associated with these originations. The Company’s normal practice is to originate
mortgage loans for sale in the secondary market and to either sell or retain the associated MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation
allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
38
The following table presents a breakdown of the Company’s mortgage lending income.
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Origination income
$
57
$
120
$
61
$
349
Servicing fees, net
85
67
174
91
Total mortgage lending income
$
142
$
187
$
235
$
440
The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of mortgage loans. Origination income decreased as market interest rates on
mortgage loans increased. The decrease in origination income was partially offset by an increase in servicing fees, net of
related amortization expense as prepayment speeds slowed, resulting in decreased amortization expense.
Noninterest Expense
Quarter ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Salaries and benefits
$
3,038
$
2,976
$
5,965
$
5,926
Net occupancy and equipment
787
727
1,586
1,161
Professional fees
299
239
637
469
Other
1,701
1,116
3,241
2,403
Total noninterest expense
$
5,825
$
5,058
$
11,429
$
9,959
The increase in net occupancy and equipment expenses was primarily due to increased expenses related to the Company’s
new headquarters in downtown Auburn. This amount includes depreciation expense and other costs associated with
operating the new headquarters. The Company relocated its main office branch and bank operations into its newly
constructed headquarters during June 2022.
The increase in other noninterest expense was due to various items including FDIC assessments, software costs, ATM and
checkcard expenses, impairment related to a new market tax credit investment, due to the remaining tax credit being less
than the Company’s investment, and a gain on sale of other real estate owned that was realized in the 2022.
Income Tax Expense
Income tax expense was $0.6 million for the first six months of 2023 and 2022, respectively. The Company’s effective
income tax rate for the first six months of 2023 was 12.48%, compared to 13.71% in the first six months of 2022. The
Company’s effective income tax rate is principally impacted by tax-exempt earnings from the Company’s investments in
municipal securities, bank-owned life insurance, and New Markets Tax Credits.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $394.1 million at June 30, 2023, 3% less than the $405.3 million at December 31, 2022.
This decrease reflects a $13.7 million decrease in the amortized cost basis of securities available -for-sale, offset by an
increase in the fair value of securities available-for-sale of $2.5 million. The average annualized tax-equivalent yields
earned on total securities were 2.36% in the first six months of 2023 and 1.84% in the first six months of 2022.
39
Loans
2023
2022
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
61,880
59,602
66,212
70,715
70,117
Construction and land development
63,874
66,500
66,479
54,773
38,654
Commercial real estate
275,801
267,962
264,576
249,527
239,873
Residential real estate
109,834
101,975
97,648
91,469
85,106
Consumer installment
9,022
9,002
9,546
7,551
7,122
Total loans
$
520,411
505,041
504,461
474,035
440,872
Total loans were $520.4 million at June 30, 2023, up 3% compared to $504.5 million at December 31, 2022. Four loan
categories represented the majority of the loan portfolio at June 30, 2023: commercial real estate (53%), residential real
estate (21%), commercial and industrial (12%) and construction and land development (12%). Approximately 25% of the
Company’s commercial real estate loans were classified as owner-occupied at June 30, 2023.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $8.1 million,
or 2%, and $7.4 million, or 1%, of total loans at June 30, 2023 and December 31, 2022, respectively. For residential real
estate mortgage loans with a consumer purpose, the Company had no loans that required interest only payments at June 30,
2023 and December 31, 2022. The Company’s residential real estate mortgage portfolio does not include any option or
hybrid ARM loans, subprime loans, or any material amount of other consumer mortgage products which are generally
viewed as high risk.
The average yield earned on loans and loans held for sale was 4.68% in the first six months of 2023 and 4.42% in the first
six months of 2022.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of
current economic conditions, including inflation and the continuing increases in market interest rates, remaining COVID-19
pandemic effects including supply chain disruptions, reduced commercial office occupancy levels, housing supply
shortages and inflation, on our borrowers’ cash flows, real estate market sales volumes and liquidity, valuations used in
making loans and evaluating collateral, reduced credit availability , (especially for commercial real estate) generally and
higher costs of financing properties, which reduce the transaction and dollar volumes of commercial real estate property
sales, real estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain
credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals,
financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations. Various projects financed
earlier that were based on lower interest rate assumptions than currently in effect may not be as profitable or successful at
higher interest rate currently in effect and currently expected in the future.
The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized
loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have
established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by
prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of
capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of
approximately $23.0 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $20.7 million. Our loan policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit. At June 30, 2023, the Bank had no
relationships exceeding these limits.
40
We periodically analyze our commercial and industrial and commercial real estate loan portfolios to determine if a
concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk -based capital at June 30, 2023 and December 31, 2022.
