Auburn National Bancorporation, Inc 10-Q for FY2021 Q3
Auburn National Bancorporation, Inc (AUBN)
10-Q
2021-10-29
For: 2021-09-30
View Original
Added on
April 08, 2026
About this 10-Q
Auburn National Bancorporation, Inc filed this 10-Q on October 29, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $149K
- up 7.2% from $139K a year earlier
- Net income
- $1.88M
- down 3.2% from net income of $1.94M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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For the quarterly period ended
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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
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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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
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Accelerated filer
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Smaller reporting company
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Emerging growth company
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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.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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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 October 28, 2021
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
28
48
49
50
51
52
53
54
55
56
Item 3
57
Item 4
57
Item 1
57
Item
1A
57
Item 2
58
Item 3
58
Item 4
58
Item 5
58
Item 6
59
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30,
December 31,
(Dollars in thousands, except share data)
2021
2020
Assets:
Cash and due from banks
$
$
Federal funds sold
Interest-bearing bank deposits
Cash and cash equivalents
Securities available-for-sale
Loans held for sale
Loans, net of unearned income
453,232
461,700
Allowance for loan losses
(5,119 )
(5,618 )
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 income, net
Less treasury stock, at cost -
and December 31, 2020, respectively
(10,673 )
(9,354 )
Total stockholders’ equity
104,929
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 September 30,
Nine months ended September 30,
(Dollars in thousands, except share and per share data)
2021
2020
2021
2020
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 loan losses
(600 )
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Mortgage lending
Bank-owned life insurance
Other
Securities gains, net
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 September 30,
Nine months ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
Net earnings
$
$
$
$
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities
(1,493 )
(5 )
(4,837 )
Reclassification adjustment for net gain on securities
recognized in net earnings
(11 )
(12 )
(11 )
(77 )
Other comprehensive (loss) income
(1,504)
(17)
(4,848 )
Comprehensive income
$
$
$
$
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
income (loss)
stock
Total
Quarter ended September 30, 2021
Balance, June 30, 2021
$
$
$
$
$
(10,103 )
$
Net earnings
—
Other comprehensive loss
—
(1,504 )
(1,504 )
Cash dividends paid ($
—
(917 )
(917 )
Stock repurchases
(16,582 )
(570 )
(570 )
Sale of treasury stock
Balance, September 30, 2021
$
$
$
$
$
(10,673 )
$
Quarter ended September 30, 2020
Balance, June 30, 2020
$
$
$
$
$
(9,355 )
$
Net earnings
—
Other comprehensive loss
—
(17 )
(17 )
Cash dividends paid ($
.255
—
(909 )
(909 )
Sale of treasury stock
Balance, September 30, 2020
$
$
$
$
$
(9,354 )
$
Nine months ended September 30, 2021
Balance, December 31, 2020
$
$
$
$
$
(9,354 )
$
Net earnings
—
6,167
Other comprehensive loss
—
(4,848 )
(4,848 )
Cash dividends paid ($
—
(2,766 )
(2,766 )
Stock repurchases
(37,093 )
(1,320 )
(1,320 )
Sale of treasury stock
Balance, September 30, 2021
$
$
$
$
$
(10,673 )
$
Nine months ended September 30, 2020
Balance, December 31, 2019
$
$
$
$
$
(9,355 )
$
Net earnings
—
5,398
Other comprehensive income
—
Cash dividends paid ($
—
(2,728 )
(2,728 )
Sale of treasury stock
Balance, September 30, 2020
$
$
$
$
$
(9,354 )
$
See accompanying notes to consolidated financial statements
7
AUBURN NATIONAL BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(Dollars in thousands)
2021
2020
Cash flows from operating activities:
Net earnings
$
$
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loan losses
(600 )
Depreciation and amortization
Premium amortization and discount accretion, net
Net gain on securities available-for-sale
(15 )
(103 )
Net gain on sale of loans held for sale
(1,168 )
(1,569 )
Net gain on other real estate owned
(52 )
Loans originated for sale
(39,632 )
(60,173 )
Proceeds from sale of loans
Increase in cash surrender value of bank-owned life insurance
(302 )
(334 )
Income recognized from death benefit on bank-owned life insurance
(282 )
Net increase in other assets
(216 )
(1,235 )
Net decrease in accrued expenses and other liabilities
(2,430 )
(585 )
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
Proceeds from prepayments and maturities of securities available-for-sale
Purchase of securities available-for-sale
(135,434 )
(140,714 )
Decrease (increase) in loans, net
(11,562 )
Net purchases of premises and equipment
(13,287 )
(1,527 )
Proceeds from bank-owned life insurance death benefit
Decrease (increase) in FHLB stock
(9 )
Proceeds from sale of other real estate owned
Net cash used in investing activities
(86,161 )
(92,029 )
Cash flows from financing activities:
Net increase in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net increase in federal funds purchased and securities sold
under agreements to repurchase
Stock repurchases
(1,320 )
Dividends paid
(2,766 )
(2,728 )
Net cash provided by financing activities
Net change in cash and cash equivalents
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
Supplemental disclosure of non-cash transactions:
Real estate acquired through foreclosure
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 individual and
corporate customers in Lee County, Alabama and surrounding counties through its wholly owned subsidiary, AuburnBank
(the “Bank”). The Company does not have any segments other than banking that are considered material.
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements in this report have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information. Accordingly, these financial statements do not
include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited
consolidated financial statements include, in the opinion of management, all adjustments necessary to present a fair
statement of the financial position and the results of operations for all periods presented. All such adjustments are of a
normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results of
operations that the Company and its subsidiaries may achieve for future interim periods or the entire year. For further
information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2020.
The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Significant intercompany transactions and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term
include other-than-temporary impairment on investment securities, the determination of the allowance for loan losses, fair
value of financial instruments, and the valuation of deferred tax assets and other real estate owned (“OREO”).
Revenue Recognition
On January 1, 2018, the Company implemented Accounting Standards Update (“ASU” or “updates”) 2014-09,
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, investment
services, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of
noninterest income. The following is a summary of the revenue streams that fall within the scope of ASC 606:
●
Service charges on deposits, investment services, ATM and interchange fees – Fees from these services are either
transaction-based, for which the performance obligations are satisfied when the individual transaction is processed,
or set periodic service charges, for which the performance obligations are satisfied over the period the service is
provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service
charges are recognized over the service period.
●
Gains on sales of OREO
A gain on sale should be recognized when a contract for sale exists and control of the
asset has been transferred to the buyer. ASC 606 lists several criteria required to conclude that a contract for sale
exists, including a determination that the institution will collect substantially all of the consideration to which it is
entitled. In addition to the loan-to-value, the analysis is based on various other factors, including the credit quality
of the borrower, the structure of the loan, and any other factors that may affect collectability.
9
Subsequent Events
The Company has evaluated the effects of events and transactions through the date of this filing that have occurred
subsequent to September 30, 2021. 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.
Accounting Developments
In the first nine months of 2021, the Company did not adopt any new accounting guidance.
NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding for
the respective period. Diluted net earnings per share reflect the potential dilution that could occur upon exercise of
securities or other rights for, or convertible into, shares of the Company’s common stock. At September 30, 2021 and
2020, respectively, the Company had no such securities or rights issued or outstanding, and therefore, no dilutive effect to
consider for the diluted net earnings per share calculation.
The basic and diluted net earnings per share computations for the respective periods are presented below
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except share and per share data)
2021
2020
2021
2020
Basic and diluted:
Net earnings
$
$
$
$
Weighted average common shares outstanding
Net earnings per share
$
$
$
$
NOTE 3: SECURITIES
At September 30, 2021 and December 31, 2020, respectively, all securities within the scope of ASC 320,
Investments –
Debt and Equity Securities,
were classified as available-for-sale. The fair value and amortized cost for securities available-
for-sale by contractual maturity at September 30, 2021 and December 31, 2020, respectively, are presented below.
1 year
1 to 5
5 to 10
After 10
Fair
Gross Unrealized
Amortized
(Dollars in thousands)
or less
years
years
years
Value
Gains
Losses
Cost
September 30, 2021
Agency obligations (a)
$
$
Agency MBS (a)
State and political subdivisions
Total available-for-sale
$
$
December 31, 2020
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 (“FHLB”) advances, and for other purposes required or permitted by law.
10
Included in other assets on the accompanying consolidated balance sheets are non-marketable equity investments. The
carrying amounts of non-marketable equity investments were $
December 31, 2020, respectively. Non-marketable equity investments include FHLB of Atlanta Stock, Federal Reserve
Bank (“FRB”) stock, and stock in a privately held financial institution.
Gross Unrealized Losses and Fair Value
The fair values and gross unrealized losses on securities at September 30, 2021 and December 31, 2020, respectively,
segregated by those securities that have been in an unrealized loss position for less than 12 months and 12 months or
longer, are presented below.
Less than 12 Months
12 Months or Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
September 30, 2021:
Agency obligations
$
$
Agency MBS
State and political subdivisions
Total
$
$
December 31, 2020:
Agency obligations
$
$
Agency MBS
State and political subdivisions
Total
$
$
For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely
than not that the Company will be required to sell the securities before recovery of the amortized cost basis, which may be
maturity. On a quarterly basis, the Company assesses each security for credit impairment. For debt securities, the Company
evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to
the securities’ amortized cost basis.
In determining whether a loss is temporary, the Company considers all relevant information including:
●
the length of time and the extent to which the fair value has been less than the amortized cost basis;
●
adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in
the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial
condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of
the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or
changes in the quality of the credit enhancement);
●
the historical and implied volatility of the fair value of the security;
●
the payment structure of the debt security and the likelihood of the issuer being able to make payments that
increase in the future;
●
failure of the issuer of the security to make scheduled interest or principal payments;
●
any changes to the rating of the security by a rating agency; and
●
recoveries or additional declines in fair value subsequent to the balance sheet date.
11
Agency obligations
The unrealized losses associated with agency obligations were primarily driven by declines in interest rates and not due to
the credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored
entities and did not have any credit losses given the explicit government guarantee or other government support.
Agency mortgage-backed securities (“MBS”)
The unrealized losses associated with agency MBS were primarily driven by changes in interest rates and not due to the
credit quality of the securities. These securities were issued by U.S. government agencies or government-sponsored entities
and did not have any credit losses given the explicit government guarantee or other government support.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions were primarily driven by declines
in interest rates and were not due to the credit quality of the securities. Some of these securities are guaranteed by a bond
insurer, but management did not rely on the guarantee in making its investment decision. These securities will continue to
be monitored as part of the Company’s quarterly impairment analysis, but are expected to perform even if the rating
agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost
basis of these securities.
The carrying values of the Company’s investment securities could decline in the future if the financial condition of an
issuer deteriorates and the Company determines it is probable that it will not recover the entire amortized cost basis for the
security. As a result, there is a risk that other-than-temporary impairment charges may occur in the future.