June 30,
December 31,
(Dollars in thousands)
2023
2022
Lessors of 1-4 family residential properties
$
56,160
$
52,278
Multi-family residential properties
44,431
41,084
Hotel/motel
37,511
33,378
Allowance for Credit Losses
The Company maintains the allowance for credit losses at a level that management believes appropriate to adequately cover
the Company’s estimate of expected losses in the loan portfolio. The allowance for credit losses was $6.6 million at June
30, 2023 compared to $5.8 million at December 31, 2022, which management believed to be adequate at each of the
respective dates. The judgments and estimates associated with the determination of the allowance for credit losses are
described under “Critical Accounting Policies.”
On January 1, 2023, we adopted ASC 326, which introduces the current expected credit losses (CECL) methodology and
requires us to estimate all expected credit losses over the remaining life of our loan portfolio. Accordingly, beginning in
2023, the allowance for credit losses represents an amount that, in management's evaluation, is adequate to provide
coverage for all expected future credit losses on outstanding loans. As of June 30, 2023 and December 31, 2022, our
allowance for credit losses was approximately $6.6 million and $5.8 million, respectively, which our management believes
to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans was 1.27% at
June 30, 2023, up from 1.14% at December 31, 2022.
The increase in the allowance for credit losses is largely the result of the implementation of ASC 326 on January 1, 2023,
which resulted in an adjustment to the opening balance of the allowance for credit losses of $1.0 million. Our CECL models
rely largely on projections of macroeconomic conditions to estimate future credit losses. Macroeconomic factors used in the
model include the Alabama unemployment rate, the Alabama home price index, the national commercial real estate price
index and the Alabama gross state product. Projections of these macroeconomic factors, obtained from an independent third
party, are utilized to predict quarterly rates of default.
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 June 30, 2023, reasonable and supportable periods of 4 quarters were utilized followed by an 8 quarter straight line
reversion period to long term averages.
41
A summary of the changes in the allowance for credit losses and certain asset quality ratios for the second quarter of 2023
and the previous four quarters is presented below.
2023
2022
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
6,821
5,765
4,966
4,716
4,658
Impact of adopting ASC 326
—
1,019
—
—
—
Charge-offs:
Commercial and industrial
—
—
(205)
(13)
(4)
Consumer installment
(56)
(11)
(3)
(3)
(16)
Total charge -offs
(56)
(11)
(208)
(16)
(20)
Recoveries
200
8
7
16
78
Net recoveries (charge-offs)
144
(3)
(201)
—
58
Provision for credit losses
(331)
40
1,000
250
—
Ending balance
$
6,634
6,821
5,765
4,966
4,716
as a % of loans
1.27
%
1.35
1.14
1.05
1.07
as a % of nonperforming loans
577
%
255
211
1,431
1,314
Net (recoveries) charge-offs as % of average loans (a)
(0.06)
%
—
0.04
—
(0.05)
(a) Net (recoveries) charge-offs are annualized.
Nonperforming Assets
At June 30, 2023 the Company had $1.1 million in nonperforming assets compared to $2.7 million at December 31, 2022.
The decrease in nonperforming assets was primarily related to the resolution of a collateral dependent nonperforming loan,
with a recorded investment of $1.3 million, that was collected in full during the second quarter of 2023.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the second
quarter of 2023 and the previous four quarters.
2023
2022
Second
First
Fourth
Third
Second
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
1,149
2,680
2,731
347
359
Total nonperforming assets
$
1,149
2,680
2,731
347
359
as a % of loans and other real estate owned
0.22
%
0.53
0.54
0.07
0.08
as a % of total assets
0.11
%
0.26
0.27
0.03
0.03
Nonperforming loans as a % of total loans
0.22
%
0.53
0.54
0.07
0.08
42
The table below provides information concerning the composition of nonaccrual loans for the second quarter of 2023 and
the previous four quarters.
2023
2022
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial and industrial
$
178
432
443
—
—
Commercial real estate
819
2,103
2,116
170
176
Residential real estate
152
135
172
177
183
Consumer installment
—
10
—
—
—
Total nonaccrual loans
$
1,149
2,680
2,731
347
359
The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process of collection .
The Company had no loans 90 days or more past due and still accruing at June 30, 2023 and December 31, 2022,
respectively.
The Company had no OREO at June 30, 2023 or December 31, 2022.