Other-Than-Temporarily Impaired Securities
Credit-impaired debt securities are debt securities where the Company has written down the amortized cost basis of a
security for other-than-temporary impairment and the credit component of the loss is recognized in earnings. At September
30, 2021 and December 31, 2020, the Company had no credit-impaired debt securities and there were no additions or
reductions in the credit loss component of credit-impaired debt securities during the quarters ended September 30, 2021 and
2020, respectively.
Realized Gains and Losses
The following table presents the gross realized gains and losses on sales of securities.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
Gross realized gains
$
$
Gross realized losses
(62 )
(81 )
Realized gains, net
$
$
12
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
September 30,
December 31,
(Dollars in thousands)
2021
2020
Commercial and industrial
$
$
Construction and land development
Commercial real estate:
Owner occupied
Hotel/motel
44,412
Multi-family
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total loans
Less: unearned income
(923 )
(788 )
Loans, net of unearned income
$
$
Loans secured by real estate were approximately
81.0%
September 30, 2021, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and
surrounding areas.
In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a
systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the
allowance, the loan portfolio is disaggregated into 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. We participated as a lender in the Paycheck Protection Program (“PPP”), which ended May 31, 2021. PPP loans
are forgivable in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the
requirements of the PPP. The Company had
$
Construction and land development (“C&D”) —
includes both loans and credit lines for the purpose of purchasing,
carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit
lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is
dependent upon the sale or refinance of the real estate collateral.
Commercial real estate (“CRE”) —
includes loans disaggregated into four classes: (1) owner occupied, (2) hotel/motel,
(3) multifamily and (4) other.
●
Owner occupied
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.
13
●
Hotel/motel
– includes loans for hotels and motels. Generally, the primary source of repayment is dependent upon
income generated from the real estate collateral. The underwriting of these loans takes into consideration the
occupancy and rental rates, as well as the financial health of the borrower.
●
Multi-family
include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary
source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these
loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.
●
Other
Loans in this class include loans for neighborhood retail centers, medical and professional offices, single retail
stores, industrial buildings, and warehouses leased to local businesses. Generally , the primary source of repayment
is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into
consideration the occupancy and rental rates, as well as the financial health of the borrower.
Residential real estate (“RRE”) —
includes loans disaggregated into two classes: (1) consumer mortgage and (2)
investment property.
●
Consumer mortgage
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 value, as
well as the financial health of the borrower.
Consumer installment —
includes loans to individuals both secured by personal property and unsecured. Loans include
personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with the
Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s
financial condition, satisfactory credit history, and, if applicable, property value.
14
The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of
September 30, 2021 and December 31, 2020.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
(Dollars in thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
September 30, 2021:
Commercial and industrial
$
$
Construction and land development
Commercial real estate:
Owner occupied
Hotel/motel
Multi-family
41,291
Other
Total commercial real estate
Residential real estate:
Consumer mortgage
Investment property
Total residential real estate
Consumer installment
Total
$
$
December 31, 2020:
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
$
$
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of
the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality
trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including
the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic
conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This
evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or
in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off
after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is
unlikely.
15
The Company deems loans impaired when, based on current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due
according to the contractual terms means that both the interest and principal payments of a loan will be collected as
scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The
impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected
future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment
measurement is based on the fair value of the collateral, less estimated disposal costs.
The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the
portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-
offs, net of recoveries of amounts previously charged-off.
In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent
loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio
whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The
Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and
reviews conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan
review results in the determination of whether or not it is probable that it will be able to collect all amounts due according
to the contractual terms of a loan.
As part of the Company’s quarterly assessment of the allowance, management evaluates the loan portfolio’s five segments:
commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer
installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.
The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each
loan segment. The estimates for these loans are established by category and based on the Company’s internal system of
credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of
credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it
does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank
groups. At September 30, 2021 and December 31, 2020, and for the periods then ended, the Company adjusted its
historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of
probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors
is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated
probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based
upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic
conditions, changes in lending personnel experience, changes in lending policies or procedures, and other factors. These
qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as
determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.
The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of
2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic
downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant
losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the
quarter ended September 30, 2021, the Company increased its look-back period to 50 quarters to continue to include losses
incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-
back period to incorporate the effects of at least one economic downturn in its loss history. During 2020, the Company
adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact of the
COVID-19 pandemic and resulting adverse economic conditions, including higher unemployment in our primary market
area. During the second quarter of 2021, the Company adjusted certain qualitative and economic factors to reflect
improvements in economic conditions in our primary market area.
16
The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods.
September 30, 2021
(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
Recoveries
Net recoveries
Provision for loan losses
(14 )
(49 )
(46 )
(10 )
Ending balance
$
$
Nine months ended:
Beginning balance
$
$
Charge-offs
(1 )
(5 )
(6 )
Recoveries
Net recoveries
Provision for loan losses
(46 )
(4 )
(346 )
(177 )
(27 )
(600 )
Ending balance
$
$
September 30, 2020
(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 )
(4 )
Recoveries
Net recoveries
Provision for loan losses
(31 )
(8 )
(27 )
Ending balance
$
$
Nine months ended:
Beginning balance
$
$
Charge-offs
(4 )
(36 )
(40 )
Recoveries
Net recoveries (charge-offs)
(23 )
Provision for loan losses
Ending balance
$
$
17
The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio
segment and impairment methodology as of September 30, 2021 and 2020.
Collectively evaluated (1)
Individually evaluated (2)
Total
Allowance
Recorded
Allowance
Recorded
Allowance
Recorded
for loan
investment
for loan
investment
for loan
investment
(Dollars in thousands)
losses
in loans
losses
in loans
losses
in loans
September 30, 2021:
Commercial and industrial (3)
$
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
$
5,119
September 30, 2020:
Commercial and industrial (4)
$
Construction and land development
Commercial real estate
Residential real estate
Consumer installment
Total
$
(1)
Represents loans collectively evaluated for impairment in accordance with ASC 450-20,
Loss Contingencies
, and
pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)
Represents loans individually evaluated for impairment in accordance with ASC 310-30,
Receivables
, and
pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
(3)
Includes $13.3 million of PPP loans for which no allowance for loan losses was allocated due to 100% SBA guarantee.
(4)
Includes $36.5 million of PPP loans for which no allowance for loan losses was allocated due to 100% SBA guarantee.
Credit Quality Indicators
The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the
standard asset classification system used by the federal banking agencies. The following table presents credit quality
indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for
loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows:
●
Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if
any) or by the fair value, less cost to acquire and sell, of any underlying collateral.
●
Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or
inadequately protect the Company’s position at some future date. These loans are not adversely classified and do
not expose an institution to sufficient risk to warrant an adverse classification.
●
Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment,
even though they are currently performing. These loans are characterized by the distinct possibility that the
Company may incur a loss in the future if these weaknesses are not corrected .
●
Nonaccrual – includes loans where management has determined that full payment of principal and interest is not
expected.
18
(Dollars in thousands)
Mention
Substandard
Accruing
Nonaccrual
Total loans
September 30, 2021:
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
$
$
December 31, 2020:
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
$
$
19
Impaired loans
The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-off are
not included in the following tables. The related allowance generally represents the following components that correspond
to impaired loans:
●
Individually evaluated impaired loans equal to or greater than $500,000 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 $250,000 not secured by real estate (nonaccrual
commercial and industrial and consumer installment loans).
●
All troubled debt restructurings.
The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated
for impairment at September 30, 2021 and December 31, 2020.
September 30, 2021
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial real estate:
Other
$
(15 )
$
Total commercial real estate
(15 )
Residential real estate:
Investment property
(8 )
Total residential real estate
(8 )
Total impaired loans
$
(23 )
$
(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
December 31, 2020
(Dollars in thousands)
Unpaid principal
balance (1)
Charge-offs and
payments applied
(2)
Recorded
investment (3)
Related allowance
With no allowance recorded:
Commercial real estate:
Other
$
(4 )
$
Total commercial real estate
(4 )
Residential real estate:
Investment property
(2 )
Total residential real estate
(2 )
Total impaired loans
$
(6 )
$
(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
20
The following table provides the average recorded investment in impaired loans, if any, by portfolio segment, and the
amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the
respective periods.
Quarter ended September 30, 2021
Nine months ended September 30, 2021
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
$
Quarter ended September 30, 2020
Nine months ended September 30, 2020
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
$
Troubled Debt Restructurings
Impaired loans also include troubled debt restructurings (“TDRs”). On March 27, 2020, the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From
Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10’s
TDR classifications for a limited period of time to account for the effects of COVID-19. On April 7, 2020, the Federal
Reserve and the other banking regulators issued a statement, “Interagency Statement on Loan Modifications and Reporting
for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (the “Interagency Statement on
COVID-19 Loan Modifications”), to encourage banks to work prudently with borrowers and to describe the agencies’
interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain
COVID-19-related modifications. The Interagency Statement on COVID -19 Loan Modifications was supplemented on
June 23, 2020 by the Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the
COVID-19 Pandemic on Institutions. If a loan modification is eligible, a bank may elect to account for the loan under
section 4013 of the CARES Act. If a loan modification is not eligible under section 4013, or if the bank elects not to
account for the loan modification under section 4013, the Revised Statement includes criteria when a bank may presume a
loan modification is not a TDR in accordance with ASC 310-40.
21
The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the
Interagency Statement on COVID-19 Loan Modifications in accordance with FASB ASC 340-10 with respect to the
classification of the loan as a TDR. In the normal course of business, management may grant concessions to borrowers that
are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of
principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest,
extension of the maturity date, or reduction of the face amount or maturity amount of the debt. A concession has been
granted when, as a result of the restructuring, the Bank does not expect to collect, when due, all amounts owed, including
interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds
elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In making the determination of
whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each
modification. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection
in determining the appropriate accrual status at the time of restructure.
Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using
the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is
collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by
establishing a valuation allowance as part of the allowance for loan losses or a charge -off to the allowance for loan losses.
In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.
The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the
related allowance for loan losses, by portfolio segment and class as of September 30, 2021 and December 31, 2020,
respectively.
TDRs
Related
(Dollars in thousands)
Accruing
Nonaccrual
Total
Allowance
September 30, 2021
Commercial real estate:
Other
$
$
Total commercial real estate
Residential real estate:
Investment property
$
Total residential real estate
Total
$
$
TDRs
Related
(In thousands)
Accruing
Nonaccrual
Total
Allowance
December 31, 2020
Commercial real estate:
Other
$
$
Total commercial real estate
Investment property
Total residential real estate
Total
$
$
22
At September 30, 2021 there were no significant outstanding commitments to advance additional funds to customers whose
loans had been restructured.
The following table summarizes loans modified in a TDR during the respective periods both before and after their
modiciation.
.
Quarter ended September 30,
Nine months ended September 30,
Pre-
Post -
Pre-
Post -
modification
modification
modification
modification
Number
outstanding
outstanding
Number
outstanding
outstanding
of
recorded
recorded
of
recorded
recorded
(Dollars in thousands)
contracts
investment
investment
contracts
investment
investment
2020:
Commercial real estate:
Other
—
$
—
—
$
Total commercial real estate
—
—
—
Residential real estate:
Investment property
—
—
—
Total residential real estate
—
—
—
Total
—
$
—
—
$
There were no loans modified in a TDR during the quarter and nine months ended September 30, 2021.
During the quarter and nine months ended September 30, 2021 and 2020, respectively, there were no loans modified in a
TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due).
NOTE 5: MORTGAGE SERVICING RIGHTS, NET
Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing rights on the date the
corresponding mortgage loans are sold. An estimate of the 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 has recorded MSRs related to loans sold without recourse to Fannie Mae. The Company generally sells
conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae. MSRs are included in other assets on the
accompanying consolidated balance sheets.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by stratifying MSRs into
groupings based on predominant risk characteristics, such as interest rate and loan type. If, by individual stratum, the
carrying amount of the MSRs exceeds fair value, a valuation allowance is established. The valuation allowance is adjusted
as the fair value changes. Changes in the valuation allowance are recognized in earnings as a component of mortgage
lending income.
23
The following table details the changes in amortized MSRs and the related valuation allowance for the respective periods.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
MSRs, net:
Beginning balance
$
$
$
$
Additions, net
Amortization expense
(127 )
(183 )
(411 )
(448 )
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 6: 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 nine months ended ended September 30, 2021,
there were no transfers between levels and no changes in valuation techniques for the Company’s financial assets and
liabilities.
24
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale
Fair values of securities available for sale were primarily measured using Level 2 inputs. For these securities, the Company
obtains pricing from third party pricing services. These third party pricing services consider observable data that may
include broker/dealer quotes, market spreads, cash flows, benchmark yields, reported trades for similar securities, market
consensus prepayment speeds, credit information, and the securities’ terms and conditions. On a quarterly basis,
management reviews the pricing received from the third party pricing services for reasonableness given current market
conditions. As part of its review, management may obtain non-binding third party broker quotes to validate the fair value
measurements. In addition, management will periodically submit pricing provided by the third party pricing services to
another independent valuation firm on a sample basis. This independent valuation firm will compare the price provided by
the third party pricing service with its own price and will review the significant assumptions and valuation methodologies
used with management.
The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of
September 30, 2021 and December 31, 2020, respectively, by caption, on the accompanying consolidated balance sheets by
ASC 820 valuation hierarchy (as described above).
Quoted Prices in
Significant
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
September 30, 2021:
Securities available-for-sale:
Agency obligations
$
Agency RMBS
State and political subdivisions
Total securities available-for-sale
Total assets at fair value
$
December 31, 2020:
Securities available-for-sale:
Agency obligations
$
Agency RMBS
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
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value. Fair values of loans held for sale are determined using
quoted market secondary market prices for similar loans. Loans held for sale are classified within Level 2 of the fair value
hierarchy.
Impaired Loans
Loans considered impaired under ASC 310-10-35,
Receivables
, are loans for which, based on current information and
events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with
the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected
payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of
the collateral less selling costs if the loan is collateral dependent.
25
The fair value of impaired loans was primarily measured based on the value of the collateral securing these loans. Impaired
loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including
equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on
independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for
costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions
from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the
customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for
determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment
and adjusted accordingly, based on the same factors discussed above.
Mortgage servicing rights, net
MSRs, net, included in other assets on the accompanying consolidated balance sheets, are carried at the lower of cost or
estimated fair value. MSRs do not trade in an active market with readily observable prices. To determine the fair value of
MSRs, the Company engages an independent third party. The independent third party’s valuation model calculates the
present value of estimated future net servicing income using assumptions that market participants would use in estimating
future net servicing income, including estimates of prepayment speeds, discount rates, default rates, cost to service, escrow
account earnings, contractual servicing fee income, ancillary income, and late fees. Periodically, the Company will review
broker surveys and other market research to validate significant assumptions used in the model. The significant
unobservable inputs include prepayment speeds or the constant prepayment rate (“CPR”) and the weighted average
discount rate. Because the valuation of MSRs requires the use of significant unobservable inputs, all of the Company’s
MSRs are classified within Level 3 of the valuation hierarchy.
The following table presents the balances of the assets and liabilities measured at fair value on a nonrecurring basis as of
September 30, 2021 and December 31, 2020, respectively, by caption, on the accompanying consolidated balance sheets
and by FASB ASC 820 valuation hierarchy (as described above):
Quoted Prices in
Active Markets
Other
Significant
for
Observable
Unobservable
Carrying
Identical Assets
Inputs
Inputs
(Dollars in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
September 30, 2021:
Loans held for sale
$
Loans, net
(1)
Other assets
(2)
Total assets at fair value
$
December 31, 2020:
Loans held for sale
$
Loans, net
(1)
Other assets
(2)
Total assets at fair value
$
(1)
Loans considered impaired under ASC 310-10-35 Receivables. This amount reflects the recorded investment in impaired loans, net
of any related allowance for loan losses.
(2)
Represents MSRs, net. These are carried at lower of cost or estimated fair value.
26
Quantitative Disclosures for Level 3 Fair Value Measurements
At September 30, 2021 and December 31, 2020, the Company had no Level 3 assets measured at fair value on a recurring
basis. For Level 3 assets measured at fair value on a non-recurring basis at September 30, 2021 and December 31, 2021,
the significant unobservable inputs used in the fair value measurements are presented below.
Weighted
Carrying
Significant
Average
(Dollars in thousands)
Amount
Valuation Technique
Unobservable Input
Range
of Input
September 30, 2021:
Impaired loans
$
Appraisal
Appraisal discounts
-
%
%
Mortgage servicing rights, net
Discounted cash flow
Prepayment speed or CPR
-
Discount rate
-
December 31, 2020:
Impaired loans
$
Appraisal
Appraisal discounts
-
%
%
Mortgage servicing rights, net
Discounted cash flow
Prepayment speed or CPR
-
Discount rate
-
Fair Value of Financial Instruments
ASC 825,
Financial Instruments
, requires disclosure of fair value information about financial instruments, whether or not
recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are
not available, fair values are based on estimates using discounted cash flow analyses. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The
following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather are a good-faith estimate of the
fair value of financial instruments held by the Company. ASC 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Loans, net
Fair values for loans were calculated using discounted cash flows. The discount rates reflected current rates at which similar
loans would be made for the same remaining maturities. Expected future cash flows were projected based on contractual
cash flows, adjusted for estimated prepayments. The fair value of loans was measured using an exit price notion.
Loans held for sale
Fair values of loans held for sale are determined using quoted secondary market prices for similar loans.
Time Deposits
Fair values for time deposits were estimated using discounted cash flows. The discount rates were based on rates currently
offered for deposits with similar remaining maturities.
27
The carrying value, related estimated fair value, and placement in the fair value hierarchy of the Company’s financial
instruments at September 30, 2021 and December 31, 2020 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
September 30, 2021:
Financial Assets:
Loans, net (1)
$
$
$
$
$
Loans held for sale
Financial Liabilities:
Time Deposits
$
$
$
$
$
December 31, 2020:
Financial Assets:
Loans, net (1)
$
$
$
$
$
Loans held for sale
Financial Liabilities:
Time Deposits
$
$
$
$
$
(1) Represents loans, net of unearned income and the allowance for loan losses. The fair value of loans was measured using an exit price notion.
28
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 nine months ended September 30, 2021 and 2020, as well as the information contained in our
annual report on Form 10-K for the year ended December 31, 2020 and our interim reports on Form 10-Q for the quarters
ended March 31, 2021 and June 30, 2021.
Special Notice Regarding Forward-Looking Statements
Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” and elsewhere,
are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance,
achievements or financial condition of the Company to be materially different from future results, performance,
achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to
update any forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,”
“could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may
not be realized due to a variety of factors, including, without limitation:
●
the effects of future economic, business and market conditions and changes, foreign, domestic and locally,
including seasonality, natural disasters or climate change, such as rising sea and water levels, hurricanes and
tornados, coronavirus or other epidemics or pandemics;
●
the effects of war or other conflicts, acts of terrorism, or other events that may affect general economic conditions;
●
governmental monetary and fiscal policies;
●
legislative and regulatory changes, including changes in banking, securities and tax laws, regulations and rules and
their application by our regulators, including capital and liquidity requirements, and changes in the scope and cost
of FDIC insurance;
●
the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit
conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan
portfolio reviews;
●
the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values
and liquidity of loan collateral, securities, and interest-sensitive assets and liabilities, and the risks and uncertainty
of the amounts realizable;
●
changes in borrower credit risks and 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;
29
●
the effects of competition from a wide variety of local, regional, national and other providers of financial,
investment and insurance services, including the disruption effects of financial technology and other competitors
who are not subject to the same regulations as the Company and the Bank;
●
the failure of assumptions and estimates underlying the establishment of allowances for possible loan losses and
other asset impairments, losses valuations of assets and liabilities and other estimates;
●
the costs of redeveloping our headquarters and the timing and amount of rental income upon completion of the
project;
●
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of
implementing such transactions, integrating operations as part of these transactions and possible failures to achieve
expected gains, revenue growth and/or expense savings from such transactions;
●
changes in technology or products that may be more difficult, costly, or less effective than anticipated;
●
cyber-attacks and data breaches that may compromise our systems, our vendor systems or customers’
information;
●
the risks that our deferred tax assets (“DTAs”), if any, could be reduced if estimates of future taxable income from
our operations and tax planning strategies are less than currently estimated, and sales of our capital stock could
trigger a reduction in the amount of net operating loss carry-forwards that we may be able to utilize for income tax
purposes; and
●
other factors and information in this report and other filings that we make with the SEC under the Exchange Act,
including our Annual Report on Form 10-K for the year ended December 31, 2020 and subsequent quarterly and
current reports. See Part II, Item 1A. “RISK FACTORS”.
All written or oral forward-looking statements that are made by us or are attributable to us are expressly qualified in their
entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are
made.
ITEM 1. BUSINESS
Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered with the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the
“BHC Act”). The Company was incorporated in Delaware in 1990, and in 1994 it succeeded its Alabama predecessor as the
bank holding company controlling AuburnBank, an Alabama state member bank with its principal office in Auburn,
Alabama (the “Bank”). The Company and its predecessor have controlled the Bank since 1984. As a bank holding
company, the Company may diversify into a broader range of financial services and other business activities than currentl y
are permitted to the Bank under applicable laws and regulations. The holding company structure also provides greater
financial and operating flexibility than is presently permitted to the Bank.