Deposits
June 30,
December 31,
(In thousands)
2023
2022
Noninterest bearing demand
$
298,479
311,371
NOW
192,083
178,641
Money market
194,435
214,298
Savings
91,216
95,652
Certificates of deposit under $250,000
100,972
93,017
Certificates of deposit and other time deposits of $250,000 or more
73,557
57,358
Total deposits
$
950,742
950,337
Total deposits were $950.7 million at June 30, 2023 and $950.3 million at December 31, 2022. The Company utilizes
brokered deposits as an additional funding source. At June 30, 2023, the Company had $16.0 million in brokered deposits,
compared to none at December 31, 2022. Excluding brokered deposits, customer deposits decreased $15.6 million, or 2%,
during the first six months of 2022. This decrease reflects net outflows to higher yield investment alternatives in a rising
interest rate environment and a decline in balances in existing accounts due to increased customer spending. Noninterest-
bearing deposits were $298.5 million, or 31% of total deposits, at June 30, 2023, compared to $311.4 million, or 33% of
total deposits at December 31, 2022.
Estimated uninsured deposits totaled $374.8 million and $381.7 million at June 30, 2023 and December 31, 2022,
respectively. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance
limits. The Bank’s uninsured deposits at June 30, 2023 and December 31, 2022 include approximately $166.0 million and
$155.0 million, respectively, of deposits of state, county and local governments that are collateralized by securities having
an equal fair value to such deposits.
The FDIC has proposed a special assessment on uninsured deposits of banks with over $5 billion in uninsured deposits to
the FDIC Deposit Insurance Fund’s costs of the systemic risk determination made in connection with two recent bank
failures. The special assessment will not apply to AuburnBank.
The average rate paid on total interest-bearing deposits was 0.81% in the first six months of 2023 compared to 0.33% in the
first six months of 2022.
43
Other Borrowings and Available Credit
The Company has no outstanding indebtedness. The Bank borrows other short-term borrowings and long-term debt from
time to time. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to
repurchase with an original maturity of one year or less. The Bank had available federal funds lines totaling $61.0 million
with no federal funds borrowings outstanding at June 30, 2023, and December 31, 2022, respectively. Securities sold under
agreements to repurchase, which were entered into on behalf of certain customers totaled $2.1 million and $2.6 million at
June 30, 2023 and December 31, 2022, respectively. At June 30, 2023 and December 31, 2022, the Bank had no
borrowings from the Federal Reserve discount window and no borrowings under the Federal Reserve’s new Bank Term
Facility Program (“BTFP”), which opened March 12, 2023.
The Bank is a member of the FHLB of Atlanta and may borrow from time to time under the FHLB of Atlanta’s advance
program to obtain funding for its growth. FHLB advances include both fixed and variable terms and are taken out with
varying maturities, and are generally secured by eligible assets. The Bank had no borrowings under FHLB of Atlanta’s
advance program at June 30, 2023 and December 31, 2022, respectively. At those dates, the Bank had $305.2 million and
$312.6 million, respectively, of available lines of credit at the FHLB of Atlanta.
The average rate paid on the Bank’s short-term borrowings was 1.82% in the first six months of 2023 compared to 0.50%
in the first six months of 2022.
The Company had no long-term debt at June 30, 2023 and December 31, 2022.
CAPITAL ADEQUACY
The Company’s consolidated stockholders’ equity was $71.0 million and $68.0 million as of June 30, 2023 and December
31, 2022, respectively. The increase from December 31, 2022 was primarily driven by net earnings of $3.9 million and
other comprehensive income due to the change in unrealized gains/losses on securities available-for-sale, net of tax of $1.8
million, partially offset by cash dividends of $1.9 million, the cumulative effect of adopting CECL accounting standard of
$0.8 million and repurchases of the Company’s stock of $0.1 million. Total unrealized losses on available-for-sale
securities declined 5% from $54.7 million on December 31, 2022 to $52.2 million June 30, 2023. These unrealized losses
do not affect the Bank’s capital for regulatory capital purposes.
The Company paid cash dividends of $0.54 per share in the first six months of 2023, an increase of 2% from the same
period in 2022. The Company’s share repurchases of $0.1 million since December 31, 2022 resulted in 4,225 fewer
outstanding common shares at June 30, 2023. These shares were repurchased at an average cost per share of $23.28.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and
related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital
conservation buffer was subject to a three-year phase-in period that began on January 1, 2016 and was fully phased-in on
January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than the required amount will be
subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to
executive officers. At June 30, 2023, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.
Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that
amended the capital conservation buffer. The interim final rule was adopted as a final rule on August 26, 2020. The new
rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking
organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by
making the limitations on capital distributions more gradual. The eligible retained income is now the greater of (i) net
income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii)
the average of all net income over the preceding four quarters. This rule only affects the capital buffers, and banking
organizations were encouraged to make prudent capital distribution decisions.
44
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 10.23%, CET1 risk-based capital ratio was 15.33%, tier 1
risk-based capital ratio was 15.33%, and total risk-based capital ratio was 16.31% at June 30, 2023. These ratios exceed the
minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for
tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered “well capitalized.” The Bank’s
capital conservation buffer was 8.31% at June 30, 2023.
On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued a joint notice of proposed
rulemaking to implement the Basel III endgame components. The proposal which is subject to public comment and change
only applies to banks and holding companies with $100 billion or more of assets. The proposal includes provisions dealing
with:
●
Credit risk, which arises from the risk that an obligor fails to perform on an obligation;
●
Credit risk, which arises from the risk than an obligor fails to perform on an obligation;
●
Market risk, which results from changes in the value of trading positions;
●
Operations risk, which is the risk of losses resulting from inadequate or failed internal process, people, and
systems, or from external events; and
●
Credit valuation adjustment risk, which results from the risk of losses on certain derivative contracts.
The proposal would also change the capital requirements for banking organizations with more than $100 billion of assets.
These regulatory proposals are not applicable to the Company.
MARKET AND LIQUIDITY RISK MANAGEMENT
Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within
the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability
Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to
ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity
risk management.
Interest Rate Risk Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO
measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and
deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic
value of equity (“EVE”) model.
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation modeling.
Forecasted levels of earning assets, interest-bearing liabilities, and off -balance sheet financial instruments are combined
with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings
simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the
variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s
flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:
●
+/- 20% for a gradual change of 400 basis points
●
+/- 15% for a gradual change of 300 basis points
●
+/- 10% for a gradual change of 200 basis points
●
+/- 5% for a gradual change of 100 basis points
While a gradual change in interest rates was used in the above analysis to provide an estimate of exposure under these
scenarios, our modeling under both a gradual and instantaneous change in interest rates indicates our balance sheet is asset
sensitive.
At June 30, 2023, our earnings simulation model indicated that we were in compliance with the policy guidelines noted
above.
45
Economic Value of Equity
. EVE measures the extent that the estimated economic values of our assets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in
interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than
the following:
●
45% for an instantaneous change of +/- 400 basis points
●
35% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At June 30, 2023, our EVE model indicated that we were in compliance with our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by
changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayments and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may
differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the
Company’s established liquidity, loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing to meet the credit and deposit
needs of our customers. From time to time, the Company also may enter into back-to-back interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not
designated as hedging instruments. At June 30, 2023 and December 31, 2022, the Company had no derivative contracts
designated as part of a hedging relationship to assist in managing its interest rate sensitivity.
Liquidity Risk Management
Liquidity is the Company’s ability to convert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations. The Company seeks to manage its liquidity to
manage or reduce its costs of funds by maintaining liquidity believed adequate to meet its anticipated funding needs, while
balancing against excessive liquidity that likely would reduce earnings due to the cost of foregoing alternative higher-
yielding assets.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and
dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of regulatory
restrictions on such dividends.
The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the
Company could also borrow money, or issue common stock or other securities. Primary uses of funds by the Company
include dividends paid to stockholders, Company stock repurchases, and payment of Company expenses.
46
Primary sources of funding for the Bank include customer deposits, other borrowings, interest payments on earning assets,
repayment and maturity of securities and loans, sales of securities, and the sale of loans, particularly residential mortgage
loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount
window and the Federal Reserve’s recent BTFP borrowing facility. In addition to these sources, the Bank is a member of
the FHLB of Atlanta and may participate in the FHLB of Atlanta’s advance program to obtain funding for its growth.
Advances include both fixed and variable terms and may be taken out with varying maturities. At June 30, 2023, the Bank
had a remaining available line of credit with the FHLB of $305.2 million. At June 30, 2023, the Bank also had $61.0
million of available federal funds lines with no borrowings outstanding. Primary uses of funds include repayment of
maturing obligations and growing the loan portfolio.
Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known
contractual obligations and unfunded commitments, including loan commitments and reasonably expected borrower,
depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations
At June 30, 2023, the Bank had outstanding standby letters of credit of $0.8 million and unfunded loan commitments
outstanding of $78.7 million. Because these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to
fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of our securities available-
for-sale, or draw on its available credit facilities or raise deposits.
Mortgage lending activities
We generally sell residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these
loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various
representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the
representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien
securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan
criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other
matters.
As of June 30, 2023, the aggregate unpaid principal balance of residential mortgage loans, which we have originated and
sold, but retained the servicing rights, was $221.6 million. Although these loans are generally sold on a non-recourse basis,
we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole
requests) if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase
or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole
requests are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to
determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks
of potential repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and
quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
The Company was not required to repurchase any loans during the first six months of 2023 as a result of representation and
warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at June 30, 2023.
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to:
(1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain
and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any
required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on
defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements
governing our rights and duties as servicer.
The agreement under which we act as servicer generally specifies standard s of responsibility for actions taken by us in such
capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the
respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be
subject to termination if the breach is not cured within a specified period following notice. The standards governing
servicing and the possible remedies for violations of such standards are determined by our agreement with Fannie Mae and
Fannie Mae’s mortgage servicing guides. Remedies could include repurchase of an affected loan.