The Bank has operated continuously since 1907 and currently conducts its business primarily in East Alabama, including
Lee County and surrounding areas. The Bank has been a member of the Federal Reserve System since April 1995. The
Bank’s primary regulators are the Federal Reserve and the Alabama Superintendent of Banks (the “Alabama
Superintendent”). The Bank has been a member of the Federal Home Loan Bank of Atlanta (the “FHLB”) since 1991.
Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by
reference to other documents, are “forward-looking statements” within the meaning of, and subject to, the protections of
Section 27A of the Securities Act.
30
Summary of Results of Operations
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2021
2020
2021
2020
Net interest income (a)
$
6,158
$
5,990
$
18,308
$
18,519
Less: tax-equivalent adjustment
117
122
355
369
Net interest income (GAAP)
6,041
5,868
17,953
18,150
Noninterest income
929
1,374
3,221
3,972
Total revenue
6,970
7,242
21,174
22,122
Provision for loan losses
—
250
(600)
1,100
Noninterest expense
4,709
4,653
14,294
14,468
Income tax expense
386
403
1,313
1,156
Net earnings
$
1,875
$
1,936
$
6,167
$
5,398
Basic and diluted earnings per share
$
0.53
$
0.54
$
1.74
$
1.51
(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures."
Financial Summary
The Company’s net earnings were $6.2 million for the first nine months of 2021, compared to $5.4 million for the first nine
months of 2020. Basic and diluted earnings per share were $1.74 per share for the first nine months of 2021, compared to
$1.51 per share for the first nine months of 2020.
Net interest income (tax-equivalent) was $18.3 million for the first nine months of 2021, a 1% decrease compared to $18.5
million for the first nine months of 2020. This decrease was primarily due to net interest margin compression resulting
from the Federal Reserve’s interest rate reductions and bond purchases in response to the COVID-19 pandemic. Our
securities holdings, which generally yield less than loans, increased as a percentage of our total assets reflecting deployment
of increased deposits. Net interest margin (tax-equivalent) de creased to 2.59% in the first nine months of 2021, compared to
2.96% for the first nine months of 2020, primarily due to the continued lower interest rate environment and changes in our
asset mix resulting from the significant increase in deposits from government stimulus and relief programs and customers’
increased savings. Net interest income (tax-equivalent) included $0.8 million in PPP loan fees, net of related costs for the
nine months ended of 2021, compared to $0.5 million for the the nine months ended of 2020.
At September 30, 2021, the Company’s allowance for loan losses was $5.1 million, or 1.13% of total loans, compared to
$5.6 million, or 1.22% of total loans, at December 31, 2020, and $5.6 million, or 1.18% of total loans, at September 30,
2020. Excluding PPP loans, which are guaranteed by the SBA, the Company’s allowance for loan losses was 1.16% of
total loans at September 30, 2021. The Company recorded a negative provision for loan losses of $0.6 million during the
first nine months of 2021, compared to a provision for loan losses of $1.1 million during the first nine months of 2020. The
negative provision for loan losses was primarily related to improvements in economic conditions in our primary market
area, and related improvements in our asset quality. The provision for loan losses is based upon various estimates and
judgements, including the absolute level of loans, loan growth, credit quality and the amount of net charge-offs.
Noninterest income was $3.2 million for the first nine months of 2021 compared to $4.0 million for the first nine months of
2020. The decrease was primarily due to a $0.3 million non-taxable death benefit from bank-owned life insurance received
in 2020 and a $0.4 million decrease in mortgage lending income in 2021 as refinance activity declined in our primary
market area.
Noninterest expense was $14.3 million for the first nine months of 2021 compared to $14.5 million for the first nine months
of 2020. The decrease was primarily due to a reduction of $0.7 million in various expenses related to the redevelopment of
the Company’s headquarters in downtown Auburn. This decrease was mostly offset by increases in salaries and benefits
expense of $0.3 million and other noninterest expense of $0.2 million during the first nine months of 2021.
Income tax expense was $1.3 million for the first nine months of 2021 compared to $1.2 million during the first nine
months of 2020, reflecting an increase in earnings before taxes and an effective tax rate of 17. 55% and 17.64%,
respectively.
31
The Company paid cash dividends of $0.78 per share in the first nine months of 2021, an increase of 2% from the same
period of 2020. The Company’s share repurchases of $1.3 million since December 31, 2020 resulted in 37,093 fewer
outstanding common shares at September 30, 2021. At September 30, 2021, 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 17.72%, a tier 1 leverage ratio of 9.57% and a common equity tier 1 (“CET1”) ratio of 16.82% at September
30, 2021.
For the third quarter of 2021, net earnings were $1.9 million, or $0.53 per share, compared to $1.9 million, or $0.54 per
share, for the third quarter of 2020. Net interest income (tax-equivalent) was $6.2 million for the third quarter of 2021, a
3% increase compared to $6.0 million for the third quarter of 2020. This increase was primarily due to balance sheet
growth, partially offset by a decrease in net interest margin. The Company’s net interest margin (tax-equivalent) decreased
to 2.51% in the third quarter of 2021, compared to 2.72% for the third quarter of 2020 primarily due to the lower interest
rate environment and changes in our asset mix resulting from the significant increase in deposits from government stimulus
and relief programs and customers’ increased savings. Net interest income (tax-equivalent) included $0.3 million in PPP
loan fees, net of related costs for both the third quarter of 2021 and 2020. The Company had no provision for loan losses
during the third quarter of 2021 compared to $0.3 million in provision for loan losses during the third quarter 2020.
Noninterest income was $1.0 million in the third quarter of 2021, compared to $1.4 million in the third quarter of 2020.
The decrease in noninterest income was primarily due to a decrease in mortgage lending income of $0.4 million as
refinance activity slowed in our primary market area. Noninterest expense was $4.7 million in the third quarter of 2021,
largely unchanged, compared to the third quarter of 2020. Income tax expense was $0.4 million for the third quarter of
2021 and 2020, respectively. The Company's effective tax rate for the third quarter of 2021 was 17.07%, compared to
17.23% in the third quarter of 2020.
COVID-19 Impact Assessment
In December 2019, COVID-19 was first reported in China and has since spread globally. In March 2020, the World Health
Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency.
The COVID-19 pandemic has, at times, especially in 2020, severely restricted the level of economic activity in our markets.
In response to the COVID-19 pandemic, the State of Alabama, and most other states, have taken preventative or protective
actions to prevent the spread of the virus, including imposing restrictions on travel and business operations and a statewide
mask mandate, advising or requiring individuals to limit or forego their time outside of their homes, limitations on
gathering of people and social distancing, and causing temporary closures of businesses that have been deemed to be non-
essential. Though certain of these measures have been relaxed or eliminated, increases in reported cases could cause these
measures to be reestablished. Auburn University, a major source of economic activity in Lee County, went to remote
instruction on March 16, 2020. Auburn University has guidelines for the remainder of the 2021 school year, which
involves resumption of full on-site operations as well as other measures.
COVID-19 has significantly affected local state, national and global health and economic activity and its future effects are
uncertain and will depend on various factors, including, among others, the duration and scope of the pandemic, the
development and distribution of COVID-19 testing and contact tracing, effective drug treatments and vaccines, together
with governmental, regulatory and private sector responses. COVID-19 has had continuing significant effects on the
economy, financial markets and our employees, customers and vendors. Our business, financial condition and results of
operations generally rely upon the ability of our borrowers to make deposits and repay their loans, the value of collateral
underlying our secured loans, market value, stability and liquidity and demand for loans and other products and services we
offer, all of which are affected by the pandemic. See “Balance Sheet Analysis – Loans” for supplemental COVID-19
disclosures.
We have implemented a number of procedures in response to the pandemic to support the safety and well-being of our
employees, customers and shareholders.
• We believe our business continuity plan has worked to provide essential banking services to our communities and
customers, while protecting our employees’ health. As part of our efforts to exercise social distancing in accordance with
the guidelines of the Centers for Disease Control, starting March 23, 2020, we limited branch lobby service to appointment
only while continuing to operate our branch drive-thru facilities and ATMs. As permitted by state public health guidelines,
on June 1, 2020, we re-opened some of our branch lobbies. In 2021, we opened our remaining branch lobbies. We continue
to provide services through our online and other electronic channels. In addition, we established remote work access to
help employees stay at home where job duties permit.
32
• We are focused on servicing the financial needs of our commercial and consumer clients with extensions and
deferrals to loan customers effected by COVID-19, provided such customers were not more than 30 days past due at the
time of the request; and
• We were a participating lender in the PPP. PPP loans are forgivable, in whole or in part, if the proceeds are used
for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of
1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not
forgiven, in whole or in part. Payments are deferred until either the date on which the Small Business Administration
(“SBA”) remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the
covered period if the borrower does not apply for forgiveness within that 10-month period. We believe these loans and our
participation in the program is good for our customers and the communities we serve.
A summary of PPP loans extended during 2020 follows:
(Dollars in thousands)
# of SBA
Approved
Mix
$ of SBA
Approved
Mix
SBA Tier:
$2 million to $10 million
—
—
%
$
—
—
%
$350,000 to less than $2 million
23
5
14,691
40
Up to $350,000
400
95
21,784
60
Total
423
100
%
$
36,475
100
%
We collected approximately $1.5 million in fees related to our PPP loans during 2020. Through September 30, 2021, we
have recognized substantially all of these fees, net of related costs. As of September 30, 2021, we have received payments
and forgiveness on all but one loan with a remaining balance of approximately $20 thousand.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid
Act”) was signed into law. The Economic Aid Act provides a second $900 billion stimulus package, including $325 billion
in additional PPP loans. The Economic Aid Act also permits the collection of a higher amount of PPP loan fees by
participating banks.
A summary of PPP loans extended during the nine months ended September 30, 2021 under the Economic Aid Act follows:
(Dollars in thousands)
# of SBA
Approved
Mix
$ of SBA
Approved
Mix
SBA Tier:
$2 million to $10 million
—
—
%
$
—
—
%
$350,000 to less than $2 million
12
5
6,494
32
Up to $350,000
242
95
13,757
68
Total
254
100
%
$
20,251
100
%
We collected approximately $1.0 million in fees related to PPP loans under the Economic Aid Act. Through September 30,
2021, we have recognized $0.5 million of these fees, net of related costs. As of September 30, 2021, we have received
payments and forgiveness on 77 PPP loans under the Economic Aid Act, totaling $7.0 million. The outstanding balance for
the remaining 177 PPP loans under the Economic Aid Act was approximately $13.3 million at September 30, 2021.
We continue to closely monitor this pandemic, and are working to continue our services during the pandemic and to address
developments as those occur. Our results of operations for the nine months ended September 30, 2021, and our financial
condition at that date reflect only the ongoing effects of the pandemic, and may not be indicative of future results or
financial conditions, including possible changes in monetary or fiscal stimulus, and the possible effects of the expiration or
extension of temporary accounting and bank regulatory relief measures in response to the COVID-19 pandemic.
As of September 30, 2021, all of our capital ratios were in excess of all regulatory requirements to be well capitalized. The
effects of the COVID-19 pandemic on our borrowers could result in adverse changes to credit quality and our regulatory
capital ratios. We continue to closely monitor this pandemic, and are working to continue our services during the pandemic
and to address developments as those occur.
33
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. GAAP and with general practices
within the banking industry. In connection with the application of those principles, we have made judgments and estimates
which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary
impairment, recurring and non-recurring fair value measurements and the valuation of OREO and deferred tax assets, were
critical to the determination of our financial position and results of operations. Other policies also require subjective
judgment and assumptions and may accordingly impact our financial position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. Determining
the amount of the allowance for loan losses is considered a critical accounting estimate because the level of the allowance is
based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known
and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of
future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions,
industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation
is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to
be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part,
when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a
“confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
The Company deems loans impaired when, based on current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due
according to the contractual terms means that both the interest and principal payments of a loan will be collected as
scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The
impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected
future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment
measurement is based on the fair value of the collateral, less estimated disposal costs.
The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the
portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-
offs, net of recoveries of amounts previously charged-off.
In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent
loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio
whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The
Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and
reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company
incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all
amounts due according to the contractual terms of a loan.
As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments:
commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer
installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.
The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each
loan segment. The estimates for these loans are established by category and based on the Company’s internal system of
credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company’s internal system of
credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it
does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank
groups. At September 30, 2021 and December 31, 2020, and for the periods then ended, the Company adjusted its
historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.
34
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of
probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors
is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated
probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based
upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic
conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing
factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance
allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of
these factors.
The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of
2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic
downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks
inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant
losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the
quarter ended September 30, 2021, the Company increased its look-back period to 50 quarters to continue to include losses
incurred by the Company beginning with the first quarter of 2009. The Company will likely continue to increase its look-
back period to incorporate the effects of at least one economic downturn in its loss history. During 2020, the Company
adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact of the
COVID-19 pandemic and resulting adverse economic conditions, including higher unemployment in our primary market
area. During the second quarter of 2021, the Company adjusted certain qualitative and economic factors to reflect
improvements in economic conditions in our primary market area. Further adjustments may be made in the future as a
result of the continuing COVID-19 pandemic.
Assessment for Other-Than-Temporary Impairment of Securities
On a quarterly basis, management makes an assessment to determine whether there have been events or economic
circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired.
For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the
Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the
debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized
cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will
be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference
between the debt security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not
more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-
down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The
credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the
present value of its expected future cash flows. The remaining difference between the security’s fair value and the present
value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive
income, net of applicable taxes.
The Company is required to own certain stock as a condition of membership, such as Federal Home Loan Bank (“FHLB”)
and Federal Reserve Bank (“FRB”). These non-marketable equity securities are accounted for at cost which equals par or
redemption value. These securities do not have a readily determinable fair value as their ownership is restricted and there is
no market for these securities. The Company records these non-marketable equity securities as a component of other
assets, which are periodically evaluated for impairment. Management considers these non-marketable equity securities to
be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the
ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Fair Value Determination
U.S. GAAP requires management to value and disclose certain of the Company’s assets and liabilities at fair value,
including investments classified as available-for-sale and derivatives. ASC 820,
Fair Value Measurements and Disclosures
,
which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands
disclosures about fair value measurements. For more information regarding fair value measurements and disclosures,
please refer to Note 6, Fair Value, of the consolidated financial statements that accompany this report.
35
Fair values are based on active market prices of identical assets or liabilities when available. Comparable assets or
liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have
readily available active market pricing. However, some of the Company’s assets or liabilities lack an available or
comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair
value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and
their underlying assumptions are based upon management’s best estimates for appropriate discount rates, default rates,
prepayments, market volatility, and other factors, taking into account current observable market data and experience.
These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in
materially different net earnings and retained earnings results.
Other Real Estate Owned
OREO consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of cost or
fair value of collateral, less estimated costs to sell at the date acquired, with any loss recognized as a charge-off through the
allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific
property basis and are included as a component of other noninterest expense along with holding costs. Any gains or losses
on disposal of OREO are also reflected in noninterest expense. Significant judgments and complex estimates are required in
estimating the fair value of OREO, and the period of time within which such estimates can be considered current is
significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions
could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other
OREO. At September 30, 2021 and December 31, 2020 the Company had no OREO properties.
Deferred Tax Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-
than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and
projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes
it is more likely than not that we will realize the benefits of these deductible differences at September 30, 2021. The amount
of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are
reduced.
36
RESULTS OF OPERATIONS
Average Balance Sheet and Interest Rates
Nine months ended September 30,
2021
2020
Average
Yield/
Average
Yield/
(Dollars in thousands)
Balance
Rate
Balance
Rate
Loans and loans held for sale
$
460,732
4.47%
$
463,581
4.71%
Securities - taxable
310,288
1.30%
225,234
1.83%
Securities - tax-exempt
62,915
3.60%
62,930
3.73%
Total securities
373,203
1.68%
288,164
2.24%
Federal funds sold
36,821
0.14%
30,739
0.51%
Interest bearing bank deposits
75,170
0.12%
53,834
0.53%
Total interest-earning assets
945,926
2.86%
836,318
3.44%
Deposits:
NOW
176,242
0.12%
153,767
0.37%
Savings and money market
289,758
0.23%
234,533
0.46%
Time Deposits
159,412
1.05%
166,115
1.43%
Total interest-bearing deposits
625,412
0.41%
554,415
0.72%
Short-term borrowings
3,329
0.50%
1,721
0.50%
Total interest-bearing liabilities
628,741
0.41%
556,136
0.72%
Net interest income and margin (tax-equivalent)
$
18,308
2.59%
$
18,519
2.96%
Net Interest Income and Margin
Net interest income (tax-equivalent) was $18.3 million for the first nine months of 2021 compared to $18.5 million for the
first nine months of 2020. This decrease was due to a decline in the Company’s net interest margin (tax-equivalent),
partially offset by balance sheet growth.
The tax-equivalent yield on total interest-earning assets decreased by 58 basis points to 2.86% in the first nine months of
2021 compared to 3.44% in the first nine months of 2020. This decrease was primarily due to the lower interest rate
environment and changes in our asset mix resulting from the significant increase in deposits from government stimulus and
relief programs and customers’ increased savings.
The cost of total interest-bearing liabilities decreased by 31 basis points to 0.41% in the first nine months of 2021 compared
to 0.72% in the first nine months of 2020. The net decrease in our funding costs was primarily due to lower prevailing
market interest rates. Our funding costs declined less than the rates earned on our interest earning assets.
The Company continues to deploy various asset liability management strategies to manage its risk to interest rate
fluctuations. The Company’s net interest margin could continue to experience pressure due to reduced earning asset yields
and increased competition for quality loan opportunities.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to provide an allowance for loan losses that
management believes, based on its processes and estimates, should be adequate to provide for the probable losses on
outstanding loans. The Company recorded a negative provision for loan losses of $0.6 million for the first nine months of
2021, compared to $1.1 million in provision for loan losses for the first nine months of 2020. The negative provision for
loan losses was primarily related to improvements in economic conditions in our primary market area. The provision for
loan losses is based upon various factors, including the absolute level of loans, loan growth, the credit quality, and the
amount of net charge-offs or recoveries.
37
Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes
should be appropriate to adequately cover its estimate of probable losses in the loan portfolio. The Company’s allowance
for loan losses as a percentage of total loans was 1.13% at September 30, 2021, compared to 1.22% at December 31, 2020.
At September 30, 2021, the Company’s allowance for loan losses was 1.16% of total loans, excluding PPP loans, which are
guaranteed by the SBA. While the policies and procedures used to estimate the allowance for loan losses, as well as the
resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from
time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise.
Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industries)
may have a material adverse effect on our asset quality and the adequacy of our allowance for loan losses resulting in
significant increases in the provision for loan losses.
Noninterest Income
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
Service charges on deposit accounts
$
149
$
139
$
419
$
437
Mortgage lending income
268
702
1,241
1,615
Bank-owned life insurance
100
109
302
615
Securities gains, net
15
16
15
103
Other
397
408
1,244
1,202
Total noninterest income
$
929
$
1,374
$
3,221
$
3,972
The Company’s income from mortgage lending was primarily attributable to the (1) origination and sale of new mortgage
loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the
mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of loans,
which are netted against the commission expense associated with these originations. The Company’s normal practice is to
originate mortgage loans for sale in the secondary market and to either sell or retain the associated MSRs when the loan is
sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold.
Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing
fee income is reported net of any related amortization expense.
The Company evaluates MSRs for impairment on a quarterly basis. Impairment is determined by grouping MSRs by
common predominant characteristics, such as interest rate and loan type. If the aggregate carrying amount of a particular
group of MSRs exceeds the group’s aggregate fair value, a valuation allowance for that group is established. The valuation
allowance is adjusted as the fair value changes. An increase in mortgage interest rates typically results in an increase in the
fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
The following table presents a breakdown of the Company’s mortgage lending income.
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
Origination income
$
233
$
722
$
1,168
$
1,569
Servicing fees, net
35
(20)
73
46
Total mortgage lending income
$
268
$
702
$
1,241
$
1,615
The Company’s income from mortgage lending typically fluctuates as mortgage interest rates change and is primarily
attributable to the origination and sale of new mortgage loans. Origination income decreased in 2021 compared to 2020 due
to a decrease in refinance activity in our primary market area.
38
Income from bank-owned life insurance decreased primarily due to $0.3 million in non-taxable death benefits received in
2020. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e.,
increases or decreases in the cash surrender value of the policies and death benefits received) on these policies is dependent
upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings
on these policies are generally not taxable.
Noninterest Expense
Quarter ended September 30,
Nine months ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
Salaries and benefits
$
2,893
$
2,802
$
8,641
$
8,230
Net occupancy and equipment
436
457
1,292
1,974
Professional fees
232
230
814
877
Other
1,148
1,164
3,547
3,387
Total noninterest expense
$
4,709
$
4,653
$
14,294
$
14,468
The increase in salaries and benefits was primarily due to a decrease in deferred costs related to the PPP loan program,
routine annual wage and benefit increases, and management increasing the minimum hourly wage for banking positions to
$15.
The decrease in net occupancy and equipment expense was primarily due to a reduction of various expenses related to the
redevelopment of the Company’s headquarters in downtown Auburn. This amount includes revised depreciation estimates
and other temporary relocation costs.
Income Tax Expense
Income tax expense was $1.3 million for the first nine months of 2021 compared to $1.2 million for the first nine months of
2020, reflecting an increase in earnings before taxes and an effective tax rate of 17.55% and 17.64%, respectively.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $407.5 million at September 30, 2021 compared to $335.2 million at December 31, 2020.