47
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 June 30, 2023, we do not believe that this exposure is material due to the historical level of
repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie
Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate
this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor
portfolios.
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result, the Bank is not
obligated to make any advances to Fannie Mae on principal and interest on such mortgage loans where the borrower is
entitled to forbearance.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial data presented herein have been prepared in
accordance with GAAP and practices within the banking industry which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance
than the effects of general levels of inflation.
Inflation can affect our noninterest expenses. It also can affect the interest rates we have to pay on our deposits and other
borrowings, and the interest rates we earn on our earning assets. The difference between our interest expense and interest
income is also affected by the shape of the yield curve and the speed at which our assets and liabilities reprice in response
to interest rate changes. The yield curve was inverted on June 30, 2023, which means shorter term interest rates are higher
than longer interest rates. This results in a lower spread between our costs of funds and our interest income. In addition,
net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our
assets or liabilities are priced with the same index. Higher market interest rates and sales of securities held by the Federal
Reserve to reduce inflation generally reduce economic activity and may reduce loan demand and growth. Inflation and
related changes in market interest rates, as the Federal Reserve acts to meet its long term inflation goal of 2%, also can
adversely affect the values and liquidity of our loans and securities.
Inflation is running at levels unseen in decades and well above the Federal Reserve’s long term inflation goal of 2.0%
annually. Beginning in March 2022, the Federal Reserve has been raising target federal funds interest rates and reducing its
securities holdings in an effort to reduce inflation During 2022, the Federal Reserve increased the target federal funds range
from 0 – 0.25% to 4.25 – 4.50%. The target federal funds rate was increased another 25 basis points on each of January 31,
March 7, May 3 and July 26, 2023 to 5.25-5.50%, and further increases in the target federal funds rate appear likely if
inflation remains elevated. Our deposit costs may increase as the Federal Reserve increases its target federal funds rate,
market interest rates increase, and as customer savings behaviors change as a result of inflation and customers seek higher
market interest rates on deposits and other alternative investments. Monetary efforts to control inflation may also affect
unemployment which is an important component in our CECL model used to estimate our allowance for credit losses.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASU has been issued by the FASB but is not yet effective.
●
ASU 2023-02,
Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax
Credit Structures Using the Proportional Amortization Method
48
Information about this pronouncement is described in more detail below.
ASU 2023-02,
Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit
Structures Using the Proportional Amortization Method
, The amendments in this Update permit reporting entities to elect
to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are
received, using the proportional amortization method if certain conditions are met. The new standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company is currently
evaluating the impact of the new standard on the Company’s consolidated financial statements.
49
Table 1 – Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly
report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-
GAAP financial measures to their most directly comparable GAAP financial measures are presented below.
2023
2022
Second
First
Fourth
Third
Second
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,888
7,109
7,471
7,243
6,374
Tax-equivalent adjustment
106
108
117
117
110
Net interest income (Tax -equivalent)
$
6,994
7,217
7,588
7,360
6,484
Six months ended June 30,
(In thousands)
2023
2022
Net interest income (GAAP)
$
13,997
12,452
Tax-equivalent adjustment
214
222
Net interest income (Tax -equivalent)
$
14,211
12,674
50
Table 2 - Selected Quarterly Financial Data
2023
2022
Second
First
Fourth
Third
Second
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,994
7,217
7,588
7,360
6,484
Less: tax-equivalent adjustment
106
108
117
117
110
Net interest income (GAAP)
6,888
7,109
7,471
7,243
6,374
Noninterest income