This increase reflects an increase in the amortized cost basis of securities available-for-sale of $78.8 million, and a decrease
of $6.5 million in the fair value of securities available-for-sale. The increase in the amortized cost basis of securities
available-for-sale was primarily attributable to management allocating more funding to the investment portfolio following
the significant increase in customer deposits. The decrease in the fair value of securities was primarily due to an increase in
long-term interest rates. The average annualized tax-equivalent yields earned on total securities were 1.68% in the first
nine months of 2021 and 2.24% in the first nine months of 2020.
Loans
2021
2020
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
79,202
87,933
88,687
82,585
98,244
Construction and land development
34,890
37,477
30,332
33,514
31,651
Commercial real estate
252,798
242,845
254,731
255,136
250,992
Residential real estate
80,205
82,164
82,848
84,154
85,054
Consumer installment
7,060
7,762
6,524
7,099
7,731
Total loans
454,155
458,181
463,122
462,488
473,672
Less: unearned income
(923)
(1,197)
(1,243)
(788)
(1,219)
Loans, net of unearned income
$
453,232
456,984
461,879
461,700
472,453
39
Total loans, net of unearned income, were $453.2 million at September 30, 2021, a decrease of $8.5 million from $461.7
million at December 31, 2020. Excluding PPP loans, total loans net of unearned income, were $440.4 million, a decrease
of $1.9 million from $442.3 million at December 31, 2020. Four loan categories represented approximately 98% of the
loan portfolio at September 30, 2021: commercial real estate (56%), residential real estate (18%), commercial and industrial
(17%) and construction and land development (8%). Approximately 23% of the Company’s commercial real estate loans
were classified as owner-occupied at September 30, 2021.
Within the residential real estate portfolio segment, the Company had junior lien mortgages of approximately $8.1 million,
or 2% of total loans, at September 30, 2021, compared to $8.7 million, or 2% of total loans, at December 31, 2020. For
residential real estate mortgage loans with a consumer purpose, the Company had no loans that required interest-only
payments at September 30, 2021 and December 31, 2020. The Company’s residential real estate mortgage portfolio does
not include any option ARM loans, subprime loans, or any material amount of other high-risk consumer mortgage products.
The average yield earned on loans and loans held for sale was 4.47% in the first nine months of 2021 and 4.71% in the first
nine months of 2020.
The specific economic and credit risks associated with our loan portfolio include, but are not limited to, the effects of
current economic conditions, including the COVID-19 pandemic’s effects, on our borrowers’ cash flows, real estate market
sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, competitive
pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations, reduced collateral
values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any
violation of applicable laws and regulations.
The Company attempts to reduce these economic and credit risks through its loan-to-value guidelines for collateralized
loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial position. Also, we have
established and periodically review, lending policies and procedures. Banking regulations limit a bank’s credit exposure by
prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of
capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships in excess of
approximately $20.9 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $18.8 million. Our loan policy requires that the Loan Committee of the
Board of Directors approve any loan relationships that exceed this internal limit. At September 30, 2021, the Bank had no
relationships exceeding these limits.
We periodically analyze our commercial and industrial and commercial real estate loan portfolios to determine if a
concentration of credit risk exists in any one or more industries. We use classification systems broadly accepted by the
financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the
following classes exceeded 25% of the Bank’s total risk -based capital at September 30, 2021 and December 31, 2020.
September 30,
December 31,
(Dollars in thousands)
2021
2020
Lessors of 1-4 family residential properties
$
47,647
$
49,127
Hotel/motel
44,412
42,900
Multi-family residential properties
41,291
40,203
Shopping centers
29,411
30,000
40
COVID-19 Modifications
In light of disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance
encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance, including
the Interagency Statement on COVID-19 Loan Modifications and the Interagency Examiner Guidance for Assessing Safety
and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions, provides that the agencies will not
criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices.
Specifically, examiners will not criticize institutions for working with borrowers as part of a risk mitigation strategy
intended to improve existing loans, even if the restructured loans have or develop weaknesses that ultimately result in
adverse credit classification. Upon demonstrating the need for payment relief, the bank will work with qualified borrowers
that were otherwise current before the pandemic to determine the most appropriate deferral option. For residential
mortgage and consumer loans the borrower may elect to defer payments for up to three months. Interest continues to
accrue and the amount due at maturity increases. Commercial real estate, commercial, and small business borrowers may
elect to defer payments for up to three months or pay scheduled interest payments for a six-month period. The bank
recognizes that a combination of the payment relief options may be prudent dependent on a borrower’s business type. As
of September 30, 2021, we had no COVID-19 loan deferrals outstanding, compared to $32.3 million, or 7% of total loans at
December 31, 2020.
The tables below provide information concerning the composition of these COVID-19 modifications as of December 31,
2020.
Modification Types
(Dollars in thousands)
# of Loans
Modified
Balance
% of Portfolio
Modified
Interest Only
Payment
P&I Payments
Deferred
December 31, 2020:
Commercial and industrial
2
$
741
%
100
%
—
%
Commercial real estate
12
31,399
100
—
Residential real estate
2
133
—
100
Total
16
$
32,273
%
99
%
1
%
COVID-19 Modifications within Commercial Real Estate Segment
(Dollars in thousands)
# of Loans
Modified
Balance of
Loans Modified
% of Total
Loan Class
December 31, 2020:
Hotel/motel
10
$
26,427
49
%
Multifamily
1
3,530
9
Restaurants
1
1,442
10
Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR
pursuant to GAAP. In addition, the Interagency Statement on COVID-19 Loan Modifications provides circumstances in
which a loan modification is not subject to classification as a TDR if such loan is not eligible for modification under
Section 4013.
Allowance for Loan Losses
The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover
the Company’s estimate of probable losses inherent in the loan portfolio. The allowance for loan losses was $5.1 million at
September 30, 2021 compared to $5.6 million at December 31, 2020, which management believed to be adequate at each of
the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are
described under “Critical Accounting Policies.”
41
A summary of the changes in the allowance for loan losses and certain asset quality ratios for the third quarter of 2021 and
the previous four quarters is presented below.
2021
2020
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Balance at beginning of period
$
5,107
5,682
5,618
5,575
5,308
Charge-offs:
Commercial and industrial
—
—
—
(4)
—
Residential real estate
—
(1)
—
—
—
Consumer installment
—
—
(5)
(1)
(4)
Total charge -offs
—
(1)
(5)
(5)
(4)
Recoveries
12
26
69
48
21
Net recoveries
12
25
64
43
17
Provision for loan losses
—
(600)
—
—
250
Ending balance
$
5,119
5,107
5,682
5,618
5,575
as a % of loans
1.13
%
1.12
1.23
1.22
1.18
as a % of nonperforming loans
1,053
%
813
726
1,052
1,015
Net (recoveries) charge-offs as % of average loans (a)
(0.01)
%
(0.02)
(0.06)
(0.04)
(0.01)
(a) Net (recoveries) charge-offs are annualized.
As described under “Critical Accounting Policies,” management assesses the adequacy of the allowance prior to the end of
each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan
loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay
(including the timing of future payment), the estimated value of any underlying collateral, composition of the loan
portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors. This evaluation is
inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future
cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our
allowance for loan losses to total loans outstanding was 1.13% at September 30, 2021, compared to 1.22% at December 31,
2020. At September 30, 2021, the Company’s allowance for loan losses was 1.16% of total loans, excluding PPP loans. In
the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the factors that influence our
quarterly allowance assessment, including the duration and magnitude of COVID-19 effects, in their entirety either improve
or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the
Company’s allowance for loan losses, and may require the Company to make additional provisions to the allowance for
loan losses based on their judgment about information available to them at the time of their examinations.
Nonperforming Assets
The Company had $0.5 million in nonperforming assets at September 30, 2021 and December 31, 2020, respectively.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the third
quarter of 2021 and the previous four quarters.
2021
2020
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonperforming assets:
Nonaccrual loans
$
486
628
783
534
549
Total nonperforming assets
$
486
628
783
534
549
as a % of loans and other real estate owned
0.11
%
0.14
0.17
0.12
0.12
as a % of total assets
0.05
%
0.06
0.08
0.06
0.06
Nonperforming loans as a % of total loans
0.11
%
0.14
0.17
0.12
0.12
42
The table below provides information concerning the composition of nonaccrual loans for the third quarter of 2021 and the
previous four quarters.
2021
2020
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Nonaccrual loans:
Commercial real estate
$
193
199
206
212
216
Residential real estate
293
429
577
322
332
Consumer installment
—
—
—
—
1
Total nonaccrual loans
$
486
628
783
534
549
The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is
90 days or more past due, unless the loan is both well-secured and in the process of collection . The Company had $0.5
million in loans on nonaccrual status at September 30, 2021 and December 31, 2020, respectively.
The Company had $0.1 million of loans 90 days or more past due and still accruing at September 30, 2021 and December
31, 2020, respectively.
The Company had no OREO at September 30, 2021 or December 31, 2020.
Potential Problem Loans
Potential problem loans represent those loans with a well-defined weakness and where information about possible credit
problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present
repayment terms. This definition is believed to be substantially consistent with the standards established by the Federal
Reserve, the Company’s primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential
problem loans, which are not included in nonperforming assets, amounted to $2.5 million, or 0.6% of total loans at
September 30, 2021, and $2.9 million, or 0.6% of total loans at December 31, 2020.
The table below provides information concerning the composition of potential problem loans for the third quarter of 2021
and the previous four quarters.
2021
2020
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Potential problem loans:
Commercial and industrial
$
274
291
299
218
230
Construction and land development
231
239
247
254
563
Commercial real estate
172
178
173
188
188
Residential real estate
1,848
2,096
2,092
2,229
2,486
Consumer installment
19
7
9
23
42
Total potential problem loans
$
2,544
2,811
2,820
2,912
3,509
At September 30, 2021 the Company had $0.1 million in potential problem loans that were past due at least 30 days, but
less than 90 days.
43
The following table is a summary of the Company’s performing loans that were past due at least 30 days, but less than
90 days, for the third quarter of 2021 and the previous four quarters.
2021
2020
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Performing loans past due 30 to 89 days:
Commercial and industrial
$
68
1
42
230
48
Construction and land development
—
204
10
61
—
Commercial real estate
—
205
180
29
—
Residential real estate
409
68
399
1,509
106
Consumer installment
25
7
36
29
6
Total
$
502
485
667
1,858
160
Deposits
Total deposits increased $115.2 million, or 14% to $955.0 million at September 30, 2021, compared to $839.8 million at
December 31, 2020. Noninterest-bearing deposits were $299.1 million, or 31% of total deposits, at September 30, 2021,
compared to $245.4 million, or 29% of total deposits at December 31, 2020. These increases reflect deposits from
customers who received PPP loans, the impact of government stimulus checks, delayed tax payments and less customer
spending and greater savings during the COVID-19 pandemic.