791
792
3,898
852
848
Total revenue
7,679
7,901
11,369
8,095
7,222
Provision for credit losses
(362)
66
1,000
250
—
Noninterest expense
5,825
5,604
4,449
5,415
5,058
Income tax expense
288
267
1,454
432
363
Net earnings
$
1,928
1,964
4,466
1,998
1,801
Per share data:
Basic and diluted net earnings
$
0.55
0.56
1.27
0.57
0.51
Cash dividends declared
0.27
0.27
0.265
0.265
0.265
Weighted average shares outstanding:
Basic and diluted
3,500,064
3,502,143
3,504,344
3,507,318
3,513,353
Shares outstanding
3,499,412
3,500,879
3,503,452
3,505,355
3,509,940
Book value
$
20.28
21.03
19.42
17.06
21.68
Common stock price
High
$
24.32
24.50
24.71
29.02
33.57
Low
18.80
22.55
22.07
23.02
27.04
Period end
21.26
22.66
23.00
23.02
27.04
To earnings ratio
7.21
x
7.79
7.82
10.46
12.52
To book value
105
%
108
118
135
125
Performance ratios:
Return on average equity
10.37
%
11.44
28.23
10.35
8.26
Return on average assets
0.75
%
0.77
1.75
0.75
0.66
Dividend payout ratio
49.09
%
48.21
20.87
46.49
51.96
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.27
%
1.35
1.14
1.05
1.07
Nonperforming loans
577
%
255
211
1,431
1,314
Nonperforming assets as a % of:
Loans and other real estate owned
0.22
%
0.53
0.54
0.07
0.08
Total assets
0.11
%
0.26
0.27
0.03
0.03
Nonperforming loans as a % of total loans
0.22
%
0.53
0.54
0.07
0.08
Annualized net (recoveries) charge-offs as a % of average loans
(0.11)
%
—
0.16
—
(0.05)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.33
%
15.45
15.39
15.39
16.59
Tier 1 risk-based capital ratio
15.33
%
15.45
15.39
15.39
16.59
Total risk-based capital ratio
16.31
%
16.48
16.25
16.16
17.38
Tier 1 leverage ratio
10.23
%
10.07
10.01
9.29
9.16
Other financial data:
Net interest margin (a)
3.03
%
3.17
3.27
3.00
2.60
Effective income tax rate
13.00
%
11.97
24.56
17.78
16.77
Efficiency ratio (b)
74.82
%
69.97
38.73
65.94
68.99
Selected average balances:
Securities
$
402,929
402,684
407,792
432,393
427,426
Loans, net of unearned income
512,066
502,158
490,163
457,722
428,612
Total assets
1,022,874
1,022,938
1,022,863
1,069,973
1,092,759
Total deposits
942,552
948,393
951,122
987,614
999,867
Total stockholders’ equity
74,404
68,655
63,283
77,191
87,247
Selected period end balances:
Securities
$
394,079
405,692
405,304
411,538
429,220
Loans, net of unearned income
520,411
505,041
504,458
474,035
440,872
Allowance for credit losses
6,634
6,821
5,765
4,966
4,716
Total assets
1,026,130
1,017,746
1,023,888
1,042,559
1,084,251
Total deposits
950,742
939,190
950,337
977,938
1,002,698
Total stockholders’ equity
70,976
73,640
68,041
59,793
76,107
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
51
Table 3 - Selected Financial Data
Six months ended June 30,
(Dollars in thousands, except per share amounts)
2023
2022
Results of Operations
Net interest income (a)
$
14,211
12,674
Less: tax-equivalent adjustment
214
222
Net interest income (GAAP)
13,997
12,452
Noninterest income
1,583
1,756
Total revenue
15,580
14,208
Provision for credit losses
(296)
(250)
Noninterest expense
11,429
9,959
Income tax expense
555
617
Net earnings
$
3,892
3,882
Per share data:
Basic and diluted net earnings
$
1.11
1.10
Cash dividends declared
0.54
0.53
Weighted average shares outstanding:
Basic and diluted
3,501,098
3,515,991
Shares outstanding, at period end
3,499,412
3,509,940
Book value
$
20.28
21.68
Common stock price:
High
$
24.50
34.49
Low
18.80
27.04
Period end
21.26
27.04
To earnings ratio
7.21
x
12.52
To book value
105
%
125
Performance ratios:
Return on average equity
10.91
%
8.10
Return on average assets
0.76
%
0.70
Dividend payout ratio
48.65
%
48.18
Asset Quality:
Allowance for credit losses as a % of:
Loans
1.27
%
1.07
Nonperforming loans
577
%
1,314
Nonperforming assets as a % of:
Loans and other real estate owned
0.22
%
0.08
Total assets
0.11
%
0.03
Nonperforming loans as a % of total loans
0.22
%
0.08
Annualized net recoveries as a % of average loans
(0.06)
%
(0.01)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
15.33
%
16.59
Tier 1 risk-based capital ratio
15.33
%
16.59
Total risk-based capital ratio
16.31
%
17.38
Tier 1 leverage ratio
10.23
%
9.16
Other financial data:
Net interest margin (a)
3.10
%
2.51
Effective income tax rate
12.48
%
13.71
Efficiency ratio (b)
72.36
%
69.02
Selected average balances:
Securities
$
402,807
431,240
Loans, net of unearned income
507,139
434,131
Total assets
1,022,906
1,103,523
Total deposits
945,456
1,001,620
Total stockholders’ equity
71,365
95,822
Selected period end balances:
Securities
$
394,079
429,220
Loans, net of unearned income
520,411
440,872
Allowance for credit losses
6,634
4,716
Total assets
1,026,130
1,084,251
Total deposits
950,742
1,002,698
Total stockholders’ equity
70,976
76,107
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income. See
"Table 1 - Explanation of Non-GAAP Financial Measures."
(c) Regulatory capital ratios presented are for the Company's wholly-owned subsidiary, AuburnBank.
52
Table 4 - Average Balances and Net Interest Income Analysis
Quarter ended June 30,
2023
2022
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
512,139
$
6,019
4.71%
$
429,182
$
4,691
4.38%
Securities - taxable (2)
347,714
1,826
2.11%
368,618
1,547
1.68%
Securities - tax-exempt (2)(3)
55,215
510
3.70%
58,807
525
3.58%
Total securities
402,929
2,336
2.33%
427,425
2,072
1.94%
Federal funds sold
3,943
48
4.88%
52,582
82
0.63%
Interest bearing bank deposits
8,023
96
4.80%
92,802
196
0.85%
Total interest-earning assets
927,034
$
8,499
3.68%
1,001,991
$
7,041
2.82%
Cash and due from banks
15,621
15,485
Other assets
80,219
75,283
Total assets
$
1,022,874
$
1,092,759
Interest-bearing liabilities:
Deposits:
NOW
$
189,406
$
287
0.61%
$
208,873
$
62
0.12%
Savings and money market
292,238
414
0.57%
331,097
159
0.19%
Time deposits
164,479
781
1.90%
155,990
331
0.85%
Total interest-bearing deposits
646,123
1,482
0.92%
695,960
552
0.32%
Short-term borrowings
3,835
23
2.41%
4,205
5
0.50%
Total interest-bearing liabilities
649,958
$
1,505
0.93%
700,165
$
557
0.32%
Noninterest-bearing deposits
296,428
303,907
Other liabilities
2,084
1,440
Stockholders' equity
74,404
87,247
Total liabilities and stockholders' equity
$
1,022,874
$
1,092,759
Net interest income and margin (tax-equivalent)
$
6,994
3.03%
$
6,484
2.60%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
(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%.
53
Table 5 - Average Balances and Net Interest Income Analysis
Six months ended June 30,
2023
2022
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
(Dollars in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Interest-earning assets:
Loans and loans held for sale (1)
$
507,176
$
11,773
4.68%
$
434,863
$
9,541
4.42%
Securities - taxable
348,066
3,691
2.14%
370,549
2,883
1.57%
Securities - tax-exempt (2)
54,741
1,021
3.76%
60,691
1,056
3.51%
Total securities
402,807
4,712
2.36%
431,240
3,939
1.84%
Federal funds sold
5,619
133
4.77%
63,021
113
0.36%
Interest bearing bank deposits
9,805
224
4.61%
88,008
228
0.52%
Total interest-earning assets
925,407
$
16,842
3.67%
1,017,132
$
13,821
2.74%
Cash and due from banks
15,574
15,296
Other assets
81,925
71,095
Total assets
$
1,022,906
$
1,103,523
Interest-bearing liabilities:
Deposits:
NOW
$
188,491
$
536
0.57%
$
204,912
$
119
0.12%
Savings and money market
296,425
703
0.48%
338,283
331
0.20%
Time deposits
160,102
1,361
1.71%
157,877
687
0.88%
Total interest-bearing deposits
645,018
2,600
0.81%
701,072
1,137
0.33%
Short-term borrowings
3,443
31
1.82%
4,075
10
0.50%
Total interest-bearing liabilities
648,461
$
2,631
0.82%
705,147
$
1,147
0.33%
Noninterest-bearing deposits
300,439
300,548
Other liabilities
2,642
2,006
Stockholders' equity
71,364
95,822
Total liabilities and stockholders' equity
$
1,022,906
$
1,103,523
Net interest income and margin (tax-equivalent)
$
14,211
3.10%
$
12,674
2.51%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
(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%.
54
Table 6 - Allocation of Allowance for Credit Losses
2023
2022
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
1,198
11.9
$
1,232
11.8
$
747
13.1
$
732
14.9
$
761
15.9
Construction and land
development
1,005
12.3
1,021
13.2
949
13.2
789
11.6
576
8.8
Commercial real estate
3,788
53.0
3,966
53.0
3,109
52.4
2,561
52.6
2,523
54.4
Residential real estate
529
21.1
497
20.2
828
19.4
783
19.3
753
19.3
Consumer installment
114
1.7
105
1.8
132
1.9
101
1.6
103
1.6
Total allowance for credit
losses
$
6,634
$
6,821
$
5,765
$
4,966
$
4,716
* Loan balance in each category expressed as a percentage of total loans.