The average rate paid on total interest-bearing deposits was 0.41% in the first nine months of 2021 compared to 0.72% in
the first nine months of 2020. The decline in average rates paid on total interest-bearing deposits was largely driven by
generally lower market interest rates.
Other Borrowings
Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal
funds purchased and agreements with certain customers to sell certain securities under agreements to repurchase with an
original maturity less than one year. The Bank had available federal funds lines totaling $41.0 million with none
outstanding at September 30, 2021, and at December 31, 2020, respectively. Securities sold under agreements to repurchase
totaled $3.3 million at September 30, 2021, compared to $2.4 million at December 31, 2020.
The average rate paid on short-term borrowings was 0.50% in the first nine months of 2021 and 2020, respectively.
The Company had no long-term debt at September 30, 2021 and December 31, 2020.
CAPITAL ADEQUACY
The Company’s consolidated stockholders’ equity was $104.9 million and $107.7 million as of September 30, 2021 and
December 31, 2020, respectively. The decrease from December 31, 2020 was primarily driven by an other comprehensive
loss due to the change in unrealized gains (losses) on securities available-for-sale, net of tax of $4.8 million, cash dividends
paid of $2.8 million, and repurchases of the Company’s stock of $1.3 million. During the first nine months of 2021, the
Company repurchased 37,093 shares under the Company’s current stock repurchase program. These shares were
repurchased at an average cost per share of $34.36 and a total cost of $1.3 million. These decreases in the Company’s
consolidated stockholders’ equity were partially offset by net earnings of $6.2 million.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and
related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules included the implementation of a
capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital
conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and was fully phased-in on
January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than the required amount will be
subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to
executive officers. At September 30, 2021, the Bank’s ratio was sufficient to meet the fully phased-in conservation buffer.
44
Effective March 20, 2020, the Federal Reserve and the other federal banking regulators adopted an interim final rule that
amended the capital conservation buffer. The interim final rule was adopted as a final rule on August 26, 2020. The new
rule revises the definition of “eligible retained income” for purposes of the maximum payout ratio to allow banking
organizations to more freely use their capital buffers to promote lending and other financial intermediation activities, by
making the limitations on capital distributions more gradual. The eligible retained income is now the greater of (i) net
income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii)
the average of all net income over the preceding four quarters. The interim final rule only affects the capital buffers, and
banking organizations were encouraged to make prudent capital distribution decisions.
The Federal Reserve has treated us as a “small bank holding company’ under the Federal Reserve’s policy. Accordingly,
our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated subsidiaries. The Bank’s
tier 1 leverage ratio was 9.57%, CET1 risk-based capital ratio was 16.82%, tier 1 risk-based capital ratio was 16.82%, and
total risk-based capital ratio was 17.72% at September 30, 2021. 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
9.72% at September 30, 2021.
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
At September 30, 2021, 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 September 30, 2021, 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. Prepayment 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 may enter into interest rate swaps to facilitate customer
transactions and meet their financing needs. These interest rate swaps qualify as derivatives, but are not designated as
hedging instruments. At September 30, 2021 and December 31, 2020, 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. Without proper management of its liquidity, the
Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead
to a decline in earnings due to the cost of foregoing alternative higher-yielding investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the Company. The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject to regulatory guidelines and requirements. The
Company depends upon dividends from the Bank for liquidity to pay its operating expenses, debt obligations and
dividends. The Bank’s payment of dividends depends on its earnings, liquidity, capital and the absence of any regulatory
restrictions.
The primary source of funding and liquidity for the Company has been dividends received from the Bank. If needed, the
Company could also issue common stock or other securities. Primary uses of funds by the Company include dividends paid
to stockholders, Company stock repurchases, and Company expenses.
46
Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of securities,
sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and
borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in the
FHLB’s advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be
taken out with varying maturities. At September 30, 2021, the Bank had a remaining available line of credit with the FHLB
of $310.7 million. At September 30, 2021, the Bank also had $41.0 million of available federal funds lines with no
borrowings outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.
Management believes that the Company and the Bank have adequate sources of liquidity to meet all their respective known
contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and
creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements, Commitments, Contingencies and Contractual Obligations
At September 30, 2021, the Bank had outstanding standby letters of credit of $1. 3 million and unfunded loan commitments
outstanding of $70.5 million. Because these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to
fund these outstanding commitments, the Bank could liquidate federal funds sold or a portion of our securities available-
for-sale, or draw on its available credit facilities.
Mortgage lending activities
We primarily sell residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these
loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various
representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the
representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien
securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan
criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other
matters.
As of September 30, 2021, the unpaid principal balance of residential mortgage loans, which we have originated and sold,
but retained the servicing rights, was $256.4 million. Although these loans are generally sold on a non-recourse basis, we
may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests)
if a loan review reveals a potential breach of seller representations and warranties. Upon receipt of a repurchase or make
whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests
are typically reviewed on an individual loan by loan basis to validate the claims made by the investor and to determine if a
contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential
repurchases, make whole requests, or other claims by mortgage loan investors through our underwriting and quality
assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
The Company was not required to repurchase any loans during the first nine months of 2021 as a result of representation
and warranty provisions contained in the Company’s sale agreements with Fannie Mae, and had no pending repurchase or
make-whole requests at September 30, 2021.
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 servicing guides issued by Fannie
Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase
of an affected loan.
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 September 30, 2021, we do not believe that this exposure is material due to the historical level
of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans serviced for Fannie
Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate
this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor
portfolios.
Section 4021 of the CARES Act allows borrowers under 1-4 family residential mortgage loans sold to Fannie Mae to
request forbearance to the servicer after affirming that such borrower is experiencing financial hardships during the
COVID-19 emergency. Such forbearance will be up to 180 days, subject to up to a 180 day extension. During forbearance,
no fees, penalties or interest shall be charged beyond those applicable if all contractual payments were fully and timely
paid. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on similar procedures
or related evictions or sales until December 31, 2020. The 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 U.S. 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. As a result of government monetary policies and fiscal stimulus,
as well as demand for goods ad services and COVID-19 pandemic related supply chain disruptions, inflation has increased
during 2021. This may result in increased noninterest operating expenses and building costs.
CURRENT ACCOUNTING DEVELOPMENTS
The following ASUs have been issued by the FASB but are not yet effective.
●
ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments;
Information about these pronouncements is described in more detail below.
ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial
Instruments
, amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt
securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses using a broader
range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The
allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to
present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a
manner similar to current GAAP, however the new standard will require that credit losses be presented as an allowance
rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are
not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not
excluded from the scope that have the contractual right to receive cash. For public business entities, the new guidance was
originally effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company has
developed an implementation team that is following a general timeline. The team has been working with an advisory
consultant, with whom a third-party software license has been purchased. The Company’s preliminary evaluation indicates
the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular
the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential impact and
expects that portfolio composition and economic conditions at the time of adoption will be a factor. On October 16, 2019,
the FASB approved a previously issued proposal granting smaller reporting companies a postponement of the required
implementation date for ASU 2016-13. The Company will now be required to implement the new standard in January
2023, with early adoption permitted in any period prior to that date.
48
Table 1 – Explanation of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly
report on Form 10-Q includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-
GAAP financial measure, including the presentation and calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net
interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the
Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance,
these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-
GAAP financial measures to their most directly comparable GAAP financial measures are presented below.
2021
2020
Third
Second
First
Fourth
Third
(in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Net interest income (GAAP)
$
6,041
5,975
5,937
6,188
5,868
Tax-equivalent adjustment
117
118
120
123
122
Net interest income (Tax -equivalent)
$
6,158
6,093
6,057
6,311
5,990
Nine months ended September 30,
(In thousands)
2021
2020
Net interest income (GAAP)
$
17,953
18,150
Tax-equivalent adjustment
355
369
Net interest income (Tax -equivalent)
$
18,308
18,519
49
Table 2 - Selected Quarterly Financial Data
2021
2020
Third
Second
First
Fourth
Third
(Dollars in thousands, except per share amounts)
Quarter
Quarter
Quarter
Quarter
Quarter
Results of Operations
Net interest income (a)
$
6,158
6,093
6,057
6,311
5,990
Less: tax-equivalent adjustment
117
118
120
123
122
Net interest income (GAAP)
6,041
5,975
5,937
6,188
5,868
Noninterest income
929
1,110
1,182
1,403
1,374
Total revenue
6,970
7,085
7,119
7,591
7,242
Provision for loan losses
—
(600)
—
—
250
Noninterest expense
4,709
4,895
4,690
5,086
4,653
Income tax expense
386
504
423
449
403
Net earnings
$
1,875
2,286
2,006
2,056
1,936
Per share data:
Basic and diluted net earnings
$
0.53
0.65
0.56
0.58
0.54
Cash dividends declared
0.26
0.26
0.26
0.255
0.255
Weighted average shares outstanding:
Basic and diluted
3,536,320
3,554,871
3,566,299
3,566,276
3,566,239
Shares outstanding, at period end
3,529,338
3,545,855
3,566,326
3,566,276
3,566,276
Book value
$
29.73
29.91
29.06
30.20
29.81
Common stock price:
High
$
35.36
38.90
48.00
43.00
56.80
Low
33.25
34.50
37.55
36.75
26.26
Period end:
33.80
35.46
38.37
42.29
36.26
To earnings ratio
14.57
x
15.22
17.85
20.23
15.97
To book value
114
%
119
132
140
122
Performance ratios:
Return on average equity
7.01
%
8.74
7.37
7.63
7.26
Return on average assets
0.72
%
0.91
0.82
0.87
0.84
Dividend payout ratio
49.06
%
40.00
46.43
43.97
47.22
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.13
%
1.12
1.23
1.22
1.18
Nonperforming loans
1,053
%
813
726
1,052
1,015
Nonperforming assets as a % of:
Loans and foreclosed properties
0.11
%
0.14
0.17
0.12
0.12
Total assets
0.05
%
0.06
0.08
0.06
0.06
Nonperforming loans as a % of total loans
0.11
%
0.14
0.17
0.12
0.12
Annualized net recoveries as % of average loans
(0.01)
%
(0.02)
(0.06)
(0.04)
(0.01)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
16.82
%
17.03
17.21
17.27
17.70
Tier 1 risk-based capital ratio
16.82
%
17.03
17.21
17.27
17.70
Total risk-based capital ratio
17.72
%
17.94
18.25
18.31
18.77
Tier 1 leverage ratio
9.57
%
9.81
9.99
10.32
10.38
Other financial data:
Net interest margin (a)
2.51
%
2.60
2.66
2.81
2.72
Effective income tax rate
17.07
%
18.06
17.41
17.92
17.23
Efficiency ratio (b)
66.45
%
67.96
64.79
65.93
63.19
Selected average balances:
Securities
$
395,529
370,582
353,031
325,102
315,542
Loans, net of unearned income
452,668
460,672
463,424
466,704
465,285
Total assets
1,040,985
1,005,041
980,884
944,439
924,949
Total deposits
927,368
894,757
863,194
828,801
810,747
Total stockholders’ equity
106,936
104,591
108,890
107,791
106,709
Selected period end balances:
Securities
$
407,474
384,865
359,630
335,177
320,922
Loans, net of unearned income
453,232
456,984
461,879
461,700
472,453
Allowance for loan losses
5,119
5,107
5,682
5,618
5,575
Total assets
1,065,871
1,036,232
993,263
956,597
937,890
Total deposits
954,971
923,462
880,590
839,792
823,980
Total stockholders’ equity
104,929
106,043
103,639
107,689
106,314
(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.