55
Table 7 – Estimated Uninsured Time Deposits by Maturity
(Dollars in thousands)
June 30, 2023
Maturity of:
3 months or less
$
11,478
Over 3 months through 6 months
19,713
Over 6 months through 12 months
5,640
Over 12 months
14,226
Total estimated uninsured time deposits
$
51,057
56
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is set forth in ITEM 2 under the caption “MARKET AND LIQUIDITY RISK
MANAGEMENT” and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective to allow timely decisions regarding disclosure in its reports that the Company files or submits to
the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. There have been no
changes in the Company’s internal control over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company and the Bank are, from time to time, involved in legal proceedings. The
Company’s and Bank’s management believe there are no pending or threatened legal, governmental, or regulatory
proceedings that, upon resolution, are expected to have a material adverse effect upon the Company’s or the Bank’s
financial condition or results of operations. See also, Part I, Item 3 of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2022.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I,
Item 1A. “RISK FACTORS” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022,
which could materially affect our business, financial condition or future results. The risks described in our annual report on
Form 10-K are not the only the risks facing our Company. Increases in inflation and the resulting tightening of Federal
Reserve monetary policy by increased target interest rates and reductions in the Federal Reserve’s securities portfolio, have
and is expected to continue to affect mortgage originations and income and the market values of our securities portfolio and
loans. These could also affect our deposit, costs and mixes, and change consumer savings and payment behaviors.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition, and/or operating results in the future.
57
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock during the second quarter of 2023 were as follows:
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
April 1 - April 30, 2023
303
22.54
303
4,544,286
May 1 - May 31, 2023
1,274
21.73
1,274
4,516,607
June 1 - June 30, 2023
—
—
—
4,516,607
Total
1,577
21.88
1,577
4,516,607
On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of Directors
had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022. The new program
authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock through the
earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan and
(iii) April 15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases,
and otherwise.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
58
ITEM 6. EXHIBITS
Exhibit
Number Description
3.1
3.2
31.1
31.2
32.1
32.2
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)
*
**
***
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.
59
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.
Date: August 8, 2023
By: /s/ David A. Hedges
David A. Hedges
President and CEO
Date: August 8, 2023
By: /s/
W.
James Walker, IV
W. James Walker, IV
Senior Vice President and Chief Financial Officer
AUBURN
NATIONAL BANCORPORATION, INC AND SUBSIDIARIES
EXHIBIT 31.1
CERTIFICATION PURSUANT
TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF
1934,
AS ADOPTED PURSUANT
TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
CERTIFICATION
I, David A. Hedges, certify
that:
1. I have reviewed this Quarterly Report on Form 10-Q of Auburn National
Bancorporation, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not
misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in
all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this
report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and
have:
a)
Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the
registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this
report is being
prepared;
b)
Designed such
internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting
and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting
principles;
c)
Evaluated the
effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered
by this report based on such
evaluation;
and
d)
Disclosed in this
report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual
report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting;
and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons
performing the
equivalent
functions):
a)
All significant
deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and
report financial
information;
and
b)
Any fraud,
whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial
reporting.
Date: August 8, 2023
/s/ David A.
Hedges
President and Chief Executive Officer
AUBURN
NATIONAL BANCORPORATION, INC AND SUBSIDIARIES
EXHIBIT 31.2
CERTIFICATION PURSUANT
TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF
1934,
AS ADOPTED PURSUANT
TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
CERTIFICATION
I, W. James
Walker, IV, certify
that:
1. I have reviewed this Quarterly Report on Form 10-Q of Auburn National
Bancorporation, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not
misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in
all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this
report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as
defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the
registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this
report is being
prepared;
b)
Designed such
internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting
and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting
principles;
c)
Evaluated the
effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered
by this report based on such
evaluation; and
d)
Disclosed in this
report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual
report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting;
and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons
performing the
equivalent
functions):
a)
All significant
deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and
report financial
information;
and
b)
Any fraud,
whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial
reporting.
Date: August 8, 2023
/s/ W. James
Walker, IV
Senior Vice President and Chief
Financial Officer
AUBURN
NATIONAL BANCORPORATION, INC AND SUBSIDIARIES
EXHIBIT 32.1
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report of Auburn National
Bancorporation, Inc. (the “Company”) on Form 10-Q for the
period ending
June 30, 2023, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I,
David A. Hedges, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of
the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934;
and
(2)
The information
contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the
Company.
Date: August 8, 2023
/s/ David A. Hedges
David A.
Hedges
President and Chief Executive Officer
AUBURN
NATIONAL BANCORPORATION, INC AND SUBSIDIARIES
EXHIBIT 32.2
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report of Auburn National
Bancorporation, Inc. (the “Company”) on Form 10-Q for the
period ending
June 30, 2023, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I,
W. James
Walker, IV, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of
2002, that:
(1)
The Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934;
and
(2)
The information
contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the
Company.
Date: August 8,
2023
/s/ W. James
Walker, IV
W. James
Walker, IV
Senior Vice President and Chief
Financial Officer