50
Table 3 - Selected Financial Data
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
2021
2020
Results of Operations
Net interest income (a)
$
18,308
18,519
Less: tax-equivalent adjustment
355
369
Net interest income (GAAP)
17,953
18,150
Noninterest income
3,221
3,972
Total revenue
21,174
22,122
Provision for loan losses
(600)
1,100
Noninterest expense
14,294
14,468
Income tax expense
1,313
1,156
Net earnings
$
6,167
5,398
Per share data:
Basic and diluted net earnings
$
1.74
1.51
Cash dividends declared
0.78
0.765
Weighted average shares outstanding:
Basic and diluted
3,552,387
3,566,184
Shares outstanding, at period end
3,529,338
3,566,276
Book value
$
29.73
29.81
Common stock price:
High
$
48.00
63.40
Low
33.25
24.11
Period end
33.80
36.26
To earnings ratio
14.57
x
15.97
To book value
114
%
122
Performance ratios:
Return on average equity
7.70
%
6.94
Return on average assets
0.81
%
0.81
Dividend payout ratio
44.83
%
50.66
Asset Quality:
Allowance for loan losses as a % of:
Loans
1.13
%
1.18
Nonperforming loans
1,053
%
1,015
Nonperforming assets as a % of:
Loans and other real estate owned
0.11
%
0.12
Total assets
0.05
%
0.06
Nonperforming loans as a % of total loans
0.11
%
0.12
Annualized net recoveries as a % of average loans
(0.03)
%
(0.03)
Capital Adequacy: (c)
CET 1 risk-based capital ratio
16.82
%
17.70
Tier 1 risk-based capital ratio
16.82
%
17.70
Total risk-based capital ratio
17.72
%
18.77
Tier 1 leverage ratio
9.57
%
10.38
Other financial data:
Net interest margin (a)
2.59
%
2.96
Effective income tax rate
17.55
%
17.64
Efficiency ratio (b)
66.39
%
64.33
Selected average balances:
Securities
$
373,203
288,164
Loans, net of unearned income
458,882
461,170
Total assets
1,009,131
885,941
Total deposits
895,342
775,853
Total stockholders’ equity
106,798
103,707
Selected period end balances:
Securities
$
407,474
320,922
Loans, net of unearned income
453,232
472,453
Allowance for loan losses
5,119
5,575
Total assets
1,065,871
937,890
Total deposits
954,971
823,980
Total stockholders’ equity
104,929
106,314
(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.
51
Table 4 - Average Balances and Net Interest Income Analysis
Quarter ended September 30,
2021
2020
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)
$
453,649
$
5,127
4.48%
$
468,203
$
5,453
4.63%
Securities - taxable
332,474
1,048
1.25%
252,398
913
1.44%
Securities - tax-exempt (2)
63,055
558
3.51%
63,144
583
3.67%
Total securities
395,529
1,606
1.61%
315,542
1,496
1.89%
Federal funds sold
40,995
16
0.15%
30,784
9
0.12%
Interest bearing bank deposits
82,878
33
0.16%
60,698
17
0.11%
Total interest-earning assets
973,051
$
6,782
2.77%
875,227
$
6,975
3.17%
Cash and due from banks
14,326
13,196
Other assets
53,608
36,526
Total assets
$
1,040,985
$
924,949
Interest-bearing liabilities:
Deposits:
NOW
$
182,417
$
51
0.11%
$
157,689
$
100
0.25%
Savings and money market
300,746
167
0.22%
250,938
285
0.45%
Time deposits
159,423
402
1.00%
164,988
598
1.44%
Total interest-bearing deposits
642,586
620
0.38%
573,615
983
0.68%
Short-term borrowings
3,454
4
0.50%
2,368
2
0.50%
Total interest-bearing liabilities
646,040
$
624
0.38%
575,983
$
985
0.68%
Noninterest-bearing deposits
284,781
237,132
Other liabilities
3,228
5,125
Stockholders' equity
106,936
106,709
Total liabilities and stockholders' equity
$
1,040,985
$
924,949
Net interest income and margin (tax-equivalent)
$
6,158
2.51%
$
5,990
2.72%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
52
Table 5 - Average Balances and Net Interest Income Analysis
Nine months ended September 30,
2021
2020
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)
$
460,732
$
15,417
4.47%
$
463,581
$
16,359
4.71%
Securities - taxable
310,288
3,006
1.30%
225,234
3,080
1.83%
Securities - tax-exempt (2)
62,915
1,692
3.60%
62,930
1,759
3.73%
Total securities
373,203
4,698
1.68%
288,164
4,839
2.24%
Federal funds sold
36,821
39
0.14%
30,739
118
0.51%
Interest bearing bank deposits
75,170
66
0.12%
53,834
214
0.53%
Total interest-earning assets
945,926
$
20,220
2.86%
836,318
$
21,530
3.44%
Cash and due from banks
14,345
13,579
Other assets
48,860
36,044
Total assets
$
1,009,131
$
885,941
Interest-bearing liabilities:
Deposits:
NOW
$
176,242
$
161
0.12%
$
153,767
$
426
0.37%
Savings and money market
289,758
488
0.23%
234,533
801
0.46%
Time deposits
159,412
1,251
1.05%
166,115
1,778
1.43%
Total interest-bearing deposits
625,412
1,900
0.41%
554,415
3,005
0.72%
Short-term borrowings
3,329
12
0.50%
1,721
6
0.50%
Total interest-bearing liabilities
628,741
$
1,912
0.41%
556,136
$
3,011
0.72%
Noninterest-bearing deposits
269,930
221,438
Other liabilities
3,662
4,659
Stockholders' equity
106,798
103,708
Total liabilities and stockholders' equity
$
1,009,131
$
885,941
Net interest income and margin (tax-equivalent)
$
18,308
2.59%
$
18,519
2.96%
(1) Average loan balances are shown net of unearned income and loans on nonaccrual status have been included
(2) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal income
tax rate of 21%.
53
Table 6 - Loan Portfolio Composition
2021
2020
Third
Second
First
Fourth
Third
(In thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Commercial and industrial
$
79,202
87,933
88,687
82,585
98,244
Construction and land development
34,890
37,477
30,332
33,514
31,651
Commercial real estate
252,798
242,845
254,731
255,136
250,992
Residential real estate
80,205
82,164
82,848
84,154
85,054
Consumer installment
7,060
7,762
6,524
7,099
7,731
Total loans
454,155
458,181
463,122
462,488
473,672
Less: unearned income
(923)
(1,197)
(1,243)
(788)
(1,219)
Loans, net of unearned income
453,232
456,984
461,879
461,700
472,453
Less: allowance for loan losses
(5,119)
(5,107)
(5,682)
(5,618)
(5,575)
Loans, net
$
448,113
451,877
456,197
456,082
466,878
54
Table 7 - Allowance for Loan Losses and Nonperforming Assets
2021
2020
Third
Second
First
Fourth
Third
(Dollars in thousands)
Quarter
Quarter
Quarter
Quarter
Quarter
Allowance for loan losses:
Balance at beginning of period
$
5,107
5,682
5,618
5,575
5,308
Charge-offs:
Commercial and industrial
—
—
—
(4)
—
Construction and land development
—
—
—
—
—
Commercial real estate
—
—
—
—
—
Residential real estate
—
(1)
—
—
—
Consumer installment
—
—
(5)
(1)
(4)
Total charge -offs
—
(1)
(5)
(5)
(4)
Recoveries
12
26
69
48
21
Net recoveries
12
25
64
43
17
Provision for loan losses
—
(600)
—
—
250
Ending balance
$
5,119
5,107
5,682
5,618
5,575
as a % of loans
1.13
%
1.12
1.23
1.22
1.18
as a % of loans (excluding PPP loans)
1.16
%
1.17
1.31
1.27
1.28
as a % of nonperforming loans
1,053
%
813
726
1,052
1,015
Net recoveries as % of avg. loans (a)
(0.01)
%
(0.02)
(0.06)
(0.04)
(0.01)
Nonperforming assets:
Nonaccrual loans
$
486
628
783
534
549
Total nonperforming assets
$
486
628
783
534
549
as a % of loans and foreclosed properties
0.11
%
0.14
0.17
0.12
0.12
as a % of total assets
0.05
%
0.06
0.08
0.06
0.06
Nonperforming loans as a % of total loans
0.11
%
0.14
0.17
0.12
0.12
Accruing loans 90 days or more past due
$
69
—
—
21
71
(a) Net recoveries are annualized.
55
Table 8 - Allocation of Allowance for Loan Losses
2021
2020
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
(Dollars in thousands)
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Amount
%*
Commercial and industrial
$
816
17.4
$
829
19.2
$
828
19.1
$
807
17.9
$
798
20.7
Construction and land
development
590
7.7
639
8.2
551
6.5
594
7.2
582
6.7
Commercial real estate
2,823
55.6
2,704
53.0
3,259
55.1
3,169
55.2
3,120
53.0
Residential real estate
799
17.7
838
17.9
951
17.9
944
18.2
954
18.0
Consumer installment
91
1.6
97
1.7
93
1.4
104
1.5
121
1.6
Total allowance for
loan losses
$
5,119
$
5,107
$
5,682
$
5,618
$
5,575
* Loan balance in each category expressed as a percentage of total loans.
56
Table 9 - CDs and Other Time Deposits of $100,000 or More
(Dollars in thousands)
September 30, 2021
Maturity of:
3 months or less
$
22,908
Over 3 months through 6 months
9,425
Over 6 months through 12 months
44,371
Over 12 months
30,377
Total CDs and other time deposits of $100,000 or more
$
107,081
57
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, 2020.
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, 2020,
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. 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.
58
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s repurchases of its common stock during the third quarter of 2021 were as follows:
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
(1)
July 1 - July 31, 2021
4,540
$
34.47
4,540
$
4,093,535
August 1 - August 31, 2021
12,042
34.32
12,042
3,680,278
September 1 - September 30, 2021
—
—
—
3,680,278
Total
16,582
34.36
16,582
3,680,278
(1)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
59
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.
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: October 29, 2021
By: /s/ Robert W. Dumas
Robert W. Dumas
Chairman, President and CEO
Date: October 29, 2021
By: /s/ David A. Hedges
David A. Hedges
Executive Vice President and Chief Financial Officer